-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TNfC8Lka3a9SS/bQfvvggA/pL6Uzmu5Mj8VYAiet8GGkC7/5QWcNcS3X2K6tzP7k FUzlcVBDraiI/3kYzPLbKg== 0001019687-05-003107.txt : 20051114 0001019687-05-003107.hdr.sgml : 20051111 20051114171839 ACCESSION NUMBER: 0001019687-05-003107 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 21 CONFORMED PERIOD OF REPORT: 20050930 FILED AS OF DATE: 20051114 DATE AS OF CHANGE: 20051114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Emrise CORP CENTRAL INDEX KEY: 0000854852 STANDARD INDUSTRIAL CLASSIFICATION: INSTRUMENTS FOR MEAS & TESTING OF ELECTRICITY & ELEC SIGNALS [3825] IRS NUMBER: 770226211 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-10346 FILM NUMBER: 051202909 BUSINESS ADDRESS: STREET 1: 9485 HAVEN AVENUE STREET 2: STE 100 CITY: RANCHO CUCAMONGA STATE: CA ZIP: 91730 BUSINESS PHONE: 9099879220 MAIL ADDRESS: STREET 1: 9485 HAVEN AVENUE STREET 2: STE 100 CITY: RANCHO CUCAMONGA STATE: CA ZIP: 91730 FORMER COMPANY: FORMER CONFORMED NAME: MICROTEL INTERNATIONAL INC DATE OF NAME CHANGE: 19951117 FORMER COMPANY: FORMER CONFORMED NAME: CXR CORP DATE OF NAME CHANGE: 19920703 10-Q 1 emrise_10q-093005.txt ================================================================================ U. S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended SEPTEMBER 30, 2005 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______________ to ______________ Commission File Number 1-10346 EMRISE CORPORATION (Exact Name of Registrant as Specified in Its Charter) DELAWARE 77-0226211 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 9485 HAVEN AVENUE, SUITE 100 RANCHO CUCAMONGA, CALIFORNIA 91730 (Address of Principal Executive Offices) (Zip Code) (909) 987-9220 (Registrant's Telephone Number, Including Area Code) NOT APPLICABLE (Former Name, Former Address And Former Fiscal Year, if Changed Since Last Report) Indicate by check whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No | | Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes | | No |X| Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes | | No |X| As of November 11, 2005, there were 37,497,750 shares of the issuer's common stock, $0.0033 par value, outstanding. ================================================================================ PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. Condensed Consolidated Balance Sheets (unaudited) as of September 30, 2005 and December 31, 2004........................................................................ F-1 Condensed Consolidated Statements of Operations (unaudited) for the Three and Nine Months Ended September 30, 2005 and 2004 ................. F-2 Condensed Consolidated Statements of Comprehensive Income (Loss) (unaudited) for the Three and Nine Months Ended September 30, 2005........................... F-3 Condensed Consolidated Statements of Stockholders' Equity (unaudited) for the Nine Months Ended September 30, 2005 ........................................................ F-4 Condensed Consolidated Statements of Cash Flows (unaudited) for the Nine Months Ended September 30, 2005 and 2004 ........................................................... F-5 Notes to Condensed Consolidated Financial Statements (unaudited)................................... F-6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS........................................................... 2 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK................................................................................... 26 ITEM 4. CONTROLS AND PROCEDURES....................................................................... 27 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS............................................................................. 28 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS............................................................................... 28 ITEM 3. DEFAULTS UPON SENIOR SECURITIES............................................................... 28 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........................................... 28 ITEM 5. OTHER INFORMATION............................................................................. 28 ITEM 6. EXHIBITS...................................................................................... 29 SIGNATURES ............................................................................................ 31 1 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS EMRISE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) September 30, December 31, ASSETS 2005 2004 ------------ ------------ Current assets: Cash and cash equivalents $ 3,398 $ 1,057 Accounts receivable, net of allowance for doubtful accounts of $248 and $153, respectively 8,982 5,796 Inventories 10,281 6,491 Deferred tax assets 1,015 352 Prepaid and other current assets 719 417 ------------ ------------ Total current assets 24,395 14,113 Property, plant and equipment, net 2,269 909 Goodwill 13,683 5,881 Intangible assets, net of accumulated amortization of $174 and $40, respectively 3,018 3,560 Other assets 563 623 ------------ ------------ $ 43,928 $ 25,086 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Borrowings under lines of credit $ 3,514 $ 878 Current portion of long-term debt 530 211 Notes payable to stockholders, current portion 500 500 Accounts payable 3,585 3,398 Income taxes payable 249 572 Accrued expenses 3,346 3,014 Total current liabilities 11,724 8,573 Long-term debt, less current portion 891 985 Notes payable to stockholders, less current portion 1,875 2,250 Deferred income taxes 1,813 1,400 Other liabilities 859 969 Total liabilities 17,162 14,177 Stockholders' equity: Common stock, $0.0033 par value Authorized 50,000,000 shares; issued and outstanding 37,498,000 and 24,777,000, respectively 123 82 Additional paid-in capital 42,837 26,746 Accumulated deficit (15,919) (16,406) Accumulated other comprehensive income (loss) (275) 487 Total stockholders' equity 26,766 10,909 ------------ ------------ $ 43,928 $ 25,086 ============ ============ See accompanying notes to condensed consolidated financial statements F-1 EMRISE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Three Months Ended Nine Months Ended September 30, September 30, ---------------------- ---------------------- 2005 2004 2005 2004 -------- -------- -------- -------- Net sales $ 11,177 $ 7,469 $ 28,438 $ 20,093 Cost of sales 6,311 4,239 16,497 11,217 -------- -------- -------- -------- Gross profit 4,866 3,230 11,941 8,876 Operating expenses: Selling, general and administrative 3,292 2,465 9,570 6,749 Engineering and product development 600 438 1,736 1,033 -------- -------- -------- -------- Income from operations 974 327 635 1,094 Other income (expense): Interest expense (106) (115) (302) (305) Interest income 27 136 Other income (expense) (91) (28) 21 (64) -------- -------- -------- -------- Income before income taxes 804 184 490 725 Income tax expense (benefit) (12) 26 3 128 -------- -------- -------- -------- Net income $ 816 $ 158 $ 487 $ 597 ======== ======== ======== ======== Basic earnings per share $ 0.02 $ 0.01 $ 0.01 $ 0.03 ======== ======== ======== ======== Diluted earnings per share $ 0.02 $ 0.01 $ 0.01 $ 0.02 ======== ======== ======== ======== See accompanying notes to condensed consolidated financial statements. F-2 EMRISE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME AND LOSS THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 (UNAUDITED) (IN THOUSANDS) Three Months Ended Nine Months Ended September 30, September 30, ------------------ ----------------- 2005 2004 2005 2004 ----- ----- ----- ----- Net income $ 816 $ 158 $ 487 $ 597 Other comprehensive loss: Foreign currency translation adjustment (6) 6 (762) (58) ----- ----- ----- ----- Comprehensive income (loss) $ 810 $ 164 $(275) $ 539 ===== ===== ===== ===== See accompanying notes to condensed consolidated financial statements. F-3 EMRISE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY NINE MONTHS ENDED SEPTEMBER 30, 2005 (UNAUDITED) (IN THOUSANDS) Accumulated Common Stock Additional Other --------------------- Paid-In Accumulated Comprehensive Shares Amount Capital Deficit Income (Loss) Total -------- -------- ------------ ------------ ------------ -------- Balance at December 31, 2004 24,777 $ 82 $ 26,746 $ (16,406) $ 487 $ 10,909 Stock option exercises 104 -- 36 -- -- 36 Warrant exercises 113 -- 14 -- -- 14 Issuance of common stock and warrants 12,504 41 16,018 -- -- 16,059 Foreign currency translation adjustment -- -- -- -- (762) (762) Warrants issued for services -- -- 23 -- -- 23 Net income -- -- -- 487 -- 487 -------- -------- ------------ ------------ ------------ -------- Balance at September 30, 2005 37,498 $ 123 $ 42,837 $ (15,919) $ (275) $ 26,766 ======== ======== ============ ============ ============ ======== See accompanying notes to condensed consolidated financial statements. F-4 EMRISE CORPORATION AND SUBSIDIARIES NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS) Nine Months Ended September 30, 2005 2004 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 487 $ 597 Adjustments to reconcile net income to cash provided by (used in) operating activities: Depreciation and amortization 616 180 Provision for doubtful accounts 116 4 Provision for inventory obsolescence 1,090 496 Deferred taxes (643) (45) Changes in operating assets and liabilities, net of businesses acquired: Accounts receivable 840 709 Inventories (218) 323 Prepaid and other assets 199) 111 Accounts payable and accrued expenses (3,645) (796) -------- -------- Cash provided by (used in) operating activities (1,158) 1,579 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Net purchases of property, plant and equipment (212) (431) Cash paid for patents (58) -- Cash paid for acquisition of Pascall, net of cash acquired (9,509) -- Cash paid for acquisition of RO Associates, net of cash acquired (4,605) -- Cash paid for acquisition of Larus, net of cash acquired -- (1,492) Disposal of property, plant and equipment 3 -- -------- -------- Cash used in investing activities (14,381) (1,923) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net repayments of lines of credit 2,636 (447) Repayments of long-term debt (1,253) (38) Proceeds from long-term debt 1,052 97 Net proceeds from issuance of common stock in offering 16,059 -- Proceeds from exercise of stock options and warrants 50 15 -------- -------- Cash provided by (used in) financing activities 18,544 (373) -------- -------- Effect of exchange rate changes on cash (664) (78) Net increase (decrease) in cash and cash equivalents 2,341 (795) Cash and cash equivalents at beginning of period 1,057 1,174 -------- -------- Cash and cash equivalents at end of period $ 3,398 $ 379 ======== ======== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Interest $ 354 $ 256 ======== ======== Income taxes $ 89 $ 427 ======== ======== See accompanying notes to condensed consolidated financial statements. F-5
EMRISE CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2005 AND 2004 (UNAUDITED) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION AND BUSINESS Emrise Corporation (the "Company"), operates through three wholly-owned subsidiaries: Emrise Electronics Corporation (formerly XET Corporation ("Emrise Electronics")), CXR Larus Corporation ("CXR Larus"), and CXR-Anderson Jacobson ("CXR-AJ"). Emrise Electronics and its subsidiaries design, develop, manufacture and market digital and rotary switches, power supplies, power conversion products, radio frequency ("RF") and microwave components and subsystems, and subsystem assemblies. CXR Larus designs, develops, manufactures and markets network access and transmission products, communications test equipment, and network timing and synchronization products. CXR-AJ designs, develops, manufactures and markets network access and transmission products. The Company conducts its operations out of various facilities in the United States, England, France and Japan and organizes itself in two product line segments: electronic components and communications equipment. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission and therefore do not include all information and footnotes necessary for a complete presentation of financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States of America. The unaudited condensed consolidated financial statements do, however, reflect all adjustments, consisting of only normal recurring adjustments, which are, in the opinion of management, necessary to state fairly the financial position as of September 30, 2005 and December 31, 2004 and the results of operations and cash flows for the related interim periods ended September 30, 2005 and 2004. However, these results are not necessarily indicative of results for any other interim period or for the year. It is suggested that the accompanying condensed consolidated financial statements be read in conjunction with the Company's audited consolidated financial statements included in its 2004 annual report on Form 10-K. STOCK-BASED COMPENSATION The Company applies Accounting Principles Bulletin ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations in accounting for its employee stock-based compensation plans. Accordingly, no compensation cost is recognized for its employee stock option plans unless the exercise price of options granted is less than fair market value on the date of grant. The Company has adopted the disclosure provisions of Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation," as amended by SFAS No. 148 "Accounting for Stock-Based Compensation-Transition and Disclosure." The following table sets forth the net income, net income available for common stockholders and earnings per share amounts for the periods presented as if the Company had elected the fair value method of accounting for stock options for all periods presented: F-6 EMRISE CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2005 AND 2004 (UNAUDITED) Three Months Ended Nine Months Ended September 30, September 30, ---------------------------- ---------------------------- 2005 2004 2005 2004 ----------- ----------- ----------- ----------- Net income (loss): As reported $ 816,000 $ 158,000 $ 487,000 $ 597,000 Add: Stock-based compensation expense included in reported net income, net of related tax effect Deduct: Stock-based compensation expense determined under the fair value-based method (49,000) (39,000) (143,000) (34,000) ----------- ----------- ----------- ----------- Pro forma $ 767,000 $ 119,000 $ 344,000 $ 563,000 =========== =========== =========== =========== Basic earnings per share: As reported $ 0.02 $ 0.01 $ 0.01 $ 0.03 Add: Stock-based compensation expense included in reported net income, net of related tax effect -- -- -- -- Deduct: Stock-based compensation expense determined under the fair value-based method -- (0.01) -- -- ----------- ----------- ----------- ----------- Pro forma $ 0.02 $ 0.00 $ 0.01 $ 0.03 =========== =========== =========== =========== Diluted earnings per share: As reported $ 0.02 $ 0.01 $ 0.01 $ 0.02 Add: Stock based compensation expense included in reported net income, net of related tax effect -- -- -- -- Deduct: Stock-based compensation expensed determined under the fair value-based method -- (0.01) -- -- ----------- ----------- ----------- ----------- Pro forma $ 0.02 $ 0.00 $ 0.01 $ 0.02 =========== =========== =========== ===========
The above calculations include the effects of all grants in the periods presented. Because options often vest over several years and additional awards are made each year, the results shown above may not be representative of the effects on net income or loss in future periods. The calculations were based on a Black-Scholes pricing model with the following assumptions: no dividend yield; expected volatility of 87% to 92%; risk-free interest rate of 3%; expected lives of 7 years. DERIVATIVE FINANCIAL INSTRUMENTS SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended, establishes accounting and reporting standards requiring that every derivative instrument be recorded in the balance sheet as either an asset or a liability measured at its fair value. SFAS No. 133 also F-7 EMRISE CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2005 AND 2004 (UNAUDITED) requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met, and that a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting. The Company uses derivatives to manage foreign currency rate risk. One of the Company's United Kingdom subsidiaries conducts business in British pounds sterling and has a program that utilizes forward currency contracts denominated in United States dollars to offset the risk associated with the effects of currency exposure for sales in United States dollars. Under this program, increases or decreases in the subsidiary's foreign currency exposure are offset by gains or losses on the forward contracts, to minimize the possibility of foreign currency transaction gains or losses. These forward contracts generally have terms of 90 days or less. The Company does not use these forward contracts for trading purposes. All outstanding foreign currency forward contracts used in this program were valued at $3,100,000 as of September 30, 2005 and were marked to market at the end of the period with unrealized gains and losses included in other income and expense. Emrise Electronics Ltd. in England also has a program that utilizes a forward currency contract denominated in British pounds sterling to offset the risk of intercompany loans to an English subsidiary. Under this program, increases or decreases in the current portion of intercompany debt due to Emrise Electronics are offset by gains or losses on the forward contract, to minimize the possibility of foreign currency transaction gains or losses. The forward contract expired in September 2005. The Company did not use this forward contract for trading purposes. The forward contract used in this program was marked to market at the end of the period with unrealized gains and losses included in other income and expense. The Company's ultimate realized gain or loss with respect to currency fluctuations will depend on the currency exchange rates and other factors in effect as the contracts mature. Net foreign exchange transaction grains included in the accompanying consolidated statements of operations totaled $30,000 for the three month period ended September 30, 2005 and $38,000 for the nine months ended September 30, 2005. There was no hedging in the year ended December 31, 2004 in which we reported $2,000 of losses due to currency exchange rates. F-8 EMRISE CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2005 AND 2004 (UNAUDITED) (2) EARNINGS PER SHARE The following table illustrates the computation of basic and diluted earnings per share (in thousands, except per share amounts): Three Months Ended Nine Months Ended September 30, September 30, ------------------- ------------------- 2005 2004 2005 2004 ------- ------- ------- ------- NUMERATOR: Net income $ 816 $ 158 $ 487 $ 597 ------- ------- ------- ------- Income attributable to common stockholders $ 816 $ 158 $ 487 $ 597 ======= ======= ======= ======= DENOMINATOR: Weighted average number of common shares outstanding during the period 37,456 24,538 37,163 23,833 Incremental shares from assumed exercises of warrants and options 1,040 556 1,195 766 ------- ------- ------- ------- Adjusted weighted average number of outstanding shares 38,496 25,094 38,358 24,599 ======= ======= ======= ======= Basic earnings per share $ 0.02 $ 0.01 $ 0.01 $ 0.03 ======= ======= ======= ======= Diluted earnings per share $ 0.02 $ 0.01 $ 0.01 $ 0.02 ======= ======= ======= ======= F-9
EMRISE CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2005 AND 2004 (UNAUDITED) The following options and warrants were excluded from the computation of diluted earnings per share as a result of the exercise prices exceeding the average market prices of the underlying shares of common stock (in thousands, except per share amounts): Three Months Ended September 30, ------------------------------ 2005 2004 ------------- ------------- Options and warrants to purchase shares of common stock 3,949 1,668 ------------- ------------- Exercise prices $1.55 - $3.44 $0.75 - $3.44 ------------- ------------- Nine Months Ended September 30, ------------------------------- 2005 2004 -------------- ------------- Options and warrants to purchase shares of common stock 3,906 1,091 -------------- ------------- Exercise prices $1.55 - $3.44 $0.75 - $3.44 -------------- ------------- (3) INVENTORIES Inventories consist of the following (in thousands): September 30, 2005 December 31, 2004 ------------------ ----------------- Raw materials $ 5,095 $ 3,222 Work-in-process 3,065 1,280 Finished goods 2,121 1,989 ------------------ ----------------- $ 10,281 $ 6,491 ================== =================
(4) REPORTABLE SEGMENTS The Company has two reportable segments: electronic components and communications equipment. The electronic components segment operates in the United States, European and Asian markets and designs, manufactures and markets digital and rotary switches, electronic power supplies, power conversion products, RF and microwave components and subsystems, and subsystem assemblies. The communications equipment segment also operates in the United States, European and Asian markets and designs, manufactures and distributes network access and transmission products, communications test instruments and network timing and synchronization products. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates performance based upon profit or loss from operations before income taxes exclusive of nonrecurring gains and losses. The Company accounts for intersegment sales at prices negotiated between the individual segments. F-10 EMRISE CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2005 AND 2004 (UNAUDITED) The Company's reportable segments are comprised of operating entities offering the same or similar products to similar customers. Each segment is managed separately because each business has different customers and different design and manufacturing and marketing strategies. Each segment has business units or components as described in paragraph 30 of SFAS No. 142. Each component has discrete financial information and a management structure. The following is a description of the Company's segment and component structure as of September 30, 2005: Reporting Units Within Electronic Components Segment: ----------------------------------------------------- o Emrise Electronics - Rancho Cucamonga, California: Digitran Division- digital and rotary switches, and electronic subsystem assemblies for defense, aerospace and industrial applications o Emrise Electronics - Monrovia, California: EEL Circuits Division - printed circuit boards mostly for intercompany use but with a small base of outside customers o EEL Japan Ltd. - Tokyo, Japan: Reseller of Digitran switches and other third party electronic components o Emrise Electronics Ltd. ("EEL") - Ashford, Kent, England/Isle of Wight, England: Power supplies and radio frequency products for defense and aerospace applications and for a broad range of other commercial applications, including in-flight entertainment systems; this reporting unit also includes XCEL Power Systems, Ltd. ("XPS"), and Pascall Electronics Limited o RO Associates Incorporated ("RO") - Sunnyvale, California: Power conversion products for defense, aerospace and industrial applications Reporting Units Within Communications Equipment Segment: -------------------------------------------------------- o CXR Larus - San Jose, California: Network timing and synchronization devices and network access equipment o CXR-AJ - Abondant, France: network access equipment and transmission equipment. There were no differences in the basis of segmentation or in the basis of measurement of segment profit or loss from the amounts disclosed in the Company's audited consolidated financial statements included in its 2004 annual report on Form 10-K except for the inclusion of Pascall sales in the electronic components segment for the last 13 days of the three months ended March 31, 2005 and for the six months ended June 30, 2005 and the inclusion of RO sales in the electronic components segment for the last 31 days of the quarter ended September 30, 2005. Selected financial data for each of the Company's operating segments is shown below (in thousands): F-11 EMRISE CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2005 AND 2004 (UNAUDITED) Three Months Three Months Nine Months Nine Months Ended Ended Ended Ended Sept. 30, 2005 Sept, 30, 2004 Sept. 30, 2005 Sept. 30, 2004 --------------- --------------- --------------- --------------- Sales to external customers: - ---------------------------- Electronic Components $ 7,262 $ 3,843 $ 17,488 $ 11,703 Communications Equipment 3,915 3,626 10,950 8,390 --------------- --------------- --------------- --------------- $ 11,177 $ 7,469 $ 28,438 $ 20,093 =============== =============== =============== =============== Segment pretax profits (losses): - -------------------------------- Electronic Components $ 1,246 $ 632 $ 2,423 $ 2,228 Communications Equipment 233 75 (57) 206 --------------- --------------- --------------- --------------- $ 1,479 $ 707 $ 2,366 $ 2,434 =============== =============== =============== =============== September 30, 2005 December 31, 2004 ------------------ ----------------- Segment assets: - --------------- Electronic Components $ 26,156 $ 8,435 Communications Equipment 15,753 16,313 ------------------ ----------------- $ 41,909 $ 24,748 ================== ================= The following is a reconciliation of the reportable segment sales, income or loss and assets to the Company's consolidated totals (in thousands): Three Months Three Months Nine Months Nine Months Ended Ended Ended Ended Sept. 30, 2005 Sept, 30, 2004 Sept. 30, 2005 Sept. 30, 2004 --------------- --------------- --------------- --------------- Income before income taxes - -------------------------- Total income for reportable segments $ 1,479 $ 707 $ 2,366 $ 2,434 Unallocated amounts: General corporate expenses 675 523 1,876 1,709 --------------- --------------- --------------- --------------- Consolidated income before income taxes $ 804 $ 184 $ 490 $ 725 =============== =============== =============== =============== September 30, 2005 December 31, 2004 ------------------ ----------------- Assets - ------ Total assets for reportable segments $ 41,909 $ 24,748 Other assets 2,066 338 ------------------ ----------------- Total consolidated assets $ 43,975 $ 25,086 ================== =================
(5) NEW ACCOUNTING PRONOUNCEMENTS New accounting pronouncements are discussed under the heading "Impacts of New Accounting Pronouncements" in Part I, Item 2 of this report. F-12 EMRISE CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2005 AND 2004 (UNAUDITED) (6) INCOME TAXES The effective tax rate for the three and nine-month period ended September 30, 2005 is different than the 34% United States statutory rate primarily because of foreign taxes on foreign source income that cannot be offset by domestic tax loss carryforwards. Also, the Company recorded a reduction in its valuation allowance of $245,000 in the third quarter of 2005. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which the net operating losses are available or when other temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities and projected future taxable income in making this assessment. Based upon projections for future taxable income, management believes it is more likely than not that the Company will realize the benefits of the deferred tax assets. (7) CREDIT FACILITIES On August 25, 2005, the Company, together with two subsidiaries, CXR Larus and Emrise Electronics, acting as guarantors, obtained a credit facility from Wells Fargo Bank, N.A. for the Company's domestic operations. As guarantors, each of CXR Telcom Corporation and Emrise Electronics is jointly and severally liable with the Company for up to $9,000,000. This facility is to be effective through September 1, 2006 and replaced the previous credit facility the Company had with Wells Fargo Bank, N.A. The previous facility was to expire July 1, 2005, but was informally extended for two months. The new credit facility has no prepayment penalty and is subject to an unused commitment fee equal to 0.25% per annum, payable quarterly based on the average daily unused amount of the line of credit described in the following paragraph. The credit facility provides a $9,000,000 revolving line of credit secured by accounts receivable, other rights to payment and general intangibles, inventories and equipment. However, borrowings may not exceed $2,000,000 until the bank has completed a collateral examination. Borrowings do not need to be supported by specific receivables or inventory balances unless aggregate borrowings under the line of credit exceed $2,000,000 at any time (a "conversion event"). If a conversion event occurs, the line of credit will convert into a formula-based line of credit until the borrowings are equal to or less than $2,000,000. The formula generally provides that outstanding borrowings under the line of credit may not exceed an aggregate of 80% of eligible accounts receivable, plus 30% of the value of eligible finished goods inventory. The interest rate is variable and is adjusted monthly based on the prime rate. The prime rate at September 30, 2005 was 6.75%. Interest is payable monthly commencing October 1, 2005. The credit facility is subject to various financial covenants on a consolidated basis. The minimum debt service coverage ratio must be greater than 1.25:1.00 on a trailing four-quarter basis. "Debt service coverage ratio" is defined as net profit after taxes, plus depreciation, plus amortization, plus or minus net distributions, divided by the sum of the current portion of long-term debt plus capitalized lease payments. The current ratio must be not less than 1.50:1.00, determined as of each fiscal quarter end. "Current ratio" is defined as total current assets divided by total current liabilities. Annual net profit after taxes must be greater than $500,000, determined as of each fiscal quarter end on a rolling four-quarter basis; provided that the Company may not sustain net loss after tax in any two consecutive fiscal quarters. Total liabilities divided by tangible net worth of the Company must not at any time be greater than 1.25:1.00, determined as of each fiscal quarter end. Tangible net worth of the Company must not at any time be less than $14,250,000 measured at the end of each quarter. "Total liabilities" is defined as current liabilities plus non-current liabilities, minus subordinated debt. "Tangible net worth" is defined as stockholders' equity plus subordinated debt, minus intangible assets. F-13 EMRISE CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2005 AND 2004 (UNAUDITED) As of September 30, 2005, the Company had no outstanding balance owing under the revolving credit line, and the Company had $2,000,000 of availability on the non-formula based portion of the credit line. As of September 30, 2005, the Company was in compliance with each of the covenants of the credit facility except for the tangible net worth covenant, as to which the Company received a waiver. The bank informally has indicated that it intends to modify the tangible net worth covenant. In the event of a default and continuation of a default, Wells Fargo may accelerate the payment of the principal balance requiring the Company to pay the entire indebtedness outstanding on that date. From and after the maturity date of the note, or any earlier date that all principal owing under the note becomes due and payable by acceleration or otherwise, the outstanding principal balance will bear interest until paid in full at an increased rate per annum equal to 4% above the rate of interest in effect from time to time under the note. The credit facility also provides for a term loan of $150,000 secured by equipment, amortizable over 36 months at a variable rate equal to the prime rate plus 1.5%. The term loan portion of the facility had a balance of $88,000 at September 30, 2005. Wells Fargo Bank, N.A. has also provided the Company with credit for the purchase of new capital equipment when needed, of which a balance of $130,000 was outstanding at September 30, 2005. The interest rate is equal to the 90-day London InterBank Offered Rate ("LIBOR") rate (4.055% at September 30, 2005) plus 3.75% per annum. Amounts borrowed under this arrangement are amortized over 60 months from the respective dates of borrowing. As of September 30, 2005, the Company's foreign subsidiaries had credit facilities, including lines of credit and term loans, with Lloyds TSB Bank PLC ("Lloyds PLC") and Lloyds TSB Commercial Finance Limited ("Lloyds") in England, IFN Finance, a subsidiary of ABN AMRO Holdings, N.V., Banc National de Paris, Societe Generale in France, and Sogelease and Johnan Shinkin Bank in Japan. At September 30, 2005, the balances outstanding under the Company's United Kingdom, France and Japan credit facilities were $3,781,000, $653,000 and $39,000, respectively. On July 8, 2005, XPS and Pascall obtained a credit facility with Lloyds. At the same time, the credit facility of Venture Finance PLC was terminated, and all debt to Venture Finance PLC was paid off. The Lloyds facility provides a revolving loan secured by receivables, with a maximum availability of 2,100,000 British pounds sterling (approximately U.S. $3,701,000 based on the exchange rate in effect on September 30, 2005). The annual interest rate on the revolving loan is 1.5% above the Lloyds TSB rate. The Lloyds TSB rate was 4.5% at September 30, 2005. This credit facility covers a period of 24 months. The financial covenants include a 50% cap on combined export gross sales of XPS and Pascall and debt turns of less than 65 days, and the funding balance is capped at 125% of XPS and Pascall combined gross sales. In addition to the revolving loan, on August 26, 2005 Lloyds also provided an unsecured cashflow loan of $1,410,000 and a $264,000 term loan that is secured by equipment and amortized over 36 months. On August 26, 2005, XCEL Power Systems, a United Kingdom-based subsidiary of the Company, entered into two agreements with Lloyds for (1) an unsecured cashflow loan of 300,000 British pounds sterling (approximately U.S. $544,000 based on the exchange rate in effect on September 30, 2005) and (2) a 150,000 British pounds sterling (approximately U.S. $272,000 based on the F-14 EMRISE CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2005 AND 2004 (UNAUDITED) exchange rate in effect on September 30, 2005) term loan, secured by equipment. Both of these loans are structured as overadvances on the previously negotiated 2,100,000 British pounds sterling revolving loan with Lloyds, bringing the maximum aggregate commitment on the revolving loan to 2,550,000 British pounds sterling (approximately U.S. $4,622,000 based on the exchange rate in effect on September 30, 2005). The unsecured cashflow loan of 300,000 British pounds sterling is payable at a rate of 25,000 British pounds sterling per month, the first payment falling due one month after initial drawdown on the revolving loan. The interest rate is variable and is adjusted monthly based on the base rate of Lloyds PLC plus 1.9%. The Lloyds PLC base rate at September 30, 2005 was 4.5%. Lloyds has sole discretion to switch the details on this overadvance account if Lloyds determines that the Company will have difficulty in meeting the specific reductions in the overadvance account. The interest rate on the secured term loan of 150,000 British pounds sterling is variable and is adjusted monthly based on the Lloyds PLC base rate plus 1.9%. Valuations of plant and machinery securing the loan are to be prepared by an independent valuer prior to drawdown and annually on the anniversary of the loan. On August 26, 2005, EEL Corporation Limited ("EEL Corp"), a United Kingdom-based subsidiary of the Company, entered into an agreement with Lloyds PLC for an unsecured term loan for 500,000 British pounds sterling (approximately U.S. $906,000 based on the exchange rate in effect on September 30, 2005). This loan is repayable in 36 consecutive monthly installments, representing principal and interest. The interest rate is variable and is adjusted daily based on the Lloyds PLC base rate plus 2.5%. The Lloyds PLC base rate at September 30, 2005 was 4.5%. The loan also includes financial covenants. EEL Corp must maintain consolidated profit before taxation and interest paid and payable of no less than 500% of the consolidated interest paid and payable. Additionally, EEL Corp must maintain consolidated profit before taxation, depreciation, amortization of goodwill and other intangibles and interest paid and payable of no less than 300% of the consolidated principal repayments and the consolidated interest paid and payable. In the event of a default, Lloyds PLC may make the loan, including any outstanding principal and interest which has accrued, repayable on demand. If any amount payable is not paid when due, EEL Corp shall pay an increased interest rate per annum equal to 3% above the rate of interest in effect from time to time under the note. In April 2003, CXR-AJ obtained a credit facility from IFN Finance, a subsidiary of ABN AMRO N.V. This credit facility is for a maximum of $1,445,000, based on the exchange rate in effect at September 30, 2005 for the conversion of euros into United States dollars. CXR-AJ also had $39,000 of term loans with several French banks outstanding as of September 30, 2005. The IFN Finance facility is secured by accounts receivable and carries an annual interest rate of 1.6% above the French "T4M" rate. At August 31, 2005, the French T4M rate was 2.067%, and this facility had a balance of $616,000. This facility has no financial performance covenants. In addition, CXR-AJ has term loans with other banks with a balance of $37,000 as of September 30, 2005. F-15 EMRISE CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2005 AND 2004 (UNAUDITED) EEL Japan Ltd., or XJL, obtained a term loan on November 29, 2002 from Johnan Shinkin Bank. The loan is amortized over five years, carries an annual fixed interest rate of 3.25% and is secured by the assets of XJL. The balance of the loan as of September 30, 2005 was $39,000 using the exchange rate in effect at that date for conversion of Japanese yen into United States dollars. There are no financial performance covenants applicable to this loan. (8) RELATED PARTY TRANSACTIONS On July 13, 2004, the Company issued two promissory notes to the former stockholders of Larus Corporation totaling $3,000,000, in addition to paying cash and issuing shares of common stock (see Note 8), in exchange for 100% of the outstanding capital stock of Larus. These notes are subordinated to the Company's bank debt and are payable in 72 monthly equal payments of principal totaling $41,667 per month plus interest at the 30-day LIBOR rate plus 5% with a maximum interest rate of 7% during the first two years of the term of the notes, 8% during the third and fourth years and 9% thereafter. As of September 30, 2005, the 30-day LIBOR rate was 3.86%. The total balance of these promissory notes as of September 30, 2005 was $2,375000. Future maturities of notes payable to stockholders are as follows Year Ending Dollars in December 31, Thousands --------------- ---------- 2005 (3 months) $ 125 2006 500 2007 500 2008 500 2009 500 Thereafter 250 ---------- $ 2,375 ========== Total interest paid on these notes for the nine months ended September 30, 2005 was $167,000. The Company entered into an above-market real property lease with the former stockholders of Larus Corporation. This lease represents an obligation that exceeds the fair market value by approximately $756,000. The lease term is for 7 years and expires on June 30, 2011. It is renewable for a 5-year term priced under market conditions. The base rent is based on a minimum rent of $0.90 per square foot per month, which is $27,000 monthly or $324,000 per year, subject to monthly adjustments of the interest rate based on the Federal Reserve Discount Rate that match the lessor's variable interest rate mortgage payments on the building. The maximum increase in any year is 1.5%, with a cumulative maximum increase of 8% over the life of the lease. The increases apply to that portion of the rent that corresponds to the interest portion of the lessor's mortgage. Lease payments paid to the related parties during the nine months ended September 30, 2005 totaled $184,000. (9) JANUARY 2005 PRIVATE PLACEMENT On January 5, 2005, the Company issued to 17 accredited record holders in a private offering an aggregate of 12,503,500 shares of common stock at a purchase price of $1.44 per share and five-year investor warrants to purchase up to an additional 3,125,875 shares of our common stock at an exercise price of $1.73 per share, for total proceeds of approximately $18,005,000. The Company F-16 EMRISE CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2005 AND 2004 (UNAUDITED) paid cash placement agent fees and expenses of approximately $961,000, and issued five-year placement warrants to purchase up to an aggregate of 650,310 shares of common stock at an exercise price of $1.73 per share in connection with the offering. The total warrants issued, representing 3,776,185 shares of the Company's common stock, have an estimated value of $4,400,000. Additional costs related to the financing include legal, accounting and consulting fees that totaled approximately $546,000 through September 30, 2005 and liquidated damages of $480,000. The Company used a portion of the proceeds from this financing to fund the acquisition of Pascall described in Note 10. The Company intends to use the remaining proceeds from this financing for additional acquisitions and for investments in new products and enhancements to existing products. The Company agreed to register for resale the shares of common stock issued to investors and the shares of common stock issuable upon exercise of the investor warrants and placement warrants. The registration obligations require, among other things, that a registration statement be declared effective no later than June 4, 2005. The Company was unable to timely meet this obligation and therefore paid to each investor liquidated damages equal to 1% of the amount paid by the investor to the Company in the offering, which damage payments totaled an aggregate of approximately $180,000. The Company also paid to the investors liquidated damages totaling $300,000 for the period from June 5, 2005 through June 30, 2005, the date the registration statement was declared effective. These damages were charged directly to equity as a return of capital against the gross proceeds of the financing. The Company also will be required to pay to each investor liquidated damages for any future periods in which the Company is unable to maintain the effectiveness of the registration in accordance with the requirements contained in the registration rights agreement the Company entered into with the investors. These liquidated damages would be, and the liquidated damages paid for the period from June 5, 2005 through June 30, 2005 were, equal to 2% of the amount paid by each investor for the common shares still owned by the investor on each monthly anniversary of the date of the default that occurs prior to the cure of the default, pro rated on a daily basis for periods of default shorter than one month. The maximum aggregate liquidated damages payable to any investor will be equal to 10% of the aggregate amount paid by the investor for the shares of the Company's common stock. Accordingly, the maximum aggregate penalty that the Company would be required to pay under this provision is 10% of the $18,005,000 initial purchase price of the common stock, which would be approximately $1,801,000. Although the Company anticipates that it will be able to meet its future registration obligations, it also anticipates that it will have sufficient cash available to pay the maximum penalties if required. (10) ACQUISITIONS LARUS CORPORATION ACQUISITION Pursuant to the terms of a stock purchase agreement executed on July 13, 2004, the Company acquired all of the issued and outstanding common stock of Larus Corporation. Larus Corporation was based in San Jose, California and engaged in the manufacturing and sale of telecommunications products. Larus Corporation had one wholly-owned subsidiary, Vista Labs, Incorporated ("Vista"), which provided engineering services to Larus Corporation. Assets held by Larus Corporation included intellectual property, cash, accounts receivable and inventories owned by each of Larus Corporation and Vista. F-17 EMRISE CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2005 AND 2004 (UNAUDITED) The purchase price for the acquisition totaled $6,539,500 and consisted of $1,000,000 in cash, the issuance of 1,213,592 shares of the Company's common stock with a fair value of $1,000,000, $887,500 in the form of two short-term, zero interest promissory notes that were repaid in 2004, $3,000,000 in the form of two subordinated secured promissory notes, warrants to purchase up to an aggregate of 150,000 shares of the Company's common stock at $1.30 per share, and approximately $580,000 of acquisition costs. The number of shares of the Company's common stock issued as part of the purchase price was calculated based on the $0.824 per share average closing price of the Company's common stock for the five trading days preceding the transaction. The warrants to purchase 150,000 shares of common stock were valued at $72,000 using a Black-Scholes formula that included a volatility of 107.19%, an interest rate of 3.25%, a life of three years and no assumed dividend. In addition, the Company assumed $245,000 in accounts payable and accrued expenses and entered into an above-market real property lease with the sellers. This lease represents an obligation that exceeds the fair market value by approximately $756,000 and is part of the acquisition accounting. The cash portion of the acquisition purchase price was funded with proceeds from the Company's credit facility with Wells Fargo Bank, N.A. and cash on-hand. In determining the purchase price for Larus Corporation, the Company took into account the historical and expected earnings and cash flow of Larus Corporation, as well as the value of companies of a size and in an industry similar to Larus Corporation, comparable transactions and the market for such companies generally. The purchase price represented a significant premium over the $1,800,000 recorded net worth of Larus Corporation's assets. In determining this premium, the Company considered the Company's potential ability to refine various Larus Corporation products and to use the Company's marketing resources and status as a qualified supplier to qualify and market those products for sale to large telecommunications companies. The Company believes that large telecommunications companies desired to have an additional choice of suppliers for those products and would be willing to purchase Larus Corporation's products following some refinements. The Company also believes that if Larus Corporation had remained independent, it was unlikely that it would have been able to qualify to sell its products to the large telecommunications companies due to its small size and lack of history selling to such companies. Therefore, Larus Corporation had a range of value separate from the net worth it had recorded on its books. In conjunction with the acquisition of Larus Corporation, the Company commissioned a valuation firm to determine what portion of the purchase price should be allocated to identifiable intangible assets. The valuation analysis is complete. Accordingly, the Company has recorded the Larus Corporation trade name and trademark at $750,000, the technology at $1,150,000, and customer relationships at $200,000. Goodwill associated with the Larus Corporation acquisition totals $4,944,000. The Larus Corporation trade name and trademark were determined to have indefinite lives and therefore are not being amortized but rather are being periodically tested for impairment. The technology and customer relationships were both estimated to have ten-year lives and, as a result, $40,000 and $129,000 of amortization expenses were recorded and charged to administrative expense during the year ended December 31, 2004 and the nine months ended September 30, 2005, respectively. Previously, management had estimated the intangibles of Larus Corporation to be $2,800,000 for trademark and trade name, $500,000 for technology, and $300,000 for customer relationships. As a result, the balances were adjusted and $50,000 of amortization expense was recorded to adjust the accumulated amortization to the revised intangible balances. F-18 EMRISE CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2005 AND 2004 (UNAUDITED) The following table summarizes the unaudited assets acquired and liabilities assumed in connection with this acquisition: Dollars in Thousands ----------- Current assets $ 2,460 Property, plant and equipment 90 Intangible assets other than goodwill 2,100 Goodwill 4,709 ----------- Total assets acquired 9,359 Current liabilities (531) Deferred income taxes (1,400) Unfavorable lease obligation and other liabilities (888) ----------- Total liabilities assumed (2,819) ----------- Net assets acquired $ 6,540 =========== The intangible assets other than goodwill consist of non-amortizable trade names with a carrying value of $750,000, and technology and customer relationships with carrying values of $1,150,000 and $200,000, respectively, that are amortizable over ten years. Amortization for the intangibles subject to amortization as of September 30, 2005 is anticipated to be approximately $129,000 per year for each of the next five years. PASCALL ACQUISITION On March 1, 2005, the Company and EEL Corporation Limited, a second-tier wholly-owned subsidiary of the Company ("EEL"), entered into an agreement ("Purchase Agreement") for EEL to acquire all of the issued and outstanding capital stock of Pascall Electronic (Holdings) Limited ("PEHL"). The closing of the purchase occurred on March 18, 2005. The Company loaned to EEL the funds that EEL used to purchase PEHL. PEHL has one wholly-owned subsidiary, Pascall Electronics Limited ("Pascall"), which produces, designs, develops, manufactures and sells power supplies and RF products for a broad range of applications, including in-flight entertainment systems and military programs. Under the Purchase Agreement, EEL purchased all of the outstanding capital stock of PEHL, using funds loaned to EEL by the Company. The purchase price for the acquisition initially totaled $9,669,000, subject to adjustments as described below, and included a $5,972,000 cash payment to PEHL's former parent, a $3,082,000 loan to PEHL and Pascall and approximately $615,000 in acquisition costs, as described below. The initial portion of the purchase price was 3,100,000 British pounds sterling (approximately U.S. $5,972,000 based on the exchange rate in effect on March 18, 2005). The initial portion of the purchase price was paid in cash at the closing and was subject to upward or downward adjustment on a pound for pound basis to the extent that the value of the net assets of Pascall as of the closing date was greater or less than 2,520,000 British pounds sterling. F-19 EMRISE CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2005 AND 2004 (UNAUDITED) On May 6, 2005, the Company submitted to Intelek Properties Limited (which is a subsidiary of Intelek PLC, a London Stock Exchange public limited company, and is the former parent of PEHL), the Company's calculation of the value of the net assets of Pascall as of the closing date, which the Company believed slightly exceeded 2,520,000 British pounds sterling. Ultimately, the parties determined that the value of the net assets of Pascall at the closing date was 2,650,000 British pounds sterling. As a result, the Company paid to Intelek Properties Limited 130,000 British pounds sterling (approximately U.S. $236,000 based on the exchange rate in effect at June 30, 2005) on August 1, 2005 to satisfy this obligation. The purchase price is also subject to downward adjustments for any payments that may be made to EEL under indemnity, tax or warranty provisions of the Purchase Agreement. EEL loaned to PEHL and Pascall at the closing 1,600,000 British pounds sterling (approximately U.S. $3,082,000 based on the exchange rate in effect on March 18, 2005) in accordance with the terms of a Loan Agreement entered into by those entities at the closing. The loaned funds were used to immediately repay outstanding intercompany debt owed by PEHL and Pascall to the seller. The Company and Intelek PLC have agreed to guarantee payment when due of all amounts payable by EEL and Intelek Properties Limited, respectively, under the Purchase Agreement. The Company and EEL agreed to seek to replace the guaranty that Intelek Properties Limited has given to Pascall's landlord with a guaranty by the Company, and EEL has agreed to indemnify Intelek Properties Limited and its affiliates for damages they suffer as a result of any failure to obtain the release of the guarantee of the 17-year lease that commenced in May 1999. The leased property is a 30,000 square foot administration, engineering and manufacturing facility located off the south coast of England. Intelek Properties Limited has agreed to various restrictive covenants that apply for various periods following the closing. The covenants include non-competition with Pascall's business, non-interference with Pascall's customers and suppliers, and non-solicitation of Pascall's employees. In conjunction with the closing, Intelek Properties Limited, Intelek PLC, EEL, and the Company entered into a Supplemental Agreement dated March 18, 2005. The Supplemental Agreement provides, among other things, that an interest-free bridge loan of 200,000 British pounds sterling (approximately U.S. $385,000 based on the exchange rate in effect on March 17, 2005) that was made by the seller to Pascall on March 17, 2005 would be repaid by Pascall by March 31, 2005. EEL agreed to ensure that Pascall had sufficient funds to repay the bridge loan. The bridge loan was repaid in full by Pascall on the March 31, 2005 due date. F-20 EMRISE CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2005 AND 2004 (UNAUDITED) The following table summarizes the unaudited assets acquired and liabilities assumed in connection with this acquisition, including $615,000 in acquisition costs: Dollars in Thousands ------------ Current assets............................... $ 6,196 Property, plant and equipment................ 1,367 Intangibles, including goodwill.............. 5,348 Total assets acquired........................ 12,911 Current liabilities.......................... (2,875) Other liabilities............................ (80) Total liabilities assumed.................... (2,955) Net assets acquired.......................... $ 9,956 The purchase price represented a significant premium over the recorded net worth of Pascall's assets. In determining to pay this premium, we considered various factors, including the opportunities that Pascall presented for us to add RF components and RF subsystem assemblies to our product offerings, the marketing resources of Pascall in the United States power supplies market, and expected synergies between Pascall's business and our existing power supply business. In conjunction with the acquisition of Pascall, the Company has selected a valuation firm to determine what portion of the purchase price should be allocated to identifiable intangible assets. The Company has considered whether the acquisition included various types of identifiable intangible assets, including trade names, trademarks, patents, covenants not to compete, customers, workforce, technology and software. The Company has estimated that the Pascall trade name and trademark are valued at $50,000. The Company has estimated that the covenants not to compete that were obtained from Pascall's former affiliates are valued at $100,000 in light of public statements made by those affiliates indicating that they were, for strategic reasons, exiting the power supply business, which the Company believes result in a low probability that they would return to the power supply business absent the covenants not to compete. The Company believes that no other identifiable intangible assets of value were acquired. No patents were acquired. The Company has not ascribed any value to Pascall's customer base because the Company's United Kingdom subsidiary, XCEL Power Systems, Ltd., already sells to Pascall's key customers. Pascall's workforce does not hold any special skills that are not readily available from other sources. The Company did not identify any valuable completed technology that was acquired, because Pascall utilizes non-proprietary technology to produce custom power supplies pursuant to customer specifications. Pascall does not develop or design software and does not own software of any material value. Accordingly, the Company has estimated that the goodwill associated with the Pascall acquisition totaled $5,298,000 as compared to the initial goodwill of $4,571,000. The Pascall trade name and trademark were determined to have indefinite lives and therefore are not being amortized but rather are being periodically tested for impairment. The covenants not to compete will be amortized over their three-year duration. The valuation of the identified intangible assets is expected to be completed by December 31, 2005 and could result in changes to the value of these identified intangible assets and corresponding changes to the value of goodwill. However, the Company does not believe these changes will be material to its financial position or results of operations. F-21 EMRISE CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2005 AND 2004 (UNAUDITED) RO ASSOCIATES ACQUISITION On September 2, 2005, Emrise Electronics entered into a stock purchase agreement dated effective as of August 31, 2005 to acquire RO Associates Incorporated, a California corporation ("RO"). Effective September 28, 2005, Emrise Electronics entered into an amendment to the stock purchase agreement. Pursuant to the terms of the stock purchase agreement, as amended, Emrise Electronics acquired all of the issued and outstanding shares of common stock of RO. Prior to the acquisition, all of the common stock of RO was owned by Robert H. Okada, as Trustee of the Robert H. Okada Trust Agreement dated February 11, 1992, and Sharon Vavro, an individual. RO is based in Sunnyvale, California and designs and manufactures power conversion products for telecom, industrial, commercial, and military applications. As a result of the acquisition, Emrise Electronics acquired all of the assets and liabilities of RO, including the intellectual property, cash, accounts receivable and inventories owned by RO. Emrise Electronics intends to use these acquired assets for the same purpose for which they were used by RO. The purchase price consisted of $2,400,000 in cash paid at closing and an additional $600,000 in cash payable in two equal installments on October 6, 2005 and March 31, 2006. The acquisition purchase price was funded with cash on-hand. The purchase price is subject to adjustment based on the value of the shareholders' equity, accounts receivable, accounts payable, cash on hand and net inventory of RO, as determined by the consolidated, unaudited balance sheet as of August 31, 2005, prepared in accordance with accounting principles generally accepted in the United States of America. In addition, concurrently with the closing of the acquisition of RO, Emrise Electronics paid in full all then existing credit facilities of RO in the aggregate amount of $1,602,000. In determining the purchase price for RO, Emrise Electronics considered the historical and expected earnings and cash flow of RO, as well as the value of companies of a size and in an industry similar to RO, comparable transactions and the market for such companies generally. The purchase price represented a premium of approximately $2,275,000 over the $2,340,000 recorded net worth of the assets of RO. In determining this premium, Emrise Electronics considered the synergistic and strategic advantages provided by having a United States-based power conversion manufacturer and the value of the goodwill, customer relationships and technology of RO. Goodwill associated with the RO acquisition totaled approximately $1,291,000. Emrise intends to commission a valuation firm to determine what portion of the purchase price should be allocated to identifiable intangible assets. Emrise has estimated that RO's technology is valued at approximately $484,000, its trademarks are valued at $300,000 and its customer relationships are valued at $200,000. The valuation of the identified intangible assets is expected to be completed in December 2005 and could result in changes to the value of these identified intangible assets and corresponding changes to the value of goodwill. However, Emrise does not believe these changes will be material to Emrise's consolidated financial position or results of operations. F-22 EMRISE CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2005 AND 2004 (UNAUDITED) In connection with the execution of the stock purchase agreement, Emrise Electronics executed a lease agreement with Caspian Associates for the lease of 25,700 square feet of a 30,700 square feet building located at 246 Caspian Drive, Sunnyvale, California. The lease provides for a two-year term, commencing on September 1, 2005 and ending on August 31, 2007, at a base rent of $9,210 per month. Additionally, the lease provides for an extension of the lease term for an additional three years, to August 31, 2010, if RO achieves net sales of at least $14,500,000 and cumulative gross profit of at least $3,987,500. If RO achieves the net sales and cumulative gross profit targets, the monthly base rent for the facility will be increased to the fair market value as of the first day of the next calendar month. The facility will continue to be used for the design, manufacture and sale of power conversion products. In connection with the stock purchase agreement, Emrise Electronics also executed an employment agreement with Richard Okada, effective as of September 1, 2005, to serve as president of RO. Mr. Okada will receive an annual base salary of $115,000 for the two-year term of the employment agreement. In addition, Mr. Okada is entitled to receive an incentive bonus based upon performance criteria to be determined in the future. In connection with Mr. Okada's employment agreement, Emrise granted Mr. Okada an incentive stock option under Emrise's 2000 Stock Option Plan to purchase up to 50,000 shares of Emrise's common stock at an exercise price of $1.35 per share. This option vests 50% on September 1, 2006 and 50% on September 1, 2007. The option expires on August 31, 2015. The following table summarizes the unaudited assets and liabilities assumed in connection with this acquisition, including $48,000 in acquisition costs: DOLLARS IN THOUSANDS -------------- Current assets $ 3,269 Property, plant and equipment 329 Intangibles, including goodwill 2,275 Other assets 66 -------------- Total assets acquired 5,939 Current liabilities (931) Other liabilities (393) -------------- Total liabilities assumed (1,324) -------------- Net assets acquired $ 4,615 ============== PRO FORMA RESULTS OF OPERATIONS The following table summarizes, on an unaudited pro forma basis, the combined results of operations of the Company, Larus Corporation, Pascall and RO, as though the Larus Corporation, Pascall and RO acquisitions occurred as of January 1, 2004. The pro forma amounts give effect to appropriate adjustments for interest expense and income taxes. The pro forma amounts presented are not necessarily indicative of future operating results (in thousands, except per share amounts). F-23 EMRISE CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2005 AND 2004 (UNAUDITED) Three Months Nine Months Ended September 30, Ended September 30, ----------------------------- ----------------------------- 2005 2004 2005 2004 ------------ ------------ ------------ ------------ Revenues $ 11,887 $ 12,098 $ 35,043 $ 33,834 Net income $ 691 $ 586 $ 431 $ 910 Earnings per share of common stock Basic $ 0.02 $ 0.02 $ 0.01 $ 0.02 ============ ============ ============ ============ Diluted $ 0.02 $ 0.02 $ 0.01 $ 0.02 ============ ============ ============ ============ (11) ACCRUED EXPENSES Accrued expenses were as follows (in thousands): September 30, 2005 December 31, 2004 ------------------ ----------------- Accrued salaries $ 720 $ 805 Accrued payroll taxes and benefits 692 491 Advance payments from customers 50 77 Other accrued expenses 1,884 1,641 ------------------ ----------------- Total accrued expenses $ 3,346 $ 3,014 ================== ================= F-25
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following discussion and analysis should be read in conjunction with our condensed consolidated financial statements and notes to financial statements included elsewhere in this document. This report and our condensed consolidated financial statements and notes to financial statements contain forward-looking statements, which generally include the plans and objectives of management for future operations, including plans and objectives relating to our future economic performance and our current beliefs regarding revenues we might earn if we are successful in implementing our business strategies. The forward-looking statements and associated risks may include, relate to or be qualified by other important factors, including, without limitation: o the projected growth or contraction in the electronic components and communications equipment markets in which we operate; o our business strategy for expanding, maintaining or contracting our presence in these markets; o our ability to efficiently and effectively integrate and operate the businesses of our newly-acquired subsidiaries, Pascall Electronics Limited ("Pascall") and RO Associates Incorporated ("RO"); o our ability to identify, fund and integrate additional businesses; o anticipated trends in our financial condition and results of operations; and o our ability to distinguish ourselves from our current and future competitors. We do not undertake to update, revise or correct any forward-looking statements. The information contained in this document is not a complete description of our business or the risks associated with an investment in our common stock. Before deciding to buy or maintain a position in our common stock, you should carefully review and consider the various disclosures we made in this report, and in our other materials filed with the Securities and Exchange Commission that discuss our business in greater detail and that disclose various risks, uncertainties and other factors that may affect our business, results of operations or financial condition. In particular, you should review our annual report on Form 10-K for the year ended December 31, 2004, and the "Risk Factors" we included in that report. Any of the factors described above could cause our financial results, including our net income or loss or growth in net income or loss to differ materially from prior results, which in turn could, among other things, cause the price of our common stock to fluctuate substantially. 2 OVERVIEW Through our three wholly-owned operating subsidiaries, Emrise Electronics Corporation ("Emrise Electronics"), CXR Larus Corporation ("CXR Larus") and CXR-Anderson Jacobson ("CXR-AJ"), and through the divisions and subsidiaries of those subsidiaries, we design, develop, manufacture, assemble, and market products and services in the following two material business segments: o Electronic Components -- digital and rotary switches -- electronic power supplies -- subsystem assemblies -- radio frequency ("RF") components and subsystem assemblies o Communications Equipment -- network access and transmission products -- network timing and synchronization products -- communications test instruments Sales to customers in the electronic components segment, primarily to aerospace customers, defense contractors and industrial customers, were 61.5% and 58.5% of our total net sales during the nine months ended September 30, 2005 and 2004, respectively. Sales of communications equipment and related services, primarily to private customer premises and public carrier customers, were 38.5% and 41.5% of our total net sales during the nine months ended September 30, 2005 and 2004, respectively. Sales of our electronic components segment increased $5,785,000 (49.4%) for the nine months ended September 30, 2005 as compared to the nine months ended September 30, 2004. Excluding sales of $8,209,000 from our new subsidiaries, Pascall and RO, which we acquired as of March 18, 2005 and August 31, 2005, respectively, our electronic components segment sales declined $2,424,000 (20.7%) for the nine months ended September 30, 2005 as compared to the nine months ended September 30, 2004, primarily due to a $2,239,000 (32.2%) decrease in net sales of power supplies manufactured by our XCEL Power Systems, Ltd. subsidiary that was primarily due to the customer's delay of delivery requirements for the Eurofighter Typhoon aircraft. We achieved a $2,560,000 (30.5%) sales increase in our communications equipment segment for the nine months ended September 30, 2005 as compared to the nine months ended September 30, 2004. This was primarily due to increased demand for our test equipment, network access equipment and synchronous timing devices. However, sales of our European network access products declined to $3,848,000 during the nine months ended September 30, 2005 from $4,391,000 during the prior nine-month period, which decline partially offset the total increases in sales of this segment. The decline primarily was due to lower sales volume caused by delay in the award of contracts by the French military for products under previous contracts. 3 We have reduced costs at CXR Larus by increasing our sourcing of test equipment from offshore manufacturers that produce for lower prices than the previous cost incurred to manufacture in-house. Outsourcing of manufacturing to Asia was a primary reason we were able to increase our gross margin from 34% in 2002 to 67% in 2004 in our CXR Larus test equipment business, which resulted in an annual cost reduction of approximately $1,372,000 during 2004. During the nine months ended September 30, 2005, we began working toward establishing a similar arrangement for the manufacture of our network timing and synchronization products, which we anticipate will result in further improvements in our gross margin. We also reduced costs elsewhere in our communications equipment segment and lowered the breakeven point both in our United States and France operations through various cost-cutting methods, such as using offshore contract manufacturers, reducing facility rent expense by approximately $150,000 on an annual basis as compared to the nine months ended September 30, 2004, and downsizing our administrative office in Paris, France. At the end of 2004, we merged Larus Corporation with and into CXR Telcom Corporation to form CXR Larus Corporation, and we integrated their operations. As described in our annual report on Form 10-K for the year ended December 31, 2004, we paid $6,539,500 to acquire the outstanding common stock of Larus Corporation on July 13, 2004 and have consolidated the results of operations of Larus Corporation beginning from the date of acquisition, July 13, 2004. We are beginning to now benefit from increased sales of our French subsidiary's products in the United States market as a result of sales and marketing support for the French products by CXR Larus' United States-based sales and marketing staff, which has resulted in the securing of relationships with two new major United States-based distributors during 2005. We consolidated our CXR Larus subsidiary's operations into Larus Corporation's facility, which resulted in annual savings in rent and facilities expense of approximately $250,000 beginning in the third quarter of 2004. During the three months ended June 30, 2005, we implemented further administrative, engineering and sales cost savings through staffing reductions of approximately $750,000 on an annual basis. These staffing reductions related to eliminating redundancies in personnel, including ten sales, marketing and administrative positions and one engineering director and the former President of CXR Telcom Corporation. On March 18, 2005, Emrise Electronics Ltd. ("EEL") purchased all of the outstanding capital stock of Pascall Electronic (Holdings) Limited ("PEHL"), the parent holding company of Pascall, using funds loaned to EEL by Emrise. The purchase price for the acquisition initially totaled $9,669,000, subject to adjustments as described below, and included a $5,972,000 cash payment to PEHL's former parent, a $3,082,000 loan from EEL to PEHL and Pascall, and approximately $615,000 in acquisition costs. The initial portion of the purchase price was 3,100,000 British pounds sterling (approximately U.S. $5,972,000 based on the exchange rate in effect on March 18, 2005). The initial portion of the purchase price was paid in cash at the closing and was subject to upward or downward adjustment on a pound for pound basis to the extent that the value of the net assets of Pascall as of the closing date was greater or less than 2,520,000 British pounds sterling. On May 6, 2005, we submitted to Intelek Properties Limited (which is a subsidiary of Intelek PLC, a London Stock Exchange public limited company, and is the former parent of PEHL), our calculation of the value of the net assets of Pascall as of the closing date, which we believed slightly exceeded 2,520,000 British pounds sterling. Ultimately, the parties determined that the value of the net assets of Pascall at the closing date was 2,650,000 British pounds sterling. As a result, we paid to Intelek Properties Limited 130,000 British pounds sterling (approximately U.S. $236,000 based on the exchange rate in effect at June 30, 2005) on August 1, 2005 to satisfy this obligation. The purchase price is also subject to downward adjustments for any payments that may be made to EEL under indemnity, tax or warranty provisions of the purchase agreement. 4 EEL loaned to Pascall and PEHL at the closing 1,600,000 British pounds sterling (approximately U.S. $3,082,000 based on the exchange rate in effect on March 18, 2005) in accordance with the terms of a loan agreement entered into by those entities at the closing. The loaned funds were used to immediately repay outstanding intercompany debt owed by Pascall and PEHL to Intelek Properties Limited. We and Intelek PLC have agreed to guarantee payment when due of all amounts payable by EEL and Intelek Properties Limited, respectively, under the PEHL purchase agreement. Emrise and EEL have agreed to seek to replace the guaranty that Intelek Properties Limited has given to Pascall's landlord with a guaranty from us, and EEL has agreed to indemnify Intelek Properties Limited and its affiliates for damages they suffer as a result of any failure to obtain the release of the guarantee of the 17-year lease that commenced in May 1999. The leased property is a 30,000 square-foot administration, engineering and manufacturing facility located off the south coast of England. Intelek Properties Limited has agreed to various restrictive covenants that apply for various periods following the closing. The covenants include non-competition with Pascall's business, non-interference with Pascall's customers and suppliers, and non-solicitation of Pascall's employees. In conjunction with the closing, Intelek Properties Limited, EEL, Intelek PLC and we entered into a Supplemental Agreement dated March 18, 2005. The Supplemental Agreement provides, among other things, that an interest-free bridge loan of 200,000 British pounds sterling (approximately U.S. $385,400 based on the exchange rate in effect on March 17, 2005) that was made by Intelek Properties Limited to Pascall on March 17, 2005 would be repaid by Pascall by March 31, 2005. EEL agreed to ensure that Pascall has sufficient funds to repay the bridge loan. The bridge loan was repaid in full by Pascall to the seller on the March 31, 2005 due date. We have consolidated the results of operations of Pascall beginning from the date of acquisition, March 18, 2005. Based on current sales projections, we anticipate that the Pascall acquisition will be accretive to our earnings per share despite the associated expenses relating both to the payment of the purchase price and the operation and integration of the Pascall business. We expect to increase Pascall's sales to its existing customers in the United States and to sell Pascall's products to Emrise's existing customers as a result of our local presence and enhanced support from our United States-based sales and marketing staff. We have consolidated a number of administrative functions of our two United Kingdom-based subsidiary's operations into the Pascall facility, which we anticipate will result in significant administrative and facilities cost savings. The following table summarizes the unaudited assets acquired and liabilities assumed in connection with this acquisition, including $615,000 in acquisition costs: Dollars in Thousands ------------ Current assets............................... $ 6,196 Property, plant and equipment................ 1,367 Intangibles, including goodwill 5,348 ------------ Total assets acquired........................ 12,911 Current liabilities.......................... (2,875) Other liabilities............................ (80) ------------ Total liabilities assumed.................... (2,955) ------------ Net assets acquired.......................... $ 9,956 ============ 5 The purchase price represented a significant premium over the recorded net worth of Pascall's assets. In determining to pay this premium, we considered various factors, including the opportunities that Pascall presented for us to add RF components and RF subsystem assemblies to our product offerings, the marketing resources of Pascall in the United States power supplies market, and expected synergies between Pascall's business and our existing power supplies business. On September 2, 2005, we entered into a stock purchase agreement dated effective as of August 31, 2005 to acquire RO. We amended the agreement on September 28, 2005. Pursuant to the terms of the stock purchase agreement, as amended, we acquired all of the issues and outstanding shares of common stock of RO. Prior to the acquisition, all of the common stock of RO was owned by Robert H. Okada, as Trustee of the Robert H. Okada Trust Agreement dated February 11, 1992, and Sharon Vavro, an individual. RO is based in Sunnyvale, California and designs and manufactures power conversion products for telecom, industrial, commercial and military applications. As a result of the acquisition, we acquired all of the assets and liabilities of RO, including the intellectual property, cash, accounts receivable and inventories owned by RO. We intend to use these acquired assets for the same purpose for which they were used by RO. The purchase price consisted of $2,400,000 in cash paid at closing and an additional $600,000 in cash payable in two equal installments on October 6, 2005 and March 31, 2006. The acquisition purchase price was funded with cash on-hand. The purchase price is subject to adjustment based on the value of the shareholders' equity, accounts receivable, accounts payable, cash on hand and net inventory of RO, as determined by the consolidated, unaudited balance sheet as of August 31, 2005, prepared in accordance with accounting principles generally accepted in the United States of America. In addition, concurrently with the closing of the acquisition of RO, we paid in full all then existing credit facilities of RO in the aggregate amount of $1,602,060. In determining the purchase price for RO, we considered the historical and expected earnings and cash flow of RO, as well as the value of companies of a size and in an industry similar to RO, comparable transactions and the market for such companies generally. The purchase price represented a premium of approximately $2,275,000 over the $2,340,000 net worth of the assets of RO. In determining this premium, Emrise Electronics considered the synergistic and strategic advantages provided by having a United States-based power converted manufacturer and the value of the goodwill, customer relationships and technology of RO. Goodwill associated with the RO acquisition totaled approximately $1,291,000. We intend to commission a valuation firm to determine what portion of the purchase price should be allocated to identifiable intangible assets. We have estimated that RO's technology is valued at approximately $484,000, its trademarks are valued at $300,000 and its customer relationships are valued at $200,000. The valuation of the identified intangible assets is expected to be completed in December 2005 and could result in changes to the value of these identified intangible assets and corresponding changes to the value of goodwill. However, we do not believe these changes will be material to our consolidated financial position or results of operations. In connection with the execution of the stock purchase agreement, we executed a lease agreement with Caspian Associates for the lease of 25,700 square feet of a 30,700 square feet building located at 245 Caspian Drive, Sunnyvale, California. The lease provides for a two-year term, commencing on September 1, 2005 and ending on August 31, 2007, at a base rent of $9,210 per month. Additionally, the lease provides for an extension of the lease term for an additional three years, to August 31, 2010 if RO achieves net sales of at 6 least $14,500,000 and cumulative gross profit of at least $3,987,500. If RO achieves the net sale and cumulative gross profit targets, the monthly base rent for the facility will be increased to the fair market value as of the first day of the next calendar month. The facility will continue to be used for the design, manufacture and sale of power conversion products. In connection with the stock purchase agreement, we also executed an employment agreement with Richard Okada, effective as of September 1, 2005, to serve as president of RO. Mr. Okada will receive an annual base salary of $115,000 for the two-year term of the employment agreement. In addition, Mr. Okada is entitled to receive an incentive bonus based upon performance criteria to be determined in the future. In connection with Mr. Okada's employment agreement, Emrise granted Mr. Okada an incentive stock option under Emrise's 2000 Stock Option Plan to purchase up to 50,000 shares of Emrise's common stock at an exercise price of $1.35 per share. This option vests 50% on September 1, 2006 and 50% on September 1, 2007. The option expires on August 31, 2015. The following table summarizes the unaudited assets and liabilities assumed in connection with the acquisition, including $48,000 in acquisition costs. Dollars in Thousands -------------- Current assets............................... $ 3,269 Property, plant and equipment................ 329 Intangibles, including goodwill 2,275 Other assets 66 Total assets acquired........................ 5,939 Current liabilities.......................... (931) Other liabilities............................ (393) Total liabilities assumed.................... (1,324) Net assets acquired.......................... $ 4,615 The following table summarizes, on an unaudited pro forma basis, the combined results of operations of Emrise, Larus Corporation, Pascall and RO, as though the Laurus Corporation, Pascall and RO acquisitions occurred as of January 1, 2004. The pro forma amounts give effect to appropriate adjustments for interest expense and income taxes. The pro forma amounts presented are not necessarily indicative of future operating results (in thousands, except per share amounts). Three Months Six Months Ended September 30, Ended September 30, ----------------------------- ----------------------------- 2005 2004 2005 2004 ------------ ------------ ------------ ------------ Revenues $ 11,887 $ 12,098 $ 35,043 $ 33,834 Net income $ 691 $ 586 $ 431 $ 910 Earnings per share of common stock Basic $ 0.02 $ 0.02 $ 0.01 $ 0.02 ============ ============ ============ ============ Diluted $ 0.02 $ 0.02 $ 0.01 $ 0.02 ============ ============ ============ ============
CRITICAL ACCOUNTING POLICIES Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make 7 estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of net sales and expenses for each period. The following represents a summary of our critical accounting policies, defined as those policies that we believe are the most important to the portrayal of our financial condition and results of operations and that require management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effects of matters that are inherently uncertain. REVENUE RECOGNITION We derive revenues from sales of electronic components and communications equipment products and services. Our sales are based upon written agreements or purchase orders that identify the type and quantity of the item being purchased and the purchase price. We recognize revenues when delivery of products has occurred or services have been rendered, no significant obligations remain on our part, and collectibility is reasonably assured based on our credit and collections practices and policies. We recognize revenues from domestic sales of our electronic components and communications equipment at the point of shipment of those products. Product returns are infrequent and require prior authorization because our sales are final and we quality test our products prior to shipment to ensure they meet the specifications of the binding purchase orders under which they are shipped. Normally, when a customer requests and receives authorization to return a product, the request is accompanied by a purchase order for a replacement product. Revenue recognition for products and services provided by our United Kingdom subsidiaries depends upon the type of contract involved. Engineering/design services contracts generally entail design and production of a prototype over a term of up to several years, with all revenue deferred until all services under the contracts have been completed. Production contracts provide for a specific quantity of products to be produced over a specific period of time. Customers issue binding purchase orders for each suborder to be produced. At the time each suborder is shipped to the customer, we recognize revenue relating to the products included in that suborder. Returns are infrequent and permitted only with prior authorization because these products are custom made to order based on binding purchase orders and are quality tested prior to shipment. Generally, these products carry a one-year limited parts and labor warranty. We do not offer customer discounts, rebates or price protection on these products. We recognize revenues for products sold by our French subsidiary at the point of shipment. Customer discounts are included in the product price list provided to the customer. Returns are infrequent and permitted only with prior authorization because these products are shipped based on binding purchase orders and are quality tested prior to shipment. Generally, these products carry a two-year limited parts and labor warranty. Generally, our electronic components, network access and transmission products and network timing and synchronization products carry a one-year limited parts and labor warranty and our communications test instruments and European network access and transmission products carry a two-year limited parts and labor warranty. Products returned under warranty are tested and repaired or replaced at our option. Historically, warranty repairs have not been material. Product returns during 2004 were less than $1,000. We do not offer customer discounts, rebates or price protection on these products. 8 Revenues from services such as repairs and modifications are recognized when the service has been completed and invoiced. For repairs that involve shipment of a repaired product, we recognize repair revenues when the product is shipped back to the customer. Service revenues represented 1.8% and 5.7% of net sales during the nine months ended September 30, 2005 and the year ended December 31, 2004, respectively. RO generates a portion of its revenue from royalties. Royalty income is recognized when the technology rights have transferred to the licensee. For agreements that provide the licensees the right to manufacture and sell our proprietary products, we recognize initial license fee revenue upon delivery of the product technology. We recognize guaranteed minimum license royalties as revenue as they become due. Per unit royalties that exceed the guaranteed minimum are recognized as earned when reported. INVENTORY VALUATION Our finished goods electronic components inventories generally are built to order. Our communications equipment inventories generally are built to forecast, which requires us to produce a larger amount of finished goods in our communications equipment business so that our customers can promptly be served. Our products consist of numerous electronic and other parts, which necessitates that we exercise detailed inventory management. We value our inventory at the lower of the actual cost to purchase or manufacture the inventory (first-in, first-out) or the current estimated market value of the inventory (net realizable value). We perform physical inventories at least once a year. We regularly review inventory quantities on hand and record a provision for excess and obsolete inventory based primarily on our estimated forecast of product demand and production requirements for the next twelve months. Additionally, to determine inventory write-down provisions, we review product line inventory levels and individual items as necessary and periodically review assumptions about forecasted demand and market conditions. Any parts or finished goods that we determine are obsolete, either in connection with the physical count or at other times of observation, are reserved for and subsequently discarded and written-off. Demand for our products can fluctuate significantly. A significant increase in the demand for our products could result in a short-term increase in the cost of inventory purchases, while a significant decrease in demand could result in an increase in the amount of excess inventory quantities on hand. In addition, the communications equipment industry is characterized by rapid technological change, frequent new product development, and rapid product obsolescence that could result in an increase in the amount of obsolete inventory quantities on hand. Also, our estimates of future product demand may prove to be inaccurate, in which case we may have understated or overstated the provision required for excess and obsolete inventory. In the future, if our inventory is determined to be overvalued, we would be required to recognize such costs in our cost of goods sold at the time of such determination. Likewise, if our inventory is determined to be undervalued, we may have over-reported our costs of goods sold in previous periods and would be required to recognize additional operating income at the time of sale. Therefore, although we make every effort to ensure the accuracy of our forecasts of future product demand, any significant unanticipated changes in demand or technological developments could have a significant impact on the value of our inventory and our reported operating results. FOREIGN CURRENCY TRANSLATION We have foreign subsidiaries that together accounted for 57.3% of our net revenues, 46.0% of our assets and 39.0% of our total liabilities as of and for the year ended December 31, 2004, and 61.0% of our net revenues, 50.3% of our assets and 53.2% of our total liabilities as of and for the nine months ended September 30, 2005. In preparing our consolidated financial statements, we 9 are required to translate the financial statements of our foreign subsidiaries from the currencies in which they keep their accounting records into United States dollars. This process results in exchange gains and losses which, under relevant accounting guidance, are either included within our statement of operations or as a separate part of our net equity under the caption "accumulated other comprehensive income (loss)." Under relevant accounting guidance, the treatment of these translation gains or losses depends upon our management's determination of the functional currency of each subsidiary. This determination involves consideration of relevant economic facts and circumstances affecting the subsidiary. Generally, the currency in which the subsidiary transacts a majority of its transactions, including billings, financing, payroll and other expenditures, would be considered the functional currency. However, management must also consider any dependency of the subsidiary upon the parent and the nature of the subsidiary's operations. If management deems any subsidiary's functional currency to be its local currency, then any gain or loss associated with the translation of that subsidiary's financial statements is included as a separate component of stockholders' equity in accumulated other comprehensive income (loss). However, if management deems the functional currency to be United States dollars, then any gain or loss associated with the translation of these financial statements would be included within our statement of operations. If we dispose of any of our subsidiaries, any cumulative translation gains or losses would be realized into our statement of operations. If we determine that there has been a change in the functional currency of a subsidiary to United States dollars, then any translation gains or losses arising after the date of the change would be included within our statement of operations. Based on our assessment of the factors discussed above, we consider the functional currency of each of our international subsidiaries as each subsidiary's local currency. Accordingly, we had a cumulative translation loss of $275,000 and gain of $487,000 that were included as part of accumulated other comprehensive income (loss) within our balance sheet at September 30, 2005 and December 31, 2004, respectively. During the nine months ended September 30, 2005 and the year ended December 31, 2004, we included translation adjustments of losses of approximately $762,000 and $379,000, respectively, under accumulated other comprehensive income (loss). If we had determined that the functional currency of our subsidiaries was United States dollars, these gains or losses would have decreased or increased our loss for these periods. The magnitude of these gains or losses depends upon movements in the exchange rates of the foreign currencies in which we transact business as compared to the value of the United States dollar. These currencies include the euro, the British pound sterling and the Japanese yen. Any future translation gains or losses could be significantly higher or lower than those we recorded for these periods. INTANGIBLES, INCLUDING GOODWILL We periodically evaluate our intangibles, including goodwill, for potential impairment. Our judgments regarding the existence of impairment are based on legal factors, market conditions and operational performance of our acquired businesses. In assessing potential impairment of goodwill, we consider these factors as well as forecasted financial performance of the acquired businesses. If forecasts are not met, we may have to record additional impairment charges not previously recognized. In assessing the recoverability of our goodwill and other intangibles, we must make assumptions regarding estimated future cash 10 flows and other factors to determine the fair value of those respective assets. If these estimates or their related assumptions change in the future, we may be required to record impairment charges for these assets that were not previously recorded. If that were the case, we would have to record an expense in order to reduce the carrying value of our goodwill. On January 1, 2002, we adopted Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets," and were required to analyze our goodwill for impairment issues by June 30, 2002, and then at least annually after that date or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. At September 30, 2005 and December 31, 2004, the reported goodwill totaled $13,683,000 and $5,881,000, respectively (net of accumulated amortization of $1,073,000 and $1,084,000, respectively). During the nine months ended September 30, 2005 and the year ended December 31, 2004, we did not record any impairment losses related to goodwill and other intangible assets. In conjunction with our July 2004 acquisition of Larus Corporation, we commissioned a valuation firm to determine what portion of the purchase price should be allocated to identifiable intangible assets. As a result of the valuation, we determined that the Larus trade name and trademark are valued at $750,000, the technology is valued at $1,150,000 and customer relationships are valued at $200,000. Goodwill associated with the Larus Corporation acquisition totaled $4,944,000. The Larus trade name and trademark were determined to have indefinite lives and therefore are not being amortized but rather are being periodically tested for impairment. The technology and customer relationships were both estimated to have ten-year lives and, as a result, $40,000 and $129,000 of amortization expenses were recorded and charged to administrative expense during the year ended December 31, 2004 and the nine months ended September 30, 2005, respectively. Previously, management had estimated the intangibles of Larus Corporation to be $2,800,000 for trademark and trade name, $500,000 for technology, and $300,000 for customer relationships. As a result, the balances were adjusted and $50,000 of amortization expense was recorded to adjust the accumulated amortization to the revised intangible balances. In conjunction with our March 2005 acquisition of Pascall, we have selected a valuation firm to determine what portion of the purchase price should be allocated to identifiable intangible assets. We have considered whether the acquisition included various types of identifiable intangible assets, including trade names, trademarks, covenants not to compete, patents, customers, workforce, technology and software. We have estimated that the Pascall trade name and trademark are valued at $50,000. We have estimated that the covenants not to compete that were obtained from Pascall's former affiliates are valued at $100,000 in light of public statements made by those affiliates indicating that they were, for strategic reasons, exiting the power supply business, which we believe results in a low probability that they would return to the power supply business absent the covenants not to compete. We believe that no other identifiable intangible assets of value were acquired. No patents were acquired. We have not ascribed any value to Pascall's customer base because our United Kingdom subsidiary, XCEL Power Systems, Ltd., already sells to Pascall's key customers. Pascall's workforce does not hold any special skills that are not readily available from other sources. We did not identify any valuable completed technology that was acquired, because Pascall utilizes non-proprietary technology to produce custom power supplies pursuant to customer specifications. Pascall does not develop or design software and does not own software of any material value. Accordingly, we have estimated that the goodwill associated with the Pascall acquisition totaled $5,298,000 as compared to the initial goodwill of $4,571,000. The Pascall trade name and trademark were determined to have indefinite lives and therefore are not being amortized but rather are being periodically tested for impairment. The covenants not to compete will be amortized over their three-year duration. The valuation of the identified intangible assets is expected to be completed during the quarter ending December 31, 2005 and could result in changes to the value of these identified intangible assets and corresponding changes to the value of goodwill. However, we do not believe these changes will be material to our financial position or results of operations. 11 Our Emrise Electronics subsidiary acquired RO Associates Incorporated effective August 31, 2005. In determining the purchase price for RO, Emrise Electronics considered the historical and expected earnings and cash flow of RO, as well as the value of companies of a size and in an industry similar to RO, comparable transactions and the market for such companies generally. The purchase price represented a premium of approximately $2,275,000 over the $2,340,000 net worth of the assets of RO. In determining this premium, Emrise Electronics considered the synergistic and strategic advantages provided by having a United States-based power converted manufacturer and the value of the goodwill, customer relationships and technology of RO. Goodwill associated with the RO acquisition totaled approximately $1,290,000. We intend to commission a valuation firm to determine what portion of the purchase price should be allocated to identifiable intangible assets. We have estimated that RO's technology is valued at approximately $484,000, its trademarks are valued at $300,000 and its customer relationships are valued at $200,000. The valuation of the identified intangible assets is expected to be completed in December 2005 and could result in changes to the value of these identified intangible assets and corresponding changes to the value of goodwill. However, we do not believe these changes will be material to our consolidated financial position or results of operations. RESULTS OF OPERATIONS The tables presented below, which compare our results of operations for the three and nine months ended September 30, 2005 to our results of operations for the three and nine months ended September 30, 2004, present the results for each period, the changes in those results from one period to another in both dollars and percentage change, and the results for each period as a percentage of net sales. The columns present the following: o The first two data columns show the absolute results for each period presented. o The columns entitled "Dollar Variance" and "Percentage Variance" show the change in results, both in dollars and percentages. These two columns show favorable changes as a positive and unfavorable changes as negative. For example, when our net sales increase from one period to the next, that change is shown as a positive number in both columns. Conversely, when expenses increase from one period to the next, that change is shown as a negative in both columns. o The last two columns show the results for each period as a percentage of net sales. 12 THREE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2004 RESULTS AS A PERCENTAGE DOLLAR PERCENTAGE OF NET SALES FOR THE THREE MONTHS ENDED VARIANCE VARIANCE THREE MONTHS ENDED September 30, ------------ ------------ SEPTEMBER 30, ---------------------- FAVORABLE FAVORABLE ------------------- 2005 2004 (UNFAVORABLE) (UNFAVORABLE) 2005 2004 -------- -------- ------------ ------------ -------- -------- (DOLLARS IN THOUSANDS) Net sales Electronic components .............. $ 7,262 $ 3,843 $ 3,419 89.0% 65.0% 51.5% Communications equipment ........... 3,915 3,626 289 8.0% 35.0% 48.5% -------- -------- ------------ ------------ -------- -------- Total net sales .................... 11,177 7,469 3,708 49.6% 100.0% 100.0% -------- -------- ------------ ------------ -------- -------- Cost of sales Electronic components .............. 4,183 2,284 (1,899) (83.1%) 37.4% 30.6% Communications equipment ........... 2,128 1,955 (173) (8.8%) 19.0% 26.2% -------- -------- ------------ ------------ -------- -------- Total cost of sales ................ 6,311 4,239 (2,072) (48.9%) 56.5% 56.8% -------- -------- ------------ ------------ -------- -------- Gross profit Electronic components .............. 3,079 1,559 1,520 97.5% 27.5% 20.9% Communications equipment ........... 1,787 1,671 116 6.9% 16.0% 22.4% -------- -------- ------------ ------------ -------- -------- Total gross profit ................. 4,866 3,230 1,636 50.7% 43.5% 43.2% -------- -------- ------------ ------------ -------- -------- Selling, general and administrative expenses ............................ 3,292 2,465 (827) (33.5%) 29.5% 33.0% Engineering and product development..... 600 438 (162) (37.0%) 5.4% 5.9% Operating income ....................... 974 327 647 197.9% 8.7% 4.4% -------- -------- ------------ ------------ -------- -------- Interest expense ....................... (106) (115) 9 7.8% 0.9% 1.5% Interest income ........................ 27 -- 27 -- 0.2% 0.0% Other expense .......................... (91) (28) (63) (225.0%) 0.8% 0.4% -------- -------- ------------ ------------ -------- -------- Income before income tax expense ....... 804 184 620 337.0% 7.2% 2.5% -------- -------- ------------ ------------ -------- -------- Income tax expense (benefit) ........... (12) 26 38 146.2% 0.1% 0.3% -------- -------- ------------ ------------ -------- -------- Net income ............................. $ 816 $ 158 $ 658 416.5% 7.3% 2.1% ======== ======== ============ ============ ======== ========
NET SALES. The $3,708,000 (49.6%) increase in total net sales for the three months ended September 30, 2005 as compared to the three months ended September 30, 2004 resulted from the combination of a $3,419,000 (89.0%) increase in net sales of our electronic components and a $289,000 (8.0%) increase in net sales of our communications equipment products and services. ELECTRONIC COMPONENTS. The increase in net sales of our electronic components segment resulted from a $2,743,000 (146.0%) increase in net sales of power supplies primarily due to the inclusion of $3,442,000 of power supplies and RF components sold by Pascall and $344,000 sold by RO, which subsidiaries we acquired on March 18, 2005 and August 31, 2005, respectively. Without Pascall and RO, sales of power supplies by XCEL Power Systems, Ltd. would have declined by $818,000, primarily due to the delay of delivery requirements for the Eurofighter Typhoon aircraft. We had $718,000 of sales of RF components and RF subsystems assemblies for the three months ended September 30, 2005 as compared to none in the prior year period due to the acquisition of Pascall in March 2005. Sales of switches decreased $165,000 (11.4%) to $1,281,000 for the three months ended September 30, 2005 from $1,446,000 for the prior year period due to a deferral of certain orders to the fourth quarter and lower orders for spares by the defense supply agency. COMMUNICATIONS EQUIPMENT. The $289,000 (8.0%) increase in net sales of our communications equipment segment resulted primarily from an increase of $394,000 (73.2%) of net sales of test instruments and a $317,000 (62.2%) increase in sales of synchronous timing devices due to an increased number of units sold. These increases were partially offset by a $473,000 (19.9%) decline 13 in net sales of network access equipment and transmission products due to lower unit sales volume. Sales of network access products produced by CXR-AJ in France held steady with no change. However, we anticipate that sales of our network access products both in France and, more importantly, in the United States will grow as new sales channels and our stronger marketing presence becomes effective and we work to utilize our two new United States-based distributors with whom we established relationships during 2005. We also anticipate that sales of our network timing and synchronization products will show growth as we build our business with telecommunications carrier companies during the remainder of 2005 and beyond. GROSS PROFIT. Gross profit as a percentage of total net sales increased to 43.5% for the three months ended September 30, 2005 from 43.2% for the prior year period. In dollar terms, gross profit increased by $1,636,000 (50.7%) to $4,866,000 for the three months ended September 30, 2005 as compared to $3,230,000 for the prior year period. Electronic Components. The $1,520,000 (97.5%) increase in gross profit for our electronic components segment was primarily due to the inclusion of Pascall's results, which contributed $1,103,000 in gross profit for the three months ended September 30, 2005, and the inclusion of $633,000 of gross profit contributed by RO primarily as a result of $550,000 of licensing revenue. Gross profit for our switch sales declined by $209,000 (26.1%) to $592,000 for the three months ended September 30, 2005 as compared to $801,000 for the prior year period due to lower sales volume, changes in product mix and delays of production into the fourth quarter. Communications Equipment. The $116,000 (6.9%) increase in gross profit for our communications equipment segment was primarily due to the increased sales of test instruments during the three months ended September 30, 2005. Gross profit for test instruments increased $206,000 (55.0%) to $579,000 as compared to $373,000 in the prior year period. This increase was slightly reduced by minor decreases in gross profit on network access equipment and network timing devices. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. The $827,000 (33.5%) increase in selling, general and administrative expenses for the three months ended September 30, 2005 as compared to the three months ended September 30, 2004 primarily was due to: o a $114,000 (70.8%) increase in sales commissions primarily due to the inclusion of sales commissions due to the RO and Pascall acquisitions; o a $329,000 (150.2%) increase in other selling and marketing expenses primarily due to the inclusion of selling expenses as a result of the Pascall acquisition; o a $379,000 (24.4%) increase in administrative expenses primarily due to the inclusion of $218,000 and $43,000 of administrative costs for Pascall and RO, respectively, and an increase of $54,000 in corporate legal expenses and a $77,000 increase in accounting and auditing expenses at our United States operations to $96,000 and $132,000, respectively. Despite the increase in selling, general and administrative expenses in dollar terms, our selling general and administrative expenses declined to 29.5% of our net sales for the three months ended September 30, 2005 as compared to 33.0% of our net sales for the prior year period due to our overall increase in net sales. We anticipate that selling, general and administrative expenses for the remainder of 2005 will remain at levels higher than those we experienced last year due to the Larus Corporation, Pascall and RO acquisitions, increased investments in new products, sales and marketing expenses for our new low profile rotary and digital switches, activity in searching for and analyzing 14 potential acquisitions, expansion of our investor relations program and increased corporate governance activities in response to the Sarbanes-Oxley Act of 2002 and recently adopted rules and regulations of the Securities and Exchange Commission. However we continue to seek efficiency and cost savings at all operations and anticipate we will further reduce our selling, general and administrative expenses by an estimated $625,000 on an annual basis over the current levels as a result of sales, marketing and administrative staffing reductions implemented in our communications equipment segment during the three months ended June 30, 2005. ENGINEERING AND PRODUCT DEVELOPMENT EXPENSES. Engineering and product development expenses consist primarily of new product development activities. The $162,000 (37.0%) increase in these expenses resulted primarily from an increase of $43,000 in expenses attributable to CXR Larus network timing devices, a $95,000 increase in engineering expenses related to new products for our Pascall acquisition and a $31,000 increase attributable to our RO acquisition. We expect this higher level of expense to continue throughout the remainder of 2005 as we continue to develop our new family of rotary switches, pursue long-term opportunities in the timing and synchronization market and continue to develop our power supply and RF component products. INTEREST EXPENSE AND OTHER INCOME. Interest expense of $106,000 declined slightly for the three months ended September 30, 2005. We recorded reduced interest expenses related to our Wells Fargo Bank loan due to the zero balance on the revolving credit line. In addition, we recorded $27,000 of interest income in the three months ended September 30, 2005, which was earned on the remaining proceeds of the January 2005 private placement. We did not have interest income during the three months ended September 30, 2004. Other expense of $91,000 for the three months ended September 30, 2005 included a United States-based currency hedging loss of $87,000. INCOME TAX EXPENSE. Income tax benefit for the three months ended September 30, 2005 was $12,000, compared to an expense of $26,000 for the three months ended September 30, 2004. We have net tax loss carryforwards for United States income tax purposes and relieved $245,000 of our tax asset valuation allowance. This was partially offset with foreign tax provisions of $233,000. NET INCOME. The net income for the three months ended September 30, 2005 increased by $658,000 (416.5%) to $816,000 as compared to net income of $158,000 for the three months ended September 30, 2004. The increase was primarily due to $313,000 of net income from Pascall and $439,000 of net income from RO that included $550,000 of royalty revenue. Improved sales of test instruments at CXR Larus provided a $277,000 increase in operating income. We continue to closely monitor costs throughout our operations and have reduced costs through staffing reductions in our communications equipment operations in the United States as indicated above. 15 NINE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2004 RESULTS AS A PERCENTAGE DOLLAR PERCENTAGE OF NET SALES FOR THE NINE MONTHS ENDED VARIANCE VARIANCE THREE MONTHS ENDED September 30, ------------ ------------ SEPTEMBER 30, ---------------------- FAVORABLE FAVORABLE ------------------- 2005 2004 (UNFAVORABLE) (UNFAVORABLE) 2005 2004 -------- -------- ------------ ------------ -------- -------- (DOLLARS IN THOUSANDS) Net sales Electronic components ............... $ 17,488 $ 11,703 $ 5,785 49.4% 61.5% 58.2% Communications equipment ............ 10,950 8,390 2,560 30.5% 38.5% 41.8% -------- -------- ------------ ------------ -------- -------- Total net sales ..................... 28,438 20,093 8,345 41.5% 100.0% 100.0% Cost of sales Electronic components ............... 10,634 6,809 (3,825) (56.2%) 37.4% 33.9% Communications equipment ............ 5,863 4,408 (1,455) (33.0%) 20.6% 21.9% Total cost of sales ................. 16,497 11,217 (5,280) (47.1%) 58.0% 55.8% Gross profit Electronic components ............... 6,854 4,894 1,960 40.0% 24.1% 24.4% Communications equipment ............ 5,087 3,982 1,105 27.7% 17.9% 19.8% Total gross profit .................. 11,941 8,876 3,065 34.5% 42.0% 44.2% Selling, general and administrative expenses ............................. 9,570 6,749 (2,821) (41.8%) 33.7% 33.6% Engineering and product development expenses ............................. 1,736 1,033 (703) (68.1%) 6.1% 5.1% Operating income ........................ 635 1,094 (459) (42.0%) 2.2% 5.4% Interest expense ........................ (302) (305) 3 1.0% 1.1% 1.5% Interest income ......................... 136 -- 136 -- 0.5% -- Other income and expense ................ 21 (64) 85 132.8% 0.1% 0.3% Income before income tax expense ........ 490 725 (235) (32.4%) 1.7% 3.6% Income tax expense ...................... 3 128 125 97.7% 0.0% 0.6% Net income .............................. $ 487 $ 597 (110) (18.4%) 1.7% 3.0% ======== ======== ============ ============ ======== ========
NET SALES. The $8,345.000 (41.5%) increase in total net sales for the nine months ended September 30, 2005 as compared to the nine months ended September 30, 2004 resulted from the combination of a $5,785,000 (49.4%) increase in net sales of our electronic components and a $2,560,000 (30.5%) increase in net sales of our communications equipment products and services. ELECTRONIC COMPONENTS. The increase in net sales of our electronic components segment resulted primarily from the inclusion in our results for the nine months ended September 30, 2005 of Pascall's $7,314,000 sales of power supplies and RF components and RO's $894,000 sales of power conversion products and licensing. This increase was offset by a $2,239,000 (32.2%) decrease in sales at XCEL Power Systems, Ltd., which decrease was primarily related to reduced sales of power supplies primarily due to the delay of deliveries for the Eurofighter Typhoon aircraft. Sales of switches increased $135,000 (1.9%) to $4,629,000 for the nine months ended September 30, 2005 from $4,541,000 for the prior year period due to slightly higher sales volume. We first reported sales of RF components during the three months ended March 31, 2005 due to the Pascall acquisition. We acquired RO on August 31, 2005. Excluding sales by Pascall from March 18, 2005 through September 30, 2005 and sales by RO for September 2005, our electronic components segment sales declined by $2,424,000 or (20.7%) for the nine months ended September 30, 2005 16 as compared to the nine months ended September 30, 2004. We currently anticipate that our sales of electronic components will increase in the fourth quarter of 2005, and throughout 2006 based upon informal indications we have received from various customers and based upon recent increases in our backlog. COMMUNICATIONS EQUIPMENT. The $2,560,000 increase in net sales of our communications equipment segment resulted primarily from the inclusion in our results for the nine months ended September 30, 2005 of $4,418,000 of net sales of network timing and synchronization products attributable to our acquisition of Larus Corporation that occurred on July 13, 2004 as compared to such sales of $1,468,000 for the period from July 13, 2004 to September 30, 2004. This increase was partially offset by a $543,000 (12.4%) decline in net sales of network access equipment and transmission products manufactured by CXR-AJ, which was primarily due to delays in French military communications infrastructure programs that utilize our products. Communications test equipment net sales increased $257,000 (14.6%) to $2,012,000 for the nine months ended September 30, 2005 as compared to $1,755,000 for the prior year period, primarily due to increased sales to an agency of the Homeland Defense Department. We anticipate that sales of our communications test equipment will continue to improve throughout the remainder of 2005. We also anticipate that sales of our network access products both in France and more importantly in the United States will grow as new sales channels and our stronger marketing presence becomes effective and we work to utilize our two new United States-based distributors we established relationships with during the three months ended March 31, 2005. We also anticipate that sales of our network timing and synchronization products will show further growth as we build our business with telecommunications carrier companies. GROSS PROFIT. Gross profit as a percentage of total net sales decreased to 42.0% from 44.2% for the prior year period. In dollar terms, gross profit increased by $3,065,000 (34.5%) to $11,941,000 for the nine months ended September 30, 2005 as compared to $8,876,000 for the prior year period. ELECTRONIC COMPONENTS. The $1,960,000 (40.0%) increase in gross profit for our electronic components segment was primarily due to the inclusion in our results for the nine months ended September 30, 2005 of $2,136,000 of gross profit from Pascall and $633,000 of gross profit from RO. Partially offsetting these increases was a $535,000 reduction in gross profit from switches primarily due to product mix and reduced sales volume and a $340,000 decrease in gross profit on power supplies produced by XCEL Power Systems, Ltd. as a direct result of reduced sales volume due to contract delivery delays. We expect overall sales of power supplies in 2005 to exceed overall sales of power supplies in 2004 and to grow further in 2006 based upon informal indications we have received from various customers and increased backlog. EEL Japan Ltd. increased its gross profit by $160,000 (40.2%) to $558,000 from $398,000 in the prior year due to increased sales of higher margin switches. COMMUNICATIONS EQUIPMENT. The $1,105,000 (27.7%) increase in gross profit for our communications equipment segment was primarily due to the inclusion of CXR Larus' $1,866,000 of gross profit during the nine months ended September 30, 2005 attributable to net sales of network access and network timing and synchronization products as compared to $595,000 in the period from July 13, 2004 to September 30, 2004. Gross profit for test instruments virtually remained unchanged at $1,253,000. The 1.0 percentage point decrease in this segment's gross profit as a percentage of total net sales was primarily the result of the larger sales contribution of the lower margin CXR Larus network timing and synchronization products and CXR-AJ network access products as compared to the higher margin test equipment. We plan to have our timing and other network access products built for us under a signed contract with Hitachi OMD and thereby increase gross margins over our in-house manufacturing. 17 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. The $2,821,000 (41.8%) increase in selling, general and administrative expenses for the nine months September 30, 2005 as compared to the nine months ended September 30, 2004 was primarily due to: o a $284,000 (78.2%) increase in sales commissions primarily due to the inclusion of $126,000, $119,000 and $42,000 of sales commission expenses of CXR Larus, Pascall and RO, respectively; o a $1,340,000 (62.8%) increase in other selling and marketing expenses primarily due to an increase of $737,000 and inclusion of $664,000 of selling expenses of our Larus division and Pascall, respectively, attendance at tradeshows and increased advertising and marketing of our electronic components; o a $1,198,000 (28.2%) increase in administrative expenses primarily due to the inclusion of $376,000 and $472,000 of administrative costs for our Larus division and Pascall, respectively; o $74,000 in severance costs we recorded to administrative expense to reflect a consolidation of CXR Larus' operations; o a $55,000 expense we recorded for a repair provision for the building in Wales that we vacated to combine our coil winding business with XCEL Power Systems, Ltd. in Ashford, England; and o an increase of $149,000 in United States corporate legal expenses and a $168,000 increase in our domestic accounting and auditing expenses. We anticipate that selling, general and administrative expenses for the remainder of 2005 will remain at levels higher than those we experienced last year due to the Larus Corporation, Pascall and RO acquisitions, increased investments in new products, sales and marketing expenses for our new low profile rotary and digital switches, increased activity in searching for and analyzing potential acquisitions, expansion of our investor relations program and increased corporate governance activities in response to the Sarbanes-Oxley Act of 2002 and rules and regulations of the Securities and Exchange Commission. However we continue to seek efficiencies and cost savings at all operations and anticipate we will further reduce our selling, general and administrative expenses by an estimated $625,000 on an annual basis over the current levels as a result of sales, marketing and administrative staffing reductions implemented in our communications equipment segment. Our selling, general and administrative expenses remained almost constant as a percentage of net sales at 33.7% as compared to 33.6% in the prior period. ENGINEERING AND PRODUCT DEVELOPMENT EXPENSES. Engineering and product development expenses consist primarily of new product development engineering activities. The $703,000 (68.1%) increase in these expenses resulted primarily from the inclusion of $381,000 of expenses attributable to our Larus division and a $194,000 increase in engineering expenses attributable to Pascall. Also, expenses related to development of our new low profile rotary switches increased $70,000 (19.9%) to $422,000 for the nine months ended September 30, 2005 as compared to $352,000 for the prior year period. We expect this higher level of expense to continue throughout the remainder of 2005 as we continue to develop our new family of rotary switches and pursue long term opportunities in the timing and synchronization market. During the nine months ended September 30, 2005, we eliminated one of our two engineering directors at CXR Larus, which we anticipate will offset approximately $75,000 of our increased engineering expenses on an annual basis. 18 INTEREST EXPENSE AND OTHER INCOME. Interest expense decreased slightly by $3,000 (1.0%) to $302,000 for the nine months ended September 30, 2005 as compared to $305,000 for the nine months ended September 30, 2004. In addition, we recorded $136,000 of interest income in the nine months ended September 30, 2005, which was earned on the proceeds of the January 2005 private placement. We did not have interest income during the nine months ended September 30, 2004. Other income of $21,000 for the nine months ended September 30, 2005 primarily resulted from a $100,000 gain due to the sale of our T-Com product line. The T-Com technology and tangible assets had no carrying value. INCOME TAX EXPENSE. Income tax expense for the nine months ended September 30, 2005 was $3,000, compared to $128,000 for the nine months ended September 30, 2004 due to lower pretax income. We relieved our tax asset valuation allowance by $245,000, which was offset by our foreign tax provision of $248,000. NET INCOME (LOSS). Net income for the nine months ended September 30, 2005 decreased by $110,000 to $487,000 as compared to $597,000 for the nine months ended September 30, 2004. The decrease was primarily due to the impact of planned increased sales and marketing expenses to launch new products and improve the marketing and sales efforts in promoting our existing products and the addition of similar expenses of CXR Larus designed to increase future revenue and net income together with the substantial increase in product development engineering associated primarily with our network timing and synchronization products. We continue to closely monitor costs throughout our operations and have reduced costs through staffing reductions in our communications equipment operations in the United States and France as indicated above. LIQUIDITY AND CAPITAL RESOURCES During the nine months ended September 30, 2005, we funded our operations primarily through revenue generated from our operations and through our existing and previous lines of credit with Wells Fargo Bank, N.A. and various foreign banks. During the nine months ended September 30, 2005, we continued to rely on our foreign credit facilities. In addition, we raised approximately $16,018,000 in net proceeds through a private placement of equity securities in January 2005 as described below to support our acquisition program. As of September 30, 2005, we had working capital of $12,671,000, which represented a $7,131,000 (128.7%) increase from working capital of $5,540,000 at December 31, 2004, primarily due to the proceeds from the private placement and the addition of the working capital of Pascall and RO. At September 30, 2005 and December 31, 2004, we had accumulated deficits of $15,919,000 and $16,406,000, respectively, and cash and cash equivalents of $3,398,000 and $1,057,000, respectively. Accounts receivable increased $3,186,000 (55.0%) during the nine months ended September 30, 2005 from $5,796,000 as of December 31, 2004 to $9,297,000 as of September 30, 2005. Sales attributable to the Pascall and RO acquisitions contributed $2,303,000 and $793,000, respectively, to accounts receivable at September 30, 2005. Without the acquisition of Pascall, our receivables would have increased by $90,000 (1.6%) during the nine months ended September 30, 2005, primarily due to increased receivables from higher test instrument sales. Days sales outstanding, which is a measure of our average accounts receivable collection period, decreased from 69 days for the year ended December 31, 2004 to 64 days for the nine months ended September 30, 2005. Our customers include many Fortune 100 companies in the United States and similarly large companies in Europe and Asia. Because of the financial strength of our customer base, we have virtually eliminated our bad debt reserves. 19 Inventory balances increased $3,790,000 (58.4%) during the nine months ended September 30, 2005, from $6,491,000 at December 31, 2004 to $10,281,000 at September 30, 2005. Inventory represented 23.4% and 25.9% of our total assets as of September 30, 2005 and December 31, 2004, respectively. Included in the September 30, 2005 amount is $2,015,000 and $2,221,000 of inventory attributable to Pascall and RO, respectively. Excluding the effect of this inclusion, inventory would have decreased by $446,000 (6.9%) and would have represented 19.6% of total assets (excluding the $6,929,000 and $6,250,000 000 of total assets related to Pascall and RO, respectively) at September 30, 2005. Inventory turnover, which is a ratio that indicates how many times our inventory is sold and replaced over a specified period, decreased to 2.14 times (excluding Pascall and RO, turnover would have increased to 2.44 times) for the nine months ended September 30, 2005 as compared to 2.48 times for the year ended December 31, 2004. We took various actions to reduce costs in 2004. These actions were intended to reduce the cash outlays of our communications equipment segment to match its revenue rate, which was negatively impacted by the telecommunications downturn of 2002 and 2003. We also have contracted with offshore manufacturers for production of test equipment at lower prices than our previous cost for in-house manufacturing. We have also contracted with Hitachi to outsource the manufacture of our network timing devices beginning approximately in the second quarter of 2006. We merged Larus Corporation with and into CXR Telcom Corporation at the end of 2004 and integrated their operations. Cash used in our operating activities totaled $1,158,000 for the nine months ended September 30, 2005 as compared to cash provided by operating activities of $1,579,000 for the nine months ended September 30, 2004. This $2,737,000 decrease in operating cash flows primarily resulted from payments made as planned reductions of accounts payable and accrued expenses. Cash used in our investing activities totaled $14,381,000 for the nine months ended September 30, 2005 as compared to $1,923,000 for the nine months ended September 30, 2004. Included in the results for the nine months ended September 30, 2005 are net cash of $9,509,000 and $4,605,000 used to acquire Pascall and RO, respectively. Also we acquired $212,000 of property, plant and equipment purchases for production equipment and computer equipment. Cash provided by our financing activities totaled $18,544,000 for the nine months ended September 30, 2005 as compared to $373,000 of cash used in our financing activities for the nine months ended September 30, 2004. The change is primarily due to the net proceeds of $16,059,000 from the issuance of common stock in the January 2005 private placement. On September 1, 2005, we obtained a credit facility from Wells Fargo Bank, N.A. for our domestic operations which replaced the prior credit facility entered into on June 1, 2004 with Wells Fargo Bank, N.A. The new credit facility has no prepayment penalty and is subject to an unused commitment fee equal to 0.25% per annum, payable quarterly based on the average daily unused amount of the line of credit described in the following paragraph. The credit facility provides a $9,000,000 revolving line of credit secured by accounts receivable, other rights to payment and general intangibles, inventories and equipment. Borrowings do not need to be supported by specific receivables or inventory balances unless aggregate borrowings under the line of credit and the term loan described in the following paragraph exceed $2,000,000 for 30 consecutive days (a "conversion event"). If a conversion event occurs, the line of credit will convert into a formula-based line of credit until the borrowings are equal to or less than $2,000,000 for 30 consecutive days. The formula generally provides that outstanding borrowings under the line of credit may not exceed an aggregate of 80% of eligible accounts receivable, plus 30% of the value of eligible finished goods inventory. The interest rate is variable and is adjusted monthly based on the prime rate plus 0.5%. The prime rate at September 30, 2005 was 6.75%. 20 The credit facility also provides for a term loan of $150,000 secured by equipment, amortizable over 36 months at a variable rate equal to the prime rate plus 1.5%. The term loan portion of the facility had a balance of $88,000 at September 30, 2005. Wells Fargo Bank, N.A. has also provided us with credit for the purchase of new capital equipment when needed, of which a balance of $130,000 was outstanding at September 30, 2005. The interest rate is equal to the 90-day London InterBank Offered Rate ("LIBOR") rate (4.055% at September 30, 2005) plus 3.75% per annum. Amounts borrowed under this arrangement are amortized over 60 months from the respective dates of borrowing. As of September 30, 2005, we had no outstanding balance owing under the revolving credit line, and we had $2,000,000 of availability on the non-formula based portion of the credit line. The credit facility is subject to various financial covenants. As of September 30, 2005, we were in compliance with each of those covenants except for the tangible net worth covenant, as to which we received a waiver The bank has informally indicated it intends to modify the tangible net worth covenant. The credit facility is subject to various financial covenants. The minimum debt service coverage ratio of the Company must be not less than 1.25:1.00 on a rolling four-quarter basis. "Debt service coverage ratio" is defined as net profit after taxes plus depreciation, plus or minus net distributions divided by the sum of the current portion of long term debt plus capitalized lease payments. The current ration of the Company must be not less than 1.50:1.00, determined as of each fiscal quarter end. "Current ratio" is defined as total current assets divided by total current liabilities. Net profit after taxes as of the Company must be not less than $500,000, determined as of each fiscal quarter end on a rolling four quarter basis; provided that we may not sustain net loss after tax in any two consecutive fiscal quarters. Total liabilities divided by tangible net worth of the Company must not at any time be greater than 1.25:1.00, determined as for each fiscal quarter end. Tangible net worth of the Company must not at any time be less than $14,250,000 measured at the end of each quarter. "Total liabilities" is defined as current liabilities plus no-current liabilities, minus subordinated debt. "Tangible net worth" is defined as stockholders' equity plus subordinated debt, minus intangible assets. In the event of a default and continuation of a default, Wells Fargo may accelerate the payment of the principal balance requiring us to pay the entire indebtedness outstanding on that date. From and after the maturity date of the note, or any earlier date that all principal owing under the note becomes due and payable by acceleration or otherwise, the outstanding principal balance will bear interest until paid in full at an increased rate per annum equal to 4% above the rate of interest in effect from time to time under the note. Events of default that would give rise to automatic acceleration of payment of the principal balance and an increase in annual interest rate on unpaid principal balance include: The credit facility will expire on September 1, 2006. As of September 30, 2005, our foreign subsidiaries had credit facilities, including lines of credit and term loans, with Lloyds TSB Bank and Lloyds TSB Commercial Finance, in England, IFN Finance, a subsidiary of ABN AMRO Holdings, N.V., Banc National de Paris, Societe Generale in France and Sogelease and Johnan Shinkin Bank in Japan. At September 30, 2005, the balances outstanding under our United Kingdom, France and Japan credit facilities were $3,781,000, $653,000 and $39,000, respectively. 21 On June 28, 2005, XPS and Pascall obtained a credit facility with Lloyds TSB Commercial Finance Limited ("Lloyds"). At the same time, the credit facility of Venture Finance PLC was terminated, and all debt to Venture Finance PLC was paid off. The Lloyds facility provides a revolving loan secured by receivables, with a maximum availability of 2,100,000 British pounds sterling (approximately U.S. $3,701,000 based on the exchange rate in effect on September 30, 2005). The annual interest rate on the revolving loan is 1.5% above the Lloyds TSB rate. The Lloyds TSB rate was 4.5% at September 30, 2005. This credit facility covers a period of 24 months. The financial covenants include a 50% cap on combined export gross sales of XPS and Pascall and debt turns of less than 65 days, and the funding balance is capped at 125% of XPS and Pascall combined gross sales. In addition to the revolving loan, on August 26, 2005 Lloyds also provided an unsecured cashflow loan of $1,410,000 and a $264,000 term loan that is secured by equipment and amortized over 36 months. In the event of a default, Lloyds PLC may make the loan, including any outstanding principal and interest which has accrued, repayable on demand. If any amount payable is not paid when due, EEL Corp shall pay an increased interest rate per annum equal to 3% above the rate of interest in effect from time to time under the note. In April 2003, CXR-AJ obtained a credit facility from IFN Finance, a subsidiary of ABN AMRO N.V. This credit facility is for a maximum of $1,445,000, based on the exchange rate in effect at September 30, 2005 for the conversion of euros into United States dollars. CSR-AJ also had $39,000 of term loans with several French banks outstanding at of June 30, 2005. The IFN Finance facility is secured by accounts receivable and carries an annual interest rate of 1.6% above the French "T4M" rate. At August 31, 2005, the French T4M rate was 2.067% and this facility had a balance of $616,000. This facility has no financial performance covenants. In addition, CXR-AJ has term loans with other banks with a balance of $37,000 as of September 320, 2005. EEL Japan Ltd., or XJL, obtained a term loan on November 29, 2002 from Johnan Shinkin Bank. The loan is amortized over five years, carries an annual fixed interest rate of 3.25% and is secured by the assets of XJL. The balance of the loan as of September 30, 2005 was $39,000 using the exchange rate in effect at that date for conversion of Japanese yen into United States dollars. There are no financial performance covenants applicable to this loan. Our backlog was $25,098,000 as of September 30, 2005 as compared to $7,307,000 as of September 30, 2004. The increase in backlog was primarily due to the addition of $8,840,000 of backlog for Pascall and $613,000 for RO. Without Pascall and RO, our backlog as of September 30, 2005 would have been $15.6 million, representing a $10.7 million (139%) increase. Our backlog as of September 30, 2005 was 96.3% related to our electronic components business, which business tends to provide us with long lead-times for our manufacturing processes due to the custom nature of the products, and 3.7% related to our communications equipment business, which business tends to deliver standard products from stock as orders are received. The amount of backlog orders represents revenue that we anticipate recognizing in the future, as evidenced by purchase orders and other purchase commitments received from customers, but on which work has not yet been initiated or with respect to which work is currently in progress. However, there can be no assurance that we will be successful in fulfilling such orders and commitments in a timely manner or that we will ultimately recognize as revenue the amounts reflected as backlog. As described above under the heading "Overview," we acquired Larus Corporation and Vista in July 2004. As a result of the acquisition, we acquired all of the assets and liabilities of Larus Corporation, including the intellectual property, cash, accounts receivable and inventories owned by each of Larus Corporation and Vista. The $6,539,500 purchase price consisted of 22 $1,000,000 in cash, the issuance of 1,213,592 shares of our common stock with a fair value of $1,000,000, $887,500 in the form of two short-term, zero interest promissory notes that were repaid in 2004, $3,000,000 in the form of two subordinated secured promissory notes, warrants to purchase up to an aggregate of 150,000 shares of our common stock at $1.30 per share, and approximately $580,000 of acquisition costs. In addition, we assumed $245,000 worth of accounts payable and accrued expenses and entered into an above-market seven-year real property lease with the sellers. This lease represents an obligation that exceeds the fair market value by approximately $756,000 and is part of the acquisition accounting. We funded the cash portion of the purchase price using proceeds from our credit facility with Wells Fargo Bank, N.A. and our cash on-hand. On January 5, 2005, we issued to 17 accredited record holders in a private offering an aggregate of 12,503,500 shares of common stock at a purchase price of $1.44 per share and five-year investor warrants to purchase up to an additional 3,125,875 shares of our common stock at an exercise price of $1.73 per share, for a total purchase price of $18,005,000. We paid cash placement agent fees and expenses of approximately $961,000, and issued five-year placement warrants to purchase up to an aggregate of 650,310 shares of common stock at an exercise price of $1.73 per share in connection with the offering. Additional costs related to the financing include registration rights-related liquidated damages and legal, accounting and consulting fees that totaled $1,026,000 through September 30, 2005 and continue to be incurred in connection with the resale registration described below. We agreed to register for resale the shares of common stock issued to investors and the shares of common stock issuable upon exercise of the investor warrants and placement warrants. The registration obligations require, among other things, that a registration statement be declared effective no later than June 4, 2005. We were unable to meet this obligation and therefore paid to each investor liquidated damages equal to 1% of the amount paid by the investor to us in the offering, which damage payments totaled an aggregate of approximately $180,000. We also paid to the investors liquidated damages totaling $300,000 for the period from June 5, 2005 through June 30, 2005, the date the registration statement was declared effective. We also will be required to pay to each investor liquidated damages for any future periods in which we are unable to maintain the effectiveness of the registration in accordance with the requirements contained in the registration rights agreement we entered into with the investors. These liquidated damages will be, and the liquidated damages paid for the period from June 5, 2005 through June 30, 2005 were, equal to 2% of the amount paid by each investor for the common shares still owned by the investor on each monthly anniversary of the date of the default that occurs prior to the cure of the default, pro rated on a daily basis for periods of default shorter than one month. The maximum aggregate liquidated damages payable to any investor will be equal to 10% of the aggregate amount paid by the investor for the shares of our common stock. Accordingly, the maximum aggregate penalty that we would be required to pay under this provision is 10% of the $18,005,000 initial purchase price of the common stock, which would be $1,801,000. Although we anticipate that we will be able to meet our future registration obligations, we also anticipate that we will have sufficient cash available to pay the maximum penalties if required. We used a portion of the proceeds from the January 2005 private placement to fund the acquisition of Pascall described above under the heading "Overview." In connection with the Pascall acquisition, we loaned to Emrise Electronics Ltd. approximately $10,100,000 in cash that was used to acquire Pascall and to repay Pascall's existing intercompany debt. As described above, the Pascall purchase price is subject to upward or downward adjustment, and accordingly we paid $237,000 to Intelek on August 1, 2005 to compensate for an upward adjustment of Pascall's net worth. We have guaranteed obligations of Emrise Electronics Ltd. in connection with the Pascall acquisition and have agreed to indemnify Pascall's former parent in connection with obligations under Pascall's facilities lease. 23 We used another portion of the proceeds from the January 2005 private placement to partially fund the acquisition of RO described above under the heading "Overview." We used $4,002,000 of cash to acquire RO including paying down RO's bank debt of $1,602,000. In addition, we agreed to make two deferred payments of $300,000 each, the first of which we paid in October 2005, and the second of which is due in March 2006. Offsetting these amounts was $35,000 received from the former RO shareholders to compensate for balance sheet adjustments. We included in our annual report on Form 10-K for the year ended December 31, 2004 a contractual obligations table that outlines payments due from us or our subsidiaries under our lines of credit and other significant contractual obligations through 2009, exclusive of interest. We intend to grow our business through both internal growth and through further acquisitions that we identify as being potentially both synergistic and accretive of our earnings. Any additional acquisitions would likely be funded through the use of cash and/or a combination of cash, notes and our limited use of our common stock. We believe that current and future available capital resources, revenues generated from operations, and other existing sources of liquidity, including the credit facilities we have and the remaining proceeds we have from the January 2005 private placement, will be adequate to meet our anticipated working capital and capital expenditure requirements for at least the next twelve months. If, however, our capital requirements or cash flow vary materially from our current projections, if unforeseen circumstances occur, or if we require a significant amount of cash to fund future acquisitions, we may require additional financing. Our failure to raise capital, if needed, could restrict our growth, limit our development of new products or hinder our ability to compete. EFFECTS OF INFLATION The impact of inflation and changing prices has not been significant on the financial condition or results of operations of either our company or our operating subsidiaries. IMPACTS OF NEW ACCOUNTING PRONOUNCEMENTS In November 2004, the Financial Accounting Standards Board ("FASB") issued SFAS No. 151, "Inventory Costs, an amendment of ARB No. 43, Chapter 4," SFAS No. 151 clarifies that abnormal inventory costs such as costs of idle facilities, excess freight and handling costs, and wasted materials (spoilage) are required to be recognized as current period costs. The provisions of SFAS No. 151 are effective for our fiscal 2006. We are currently evaluating the provisions of SFAS No. 151 and do not expect that adoption will have a material effect on our financial position, results of operations or cash flows. On December 16, 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based Payment," which is a revision of SFAS No. 123. SFAS No. 123(R) supersedes APB Opinion No. 25, and amends SFAS No. 95, "Statement of Cash Flows." Generally, the approach in SFAS No. 123(R) is similar to the approach described in SFAS 123. However, SFAS 123(R) generally requires share-based payments to employees, including grants of employee stock options and purchases under employee stock purchase plans, to be recognized in the statement of operations based on their fair values. Pro forma disclosure of fair value recognition will no longer be an alternative. SFAS No. 123(R) permits public companies to adopt its requirements using one of two methods: 24 o Modified prospective method: Compensation cost is recognized beginning with the effective date of adoption (a) based on the requirements of SFAS No. 123(R) for all share-based payments granted after the effective date of adoption and (b) based on the requirements of SFAS No. 123 for all awards granted to employees prior to the effective date of adoption that remain unvested on the date of adoption. o Modified retrospective method: Includes the requirements of the modified prospective method described above, but also permits restatement using amounts previously disclosed under the pro forma provisions of SFAS No. 123 either for (a) all prior periods presented or (b) prior interim periods of the year of adoption. On April 14, 2005, the Commission announced that the SFAS No. 123(R) effective transition date will be extended to annual periods beginning after June 15, 2005. We are required to adopt this new standard on June 1, 2006, with early adoption permitted. SFAS No. 123(R) also requires the benefits of tax deductions in excess of recognized compensation expense to be reported as a financing cash flow, rather than as an operating cash flow as prescribed under current accounting rules. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. Total cash flow will remain unchanged from what would have been reported under prior accounting rules. As permitted by SFAS No. 123, we currently account for share-based payments to employees using APB Opinion No. 25's intrinsic value method. As a consequence, we generally recognize no compensation cost for employee stock options under our employee stock option plans. Although the adoption of SFAS No. 123(R)'s fair value method will have no adverse effect on our balance sheet or total cash flows, it will affect our net income and diluted earnings per share. The actual effects of adopting SFAS No. 123(R) will depend on numerous factors, including the amounts of share-based payments granted in the future, the valuation model we use to value future share-based payments to employees and estimated forfeiture rates. See Note 1 to our condensed consolidated financial statements for the effect on reported net income and earnings per share that would have occurred if we had accounted for our employee stock options using the fair value recognition provisions of SFAS No. 123. On December 16, 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets, an Amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions." SFAS No. 153 addresses the measurement of exchanges of nonmonetary assets and redefines the scope of transactions that should be measured based on the fair value of the assets exchanged. SFAS No. 153 is effective for nonmonetary asset exchanges beginning in our second quarter of fiscal 2006. We do not believe our adoption of SFAS No. 153 will have a material effect on our consolidated financial position, results of operations or cash flows. On June 7, 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections," a replacement of APB Opinion No. 20, "Accounting Changes," and SFAS No. 3, "Reporting Accounting Changes in Interim Financial Statements." SFAS No. 154 changes the requirements for the accounting for and reporting of a change in accounting principle. Previously, most voluntary changes in accounting principles required recognition of a cumulative effect adjustment within net income of the period of the change. SFAS No. 154 requires retrospective application to prior periods' financial statements, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS No. 154 is effective for accounting changes made in fiscal years beginning after December 15, 2005. However, SFAS No. 154 does not change the transition provisions of any existing accounting pronouncements. We do not believe our adoption of SFAS No. 154 will have a material effect on our consolidated financial position, results of operations or cash flows. 25 On June 29, 2005, the FASB ratified the EITF's Issue No. 05-06, "Determining the Amortization Period for Leasehold Improvements." Issue No. 05-06 provides that the amortization period used for leasehold improvements acquired in a business combination or purchased after the inception of a lease shall be the shorter of (a) the useful life of the assets or (b) a term that includes required lease periods and renewals that are reasonably assured upon the acquisition or the purchase. The provisions of Issue No. 05-06 are effective on a prospective basis for leasehold improvements purchased or acquired beginning in our second quarter of fiscal 2006. We do not believe the adoption of Issue No. 05-06 will have a material effect on our consolidated financial position, results of operations or cash flows. On March 3, 2005, the FASB issued Financial Interpretation No. ("FIN") 46(R), "Implicit Variable Interests under FASB Interpretation No. 46 (revised December 2003) Variable Interest Entities an Interpretation of ARB No. 51." FIN 46(R) requires us to consolidate variable interest entities if we are designated as the primary beneficiary of that entity, even if we do not own a majority of voting interests. A variable interest entity is generally defined as an entity that has insufficient equity to finance its activities or the owners of the entity lack the risks and rewards of ownership. The provisions of FIN 46(R) had no impact on our results of operations or financial position. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. We have established and acquired international subsidiaries that prepare their balance sheets in the relevant foreign currency. In order to be included in our consolidated financial statements, these balance sheets are converted, at the then current exchange rate, into United States dollars, and the statements of operations are converted using weighted average exchange rates for the applicable period. Accordingly, fluctuations of the foreign currencies relative to the United States dollar could have an effect on our consolidated financial statements. Our exposure to fluctuations in currency exchange rates has increased as a result of the acquisition of Pascall located in England. SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended, establishes accounting and reporting standards requiring that every derivative instrument be recorded in the balance sheet as either an asset or a liability measured at its fair value. SFAS No. 133 also requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met, and that a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting. We currently use derivatives to manage foreign currency rate risk. One of our United Kingdom subsidiaries conducts business in British pounds sterling and has a program that utilizes forward currency contracts denominated in United States dollars to offset the risk associated with the effects of currency exposure for sales in United States dollars. Under this program, increases or decreases in the subsidiary's foreign currency exposure are offset by gains or losses on the forward contracts, to mitigate the possibility of foreign currency transaction gains or losses. These forward contracts generally have terms of 90 days or less. We do not use these forward contracts for trading purposes. All outstanding foreign currency forward contracts used in this program are marked to market at the end of the period with unrealized gains and losses included in other income and expense. Emrise Electronics Ltd. also has a program that utilizes a forward currency contract denominated in British pounds sterling to offset the risk of intercompany loans to an English subsidiary. Under this program, increases or decreases in the current portion of intercompany debt due to Emrise Electronics 26 Ltd. are offset by gains or losses on the forward contract, to mitigate the possibility of foreign currency transaction gains or losses. The forward contract expired in September 2005. We do not use this forward contract for trading purposes. The forward contract used in this program was marked to market at the end of the period with unrealized gains and losses included in other income and expense. Our ultimate realized gain or loss with respect to currency fluctuations will depend on the currency exchange rates and other factors in effect as the contracts mature. Net foreign exchange transaction losses included in other income and expense in the accompanying consolidated statements of operations totaled $115,000 for the nine months ended September 30, 2005. There was no hedging in the year ended December 31, 2004. A substantial portion of our notes payable and long-term debt have variable interest rates based on the prime interest rate and/or the lender's base rate, which exposes us to risk of earnings loss due to changes in such interest rates. Our annual report on Form 10-K for the year ended December 31, 2004 contains information about our debt obligations that are sensitive to changes in interest rates under "Item 7A. Quantitative and Qualitative Disclosures About Market Risk." There were no material changes in those market risks during the nine months ended September 30, 2005. ITEM 4. CONTROLS AND PROCEDURES. On August 15, 2005, in connection with its review of our condensed consolidated financial statements for the quarter ended June 30, 2005, Grant Thornton LLP, our independent registered public accounting firm, advised our management of a matter that Grant Thornton LLP considered to be a "material weakness" as that term is defined under standards established by the Public Company Accounting Oversight Board (United States). Grant Thornton LLP noted that we recorded revenue in our Pascall division for certain items previously recorded as "bill and hold" inventory. We had shipped the items to the customer on June 30, 2005, the customer took title to the items and paid for the items. However, the customer requested that Pascall modify the items and returned the items to Pascall on July 7, 2005 under a separate contract. The return of the items by the customer subsequent to June 30, 2005 resulted in the transaction not meeting the revenue recognition criteria under Staff Accounting Bulletin ("SAB") No. 104. The recording of these items as sales in the quarter ended June 30, 2005 resulted in an adjusting journal entry to reduce revenue by $841,000 and to reduce net income by $314,000 ($0.01 per share). Grant Thornton LLP met with our audit committee on August 18, 2005 and recommended that we review the control procedures over bill and hold arrangements to determine adherence to SAB 104. Our audit committee and management have undertaken an extensive review of SAB 104. We have sought and plan to continue to seek guidance from our financial consultants, who are certified public accountants with the requisite background and experience, to assist us in our future compliance with SAB 104 as it relates to control procedures over bill and hold matters and believe we have therefore corrected the material weakness. As of September 30, 2005 the products included in the bill and hold matter were no longer at our facility as they had all been processed and shipped back to the customer. Therefore, we recognized in the third quarter the revenue and income we had deferred during the second quarter. Our Chief Executive Officer and Chief Financial Officer (our principal executive officer and principal financial officer, respectively) have concluded, based on their evaluation as of September 30, 2005, that the design and operation of our "disclosure controls and procedures" (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended ("Exchange Act")) are effective to ensure that information required to be disclosed by us 27 in the reports filed or submitted by us under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms, including to ensure that Information required to be disclosed by us in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding whether or not disclosure is required. During the quarter ended September 30, 2005, except as described above with regard to our review of SAB 104, there were no changes in our "internal controls over financial reporting" (as defined in Rule 13a-15(f) under the Exchange Act) that materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting. PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. We are not a party to any material pending legal proceedings. ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. DIVIDENDS We have not declared or paid any cash dividends on our capital stock in the past, and we do not anticipate declaring or paying cash dividends on our common stock in the foreseeable future. In addition, our credit facility with Wells Fargo Bank, N.A., described in "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources," restricts the payment of dividends without the bank's consent. We will pay dividends on our common stock only if and when declared by our board of directors. Our board of directors' ability to declare a dividend is subject to restrictions imposed by Delaware law. In determining whether to declare dividends, the board of directors will consider these restrictions as well as our financial condition, results of operations, working capital requirements, future prospects and other factors it considers relevant. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. ITEM 5. OTHER INFORMATION. None. 28 ITEM 6. EXHIBITS. Exhibit Number Description - ------ ----------- 2.1 Stock Purchase Agreement dated September 2, 2005 between Emrise Electronics Corporation, a New Jersey corporation, Robert H. Okada, as Trustee of the Robert H. Okada Trust Agreement dated February 11, 1992, and Sharon Vavro, an individual (1) 2.2 Amendment No. 1 dated effective as of September 28, 2005 to Stock Purchase Agreement dated September 2, 2005 between Emrise Electronics Corporation, a New Jersey corporation, Robert H. Okada, as Trustee of the Robert H. Okada Trust Agreement dated February 11, 1992, and Sharon Vavro, an individual (2) 10.1 Credit Agreement between Emrise Corporation and Wells Fargo Bank, National Association dated as of August 25, 2005 (3) 10.2 Revolving Line of Credit Note between Emrise Corporation and Wells Fargo Bank, National Association dated as of August 25, 2005 (3) 10.3 Security Agreement between Emrise Corporation and Wells Fargo Bank, National Association dated as of August 25, 2005 (3) 10.4 Continuing Security Agreement between Emrise Corporation and Wells Fargo Bank, National Association dated as of August 25, 2005 (3) 10.5 Continuing Guaranty between CXR Telcom Corporation and Wells Fargo Bank, National Association dated as of August 25, 2005 (3) 10.6 Continuing Guaranty between Emrise Electronics Corporation and Wells Fargo Bank, National Association dated as of August 25, 2005 (3) 10.7 Agreement and Acknowledgment of Security Interest by and among Wells Fargo Bank, National Association, Emrise Corporation and Noel C. McDermott and Warren P. Yost dated as of August 25, 2005 (3) 10.8 Debt Purchase Agreement between Lloyds TSB Commercial Finance Limited and Pascall Electronics Limited dated June 28, 2005(3) 10.9 Debt Purchase Agreement between Lloyds TSB Commercial Finance Limited and XCEL Power Systems Limited dated June 28, 2005 (3) 10.10 Loan Agreement between Lloyds TSB Commercial Finance Limited and XCEL Power Systems Limited dated June 28, 2005 (3) 10.11 Business Loan Agreement between Lloyds TSB Bank PLC and XCEL Corporation Limited dated June 30, 2005 (3) 10.12 Guaranty and Indemnity between XCEL Power Systems Limited, Pascall Electronics Limited, Pascall Electronic (Holdings) Limited, Belix Wound Components Limited and Lloyds TSB Commercial Finance Limited dated June 21, 2005 (3) 29 Exhibit Number Description - ------ ----------- 10.13 Deed of Guaranty and Indemnity between XCEL Corporation Limited and Lloyds TSB Commercial Finance Limited dated June 21, 2005 (3) 10.14 Deed of Guarantee and Indemnity between Pascall Electronics Limited and Lloyds TSB Commercial Finance Limited dated June 21, 2005 10.15 Deed of Guarantee and Indemnity between XCEL Corporation Limited and Lloyds TSB Commercial Finance Limited dated June 21, 2005 10.16 Deed of Priorities between Lloyds TSB Commercial Finance Limited and Lloyds TSB Bank PLC and Pascall Electronics Limited dated June 28, 2005 10.17 Deed of Priorities between Lloyds TSB Commercial Finance Limited and Lloyds TSB Bank PLC and XCEL Power Systems Limited dated June 28, 2005 (3) 10.18 All Assets Debenture given by XCEL Power Systems Limited in favor of Lloyds TSB Commercial Finance Limited dated June 28, 2005 (3) 31 Certifications Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (3) 32 Certification of Chief Executive Officer and Acting Chief Financial Officer Pursuant to 18 U.S.C. Section 350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (3) - ------------------ (1) Filed as an exhibit to our Form 8-K for September 2, 2005 and incorporated herein by reference. (2) Filed as an exhibit to Amendment No. 1 to the our current report on Form 8-K for September 2, 2005 and incorporated herein by reference. (3) Filed with this report. 30 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. EMRISE CORPORATION Dated: November 14, 2005 By: /S/ CARMINE T. OLIVA -------------------------------------------- Carmine T. Oliva, Chairman of the Board, Chief Executive Officer (principal executive officer) and President By: /S/ RANDOLPH D. FOOTE -------------------------------------------- Randolph D. Foote, Chief Financial Officer (principal financial and accounting officer) 31 EXHIBITS ATTACHED TO THIS REPORT Exhibit Number Description - ------ ----------- 10.1 Credit Agreement between Emrise Corporation and Wells Fargo Bank, National Association dated as of August 25, 2005 10.2 Revolving Line of Credit Note between Emrise Corporation and Wells Fargo Bank, National Association dated as of August 25, 2005 10.3 Security Agreement between Emrise Corporation and Wells Fargo Bank, National Association dated as of August 25, 2005 10.4 Continuing Security Agreement between Emrise Corporation and Wells Fargo Bank, National Association dated as of August 25, 2005 10.5 Continuing Guaranty between CXR Telcom Corporation and Wells Fargo Bank, National Association dated as of August 25, 2005 10.6 Continuing Guaranty between Emrise Electronics Corporation and Wells Fargo Bank, National Association dated as of August 25, 2005 10.7 Agreement and Acknowledgment of Security Interest by and among Wells Fargo Bank, National Association, Emrise Corporation and Noel C. McDermott and Warren P. Yost dated as of August 25, 2005 10.8 Debt Purchase Agreement between Lloyds TSB Commercial Finance Limited and Pascall Electronics Limited dated June 28, 2005 10.9 Debt Purchase Agreement between Lloyds TSB Commercial Finance Limited and XCEL Power Systems Limited dated June 28, 2005 10.10 Loan Agreement between Lloyds TSB Commercial Finance Limited and XCEL Power Systems Limited dated June 28, 2005 10.11 Business Loan Agreement between Lloyds TSB Bank PLC and XCEL Corporation Limited dated June 30, 2005 (3) 10.12 Guaranty and Indemnity between XCEL Power Systems Limited, Pascall Electronics Limited, Pascall Electronic (Holdings) Limited, Belix Wound Components Limited and Lloyds TSB Commercial Finance Limited dated June 21, 2005 10.13 Deed of Guaranty and Indemnity between XCEL Corporation Limited and Lloyds TSB Commercial Finance Limited dated June 21, 2005 10.14 Deed of Guarantee and Indemnity between Pascall Electronics Limited and Lloyds TSB Commercial Finance Limited dated June 28, 2005 32 Exhibit Number Description - ------ ----------- 10.15 Deed of Guarantee and Indemnity between XCEL Corporation Limited and Lloyds TSB Commercial Finance Limited dated June 28, 2005 10.16 Deed of Priorities between Lloyds TSB Commercial Finance Limited and Lloyds TSB Bank PLC and Pascall Electronics Limited dated June 28, 2005 10.17 Deed of Priorities between Lloyds TSB Commercial Finance Limited and Lloyds TSB Bank PLC and XCEL Power Systems Limited dated June 28, 2005 10.18 All Assets Debenture given by XCEL Power Systems Limited in favor of Lloyds TSB Commercial Finance Limited dated June 28, 2005 31 Certifications Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32 Certification of Chief Executive Officer and Acting Chief Financial Officer Pursuant to 18 U.S.C. Section 350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 33 EX-10.1 2 emrise_10qex10-1.txt EXHIBIT 10.1 CREDIT AGREEMENT THIS CREDIT AGREEMENT (this "Agreement") is entered into as of September 1, 2005, by and between EMRISE CORPORATION, a Delaware corporation ("Borrower"), and WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank"). RECITALS -------- Borrower has requested that Bank extend or continue credit to Borrower as described below, and Bank has agreed to provide such credit to Borrower on the terms and conditions contained herein. NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Bank and Borrower hereby agree as follows: ARTICLE I --------- CREDIT TERMS ------------ SECTION 1.1 LINE OF CREDIT. (a) LINE OF CREDIT. Subject to the terms and conditions of this Agreement, Bank hereby agrees to make advances to Borrower from time to time up to and including September 1, 2006, not to exceed at any time the aggregate principal amount of Nine Million Dollars ($9,000,000.00) ("Line of Credit"), the proceeds of which shall be used to finance Borrower's working capital requirements. Borrower's obligation to repay advances under the Line of Credit shall be evidenced by a promissory note dated as of September 1, 2005 ("Line of Credit Note"), all terms of which are incorporated herein by this reference. (b) INITIAL LIMITATION ON BORROWINGS; CONVERSION TO FORMULA LINE OF CREDIT. Notwithstanding anything herein to the contrary, until such time as Bank has completed a collateral examination of Borrower's accounts receivable and inventory in form and substance satisfactory to Bank in its discretion, borrowings hereunder shall not exceed an aggregate of Two Million Dollars ($2,000,000.00) outstanding at any time. Thereafter, if at any time aggregate outstanding borrowings under the Line of Credit exceed Two Million Dollars ($2,000,000.00) (a "Conversion Event"), the Line of Credit shall be immediately converted to a formula-based Line of Credit as set forth herein. Immediately upon the occurrence of a Conversion Event and continuing up to and including such time as a Reconversion Event (as such term is defined in Section 1.1 (c) below), if any, occurs hereunder, outstanding borrowings under the Line of Credit, to a maximum of the principal amount set forth above, shall not at any time exceed an aggregate of eighty percent (80%) of Borrower's eligible accounts receivable plus thirty percent (30%) of the value of finished goods inventory (exclusive of work in process and inventory which is obsolete, unsaleable, damaged, consigned or offsite items), with value defined as the lower of cost or market value. All of the foregoing shall be determined by Bank upon receipt and review of all collateral reports required hereunder and such other documents and collateral information as Bank may from time to time require. Borrower acknowledges that said borrowing base was established by Bank with the understanding that, among other items, the aggregate of all returns, rebates, discounts, credits and allowances for the immediately preceding three (3) months at all times shall be less than five percent (5%) of Borrower's gross sales for said period. If such dilution of Borrower's accounts for the immediately preceding three (3) months at any time exceeds five percent (5%) of Borrower's gross sales for said period, or if there at any time exists any other matters, events, conditions or contingencies which Bank reasonably believes may affect payment of any portion of Borrower's accounts, Bank, in its sole discretion, may reduce the foregoing advance rate against eligible accounts receivable to a percentage appropriate to reflect such additional dilution and/or establish additional reserves against Borrowers eligible accounts receivable. As used herein, "eligible accounts receivable" shall consist solely of trade accounts created in the ordinary course of Borrower's business, upon which Borrowers right to receive payment is absolute and not contingent upon the fulfillment of any condition whatsoever, and in which Bank has a perfected security interest of first priority, and shall not include: (i) any account which is more than sixty-one (61) days past due; (ii) that portion of any account for which there exists any right of setoff, defense or discount (except regular discounts allowed in the ordinary course of business to promote prompt payment) or for which any defense or counterclaim has been asserted; (iii) any account which represents an obligation of any state or municipal government or of the United States government or any political subdivision thereof (except accounts which represent obligations of the United States government and for which the assignment provisions of the Federal Assignment of Claims Act, as amended or recodified from time to time, have been complied with to Bank's satisfaction); (iv) any account which represents an obligation of an account debtor located in a foreign country; (v) any account which arises from the sale or lease to or performance of services for, or represents an obligation of, an employee, affiliate, partner, member, parent or subsidiary of Borrower; (vi) that portion of any account, which represents interim or progress billings or retention rights on the part of the account debtor; (vii) any account which represents an obligation of any account debtor when twenty percent (20%) or more of Borrower's accounts from such account debtor are not eligible pursuant to (i) above; (viii) that portion of any account from an account debtor which represents the amount by which Borrower's total accounts from said account debtor exceeds twenty-five percent (25%) of Borrower's total accounts; (ix) any account deemed ineligible by Bank when Bank, in its sole discretion, deems the creditworthiness or financial condition of the account debtor, or the industry in which the account debtor is engaged, to be unsatisfactory. (c) RECONVERSION TO NON-FORMULA LINE OF CREDIT. If, following a Conversion Event, aggregate outstanding borrowings under the Line of Credit at any time are equal to or less than Two Million Dollars ($2,000,000.00) (a "Reconversion Event"), the Line of Credit shall be reconverted immediately to a non-formula based Line of Credit until such time as a Conversion Event, if any, shall occur hereunder. 2 (d) BORROWING AND REPAYMENT. Borrower may from time to time during the term of the Line of Credit borrow, partially or wholly repay its outstanding borrowings, and reborrow, subject to all of the limitations, terms and conditions contained herein or in the Line of Credit Note; PROVIDED, HOWEVER, that the total outstanding borrowings under the Line of Credit shall not at any time exceed the maximum principal amount available thereunder, as set forth above. SECTION 1.2 INTEREST/FEES. (a) INTEREST. The outstanding principal balance of the Line of Credit shall bear interest at the rate of interest set forth in the Line of Credit Note. (b) COMPUTATION AND PAYMENT. Interest shall be computed on the basis of a 360-day year, actual days elapsed. Interest shall be payable at the times and place set forth in each promissory note or other instrument or document required hereby. (c) UNUSED COMMITMENT FEE. Borrower shall pay to Bank a fee equal to one-quarter percent (0.25%) per annum (computed on the basis of a 360-day year, actual days elapsed) on the average daily unused amount of the Line of Credit, which fee shall be calculated on a quarterly basis by Bank and shall be due and payable by Borrower in arrears on the first day of each calendar quarter. SECTION 1.3 COLLECTION OF PAYMENTS. Borrower authorizes Bank to collect all interest and fees due under each credit subject hereto by charging Borrower's deposit account number 4950-002477 with Bank, or any other deposit account maintained by Borrower with Bank, for the full amount thereof. Should there be insufficient funds in any such deposit account to pay all such sums when due, the full amount of such deficiency shall be immediately due and payable by Borrower. SECTION 1.4 COLLATERAL. As security for all indebtedness of Borrower to Bank subject hereto, Borrower hereby grants to Bank security interests of first priority in all Borrower's accounts receivable and other rights to payment, general intangibles, inventory and equipment. All of the foregoing shall be evidenced by and subject to the terms of such security agreements, financing statements, deeds or mortgages, and other documents as Bank shall reasonably require, all in form and substance satisfactory to Bank. Borrower shall reimburse Bank immediately upon demand for all costs and expenses incurred by Bank in connection with any of the foregoing security, including, without limitation, filing and recording fees and costs of appraisals, audits and title insurance. Without in any way limiting the generality of the foregoing, Borrower shall reimburse Bank for all costs and expenses incurred by Bank in connection with any audits of new collateral acquired by Borrower through Permitted Acquisitions (as defined in Section 5.3 hereof) within sixty (60) days following completion of each such new collateral audit. SECTION 1.5 GUARANTIES. All indebtedness of Borrower to Bank shall be guaranteed jointly and severally by CXR Telcom Corporation and Emrise Electronics Corporation in the principal amount of Nine Million Dollars ($9,000,000.00) each, as evidenced by and subject to the terms of guaranties in form and substance satisfactory to Bank. 3 ARTICLE II ---------- REPRESENTATIONS AND WARRANTIES ------------------------------ Borrower makes the following representations and warranties to Bank, which representations and warranties shall survive the execution of this Agreement and shall continue in full force and effect until the full and final payment, and satisfaction and discharge, of all obligations of Borrower to Bank subject to this Agreement. SECTION 2.1 LEGAL STATUS. Borrower is a corporation, duly organized and existing and in good standing under the laws of Delaware, and is qualified or licensed to do business (and is in good standing as a foreign corporation, if applicable) in all jurisdictions in which such qualification or licensing is required or in which the failure to so qualify or to be so licensed could have a material adverse effect on Borrower. SECTION 2.2 AUTHORIZATION AND VALIDITY. This Agreement and each promissory note, contract, instrument and other document required hereby or at any time hereafter delivered to Bank in connection herewith (collectively, the "Loan Documents") have been duly authorized, and upon their execution and delivery in accordance with the provisions hereof will constitute legal, valid and binding agreements and obligations of Borrower or the party which executes the same, enforceable in accordance with their respective terms. SECTION 2.3 NO VIOLATION. The execution, delivery and performance by Borrower of each of the Loan Documents do not violate any provision of any law or regulation, or contravene any provision of the Articles of Incorporation or By-Laws of Borrower, or result in any breach of or default under any contract, obligation, indenture or other instrument to which Borrower is a party or by which Borrower may be bound. SECTION 2.4 LITIGATION. There are no pending, or to the best of Borrower's knowledge threatened, actions, claims, investigations, suits or proceedings by or before any governmental authority, arbitrator, court or administrative agency which could have a material adverse effect on the financial condition or operation of Borrower other than those disclosed by Borrower to Bank in writing prior to the date hereof. SECTION 2.5 CORRECTNESS OF FINANCIAL STATEMENT. The financial statement of Borrower dated May 31, 2005, a true copy of which has been delivered by Borrower to Bank prior to the date hereof, (a) is complete and correct and presents fairly the financial condition of Borrower, (b) discloses all liabilities of Borrower that are required to be reflected or reserved against under generally accepted accounting principles, whether liquidated or unliquidated, fixed or contingent, and (c) has been prepared in accordance with generally accepted accounting principles consistently applied. Since the date of such financial statement there has been no material adverse change in the financial condition of Borrower, nor has Borrower mortgaged, pledged, granted a security interest in or otherwise encumbered any of its assets or properties except in favor of Bank or as otherwise permitted by Bank in writing. SECTION 2.6 INCOME TAX RETURNS. Borrower has no knowledge of any pending assessments or adjustments of its income tax payable with respect to any year. SECTION 2.7 NO SUBORDINATION. There is no agreement, indenture, contract or instrument to which Borrower is a party or by which Borrower may be bound that requires the subordination in right of payment of any of Borrower's obligations subject to this Agreement to any other obligation of Borrower. 4 SECTION 2.8 PERMITS, FRANCHISES. Borrower possesses, and will hereafter possess, all permits, consents, approvals, franchises and licenses required and rights to all trademarks, trade names, patents, and fictitious names, if any, necessary to enable it to conduct the business in which it is now engaged in compliance with applicable law. SECTION 2.9 ERISA. Borrower is in compliance in all material respects with all applicable provisions of the Employee Retirement Income Security Act of 1974, as amended or recodified from time to time ("ERISA"); Borrower has not violated any provision of any defined employee pension benefit plan (as defined in ERISA) maintained or contributed to by Borrower (each, a "Plan"); no Reportable Event as defined in ERISA has occurred and is continuing with respect to any Plan initiated by Borrower; Borrower has met its minimum funding requirements under ERISA with respect to each Plan; and each Plan will be able to fulfill its benefit obligations as they come due in accordance with the Plan documents and under generally accepted accounting principles. SECTION 2.10 OTHER OBLIGATIONS. Borrower is not in default on any obligation for borrowed money, any purchase money obligation or any other material lease, commitment, contract, instrument or obligation. SECTION 2.11 ENVIRONMENTAL MATTERS. Except as disclosed by Borrower to Bank in writing prior to the date hereof, Borrower is in compliance in all material respects with all applicable federal or state environmental, hazardous waste, health and safety statutes, and any rules or regulations adopted pursuant thereto, which govern or affect any of Borrower's operations and/or properties, including, without limitation, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, the Superfund Amendments and Reauthorization Act of 1986, the Federal Resource Conservation and Recovery Act of 1976, and the Federal Toxic Substances Control Act, as any of the same may be amended, modified or supplemented from time to time. None of the operations of Borrower is the subject of any federal or state investigation evaluating whether any remedial action involving a material expenditure is needed to respond to a release of any toxic or hazardous waste or substance into the environment. Borrower has no material contingent liability in connection with any release of any toxic or hazardous waste or substance into the environment. ARTICLE III ----------- CONDITIONS ---------- SECTION 3.1 CONDITIONS OF INITIAL EXTENSION OF CREDIT. The obligation of Bank to extend any credit contemplated by this Agreement is subject to the fulfillment to Bank's satisfaction of all of the following conditions: (a) APPROVAL OF BANK COUNSEL. All legal matters incidental to the extension of credit by Bank shall be satisfactory to Bank's counsel. (b) DOCUMENTATION. Bank shall have received, in form and substance satisfactory to Bank, each of the following, duly executed: (i) This Agreement and each promissory note or other instrument or document required hereby. (ii) Certificates of incumbency. (iii) Corporate Resolution: Borrowing. (iv) Corporate Resolutions: Continuing Guaranty. 5 (v) Continuing Guaranties. (vi) Continuing Security Agreement: Rights to Payment and Inventory. (vii) Disbursement Order. (viii) Security Agreement: Equipment. (ix) Such other documents as Bank may require under any other Section of this Agreement. (c) FINANCIAL CONDITION. There shall have been no material adverse change, as determined by Bank, in the financial condition or business of Borrower or any guarantor hereunder, nor any material decline, as determined by Bank, in the market value of any collateral required hereunder or a substantial or material portion of the assets of Borrower or any such guarantor. (d) INSURANCE. Borrower shall have delivered to Bank evidence of insurance coverage on all Borrower's property, in form, substance, amounts, covering risks and issued by companies satisfactory to Bank, and where required by Bank, with loss payable endorsements in favor of Bank. SECTION 3.2 CONDITIONS OF EACH EXTENSION OF CREDIT. The obligation of Bank to make each extension of credit requested by Borrower hereunder shall be subject to the fulfillment to Bank's satisfaction of each of the following conditions: (a) COMPLIANCE. The representations and warranties contained herein and in each of the other Loan Documents shall be true on and as of the date of the signing of this Agreement and on the date of each extension of credit by Bank pursuant hereto, with the same effect as though such representations and warranties had been made on and as of each such date, and on each such date, no Event of Default as defined herein, and no condition, event or act which with the giving of notice or the passage of time or both would constitute such an Event of Default, shall have occurred and be continuing or shall exist. (b) DOCUMENTATION. Bank shall have received all additional documents which may be required in connection with such extension of credit. ARTICLE IV ---------- AFFIRMATIVE COVENANTS --------------------- Borrower covenants that so long as Bank remains committed to extend credit to Borrower pursuant hereto, or any liabilities (whether direct or contingent, liquidated or unliquidated) of Borrower to Bank under any of the Loan Documents remain outstanding, and until payment in full of all obligations of Borrower subject hereto, Borrower shall, unless Bank otherwise consents in writing: SECTION 4.1 PUNCTUAL PAYMENTS. Punctually pay all principal, interest, fees or other liabilities due under any of the Loan Documents at the times and place and in the manner specified therein, and immediately upon demand by Bank, the amount by which the outstanding principal balance of any credit subject hereto at any time exceeds any limitation on borrowings applicable thereto. SECTION 4.2 ACCOUNTING RECORDS. Maintain adequate books and records in accordance with generally accepted accounting principles consistently applied, and permit any representative of Bank, at any reasonable time, to inspect, audit and examine such books and records, to make copies of the same, and to inspect the properties of Borrower. 6 SECTION 4.3 FINANCIAL STATEMENTS. Provide to Bank all of the following, in form and detail satisfactory to Bank: (a) not later than 120 days after and as of the end of each fiscal year, a consolidated and consolidating audited copy of Borrower's 10K report filed with the Securities Exchange Commission and financial statements of Borrower, CXR Telcom Corporation and Emrise Electronics Corporation, prepared by a certified public accountant acceptable to Bank, to include a balance sheet, statements of income, retained earnings and cash flow, together with all supporting schedules and footnotes; (b) not later than 30 days after and as of the end of each month, a financial statement of Borrower, prepared by Borrower, to include a balance sheet, an income statement and all supporting schedules and footnotes; (c) not later than 30 days after and as of the end of each fiscal year, projections of the consolidated financial statements of Borrower for the immediately following fiscal year; (d) commencing immediately upon the occurrence of a Conversion Event, if any, and continuing up to and including such time as a Reconversion Event, if any, occurs: (i) not later than 10 days after and as of the end of each month, a borrowing base certificate, an inventory collateral report, an aged listing of accounts receivable and accounts payable. and a reconciliation of accounts; and (ii) not later than 10 clays after and as of each June 30 and December 31, a list of the names and addresses of all Borrower's account debtors; (e) from time to time such other information as Bank may reasonably request. SECTION 4.4 COMPLIANCE. Preserve and maintain all licenses, permits, governmental approvals, rights, privileges and franchises necessary for the conduct of its business; and comply with the provisions of all documents pursuant to which Borrower is organized and/or which govern Borrower's continued existence and with the requirements of all laws, rules, regulations and orders of any governmental authority applicable to Borrower and/or its business. SECTION 4.5 INSURANCE. Maintain and keep in force insurance of the types and in amounts customarily carried in lines of business similar to that of Borrower, including but not limited to fire, extended coverage, public liability, flood, property damage and workers' compensation, with all such insurance carried with companies and in amounts satisfactory to Bank, and deliver to Bank from time to time at Bank's request schedules setting forth all insurance then in effect. SECTION 4.6 FACILITIES. Keep all properties useful or necessary to Borrower's business in good repair and condition, and from time to time make necessary repairs, renewals and replacements thereto so that such properties shall be fully and efficiently preserved and maintained. SECTION 4.7 TAXES AND OTHER LIABILITIES. Pay and discharge when due any and all indebtedness, obligations, assessments and taxes, both real or personal, including, without limitation federal and state income taxes and state and local 7 property taxes and assessments, except such (a) as Borrower may in good faith contest or as to which a bona fide dispute may arise, and (b) for which Borrower has made provision, to Bank's satisfaction, for eventual payment thereof in the event Borrower is obligated to make such payment. SECTION 4.8 LITIGATION. Promptly give notice in writing to Bank of any litigation pending or threatened against Borrower. SECTION 4.9 FINANCIAL CONDITION. Maintain Borrower's financial condition as follows using generally accepted accounting principles consistently applied and used consistently with prior practices (except to the extent modified by the definitions herein): (a) Current Ratio not less than 1.50 to 1.0 as of each fiscal quarter end, with "Current Ratio" defined as total current assets divided by total current liabilities. (b) Tangible Net Worth not less than $14,250,000.00 as of each fiscal quarter end, with "Tangible Net Worth" defined as the aggregate of total stockholders' equity plus subordinated debt less any intangible assets. (c) Total Liabilities divided by Tangible Net Worth not greater than 1.25 to 1.0 as of each fiscal quarter end, with "Total Liabilities" defined as the aggregate of current liabilities and non-current liabilities less subordinated debt, and with "Tangible Net Worth" as defined above. (d) Net profit after taxes greater than $500,000.00, determined as of each fiscal quarter end on a rolling four-quarter basis; PROVIDED, HOWEVER, that for purposes of such calculation of net profit after taxes, Borrower may not sustain net loss after tax in any two consecutive fiscal quarters. (e) Debt Service Coverage Ratio greater than 1.25 to 1.0, determined as of each fiscal quarter end on a rolling four-quarter basis, with "Debt Service Coverage Ratio" defined as the sum of (i) net profit after taxes, PLUS (ii) depreciation, PLUS (iii) amortization, (iv) PLUS OR MINUS net distributions DIVIDED BY, the sum of (v) the current portion of long term debt PLUS (vi) capitalized lease payments. SECTION 4.10 NOTICE TO BANK. Promptly (but in no event more than five (5) days after the occurrence of each such event or matter) give written notice to Bank in reasonable detail of: (a) the occurrence of any Event of Default, or any condition, event or act which with the giving of notice or the passage of time or both would constitute an Event of Default; (b) any change in the name or the organizational structure of Borrower; (c) the occurrence and nature of any Reportable Event or Prohibited Transaction, each as defined in ERISA, or any funding deficiency with respect to any Plan; or (d) any termination or cancellation of any insurance policy which Borrower is required to maintain, or any uninsured or partially uninsured loss through liability or property damage, or through fire, theft or any other cause affecting Borrower's property. ARTICLE V --------- NEGATIVE COVENANTS ------------------ Borrower further covenants that so long as Bank remains committed to extend credit to Borrower pursuant hereto, or any liabilities (whether direct or contingent, liquidated or unliquidated) of Borrower to Bank under any of the Loan Documents remain outstanding, and until payment in full of all obligations of Borrower subject hereto, Borrower will not without Bank's prior written consent: 8 SECTION 5.1 USE OF FUNDS. Use any of the proceeds of any credit extended hereunder except for the purposes stated in Article I hereof. SECTION 5.2 DIVIDENDS, DISTRIBUTIONS. Declare or pay any dividend or distribution either in cash, stock or any other property on Borrower's stock now or hereafter outstanding, nor redeem, retire, repurchase or otherwise acquire any shares of any class of Borrower's stock now or hereafter outstanding. SECTION 5.3 ACQUISITIONS. Acquire all or substantially all of the assets, business, stock, partnership interests or membership interests of any person or entity, or acquire any corporation, partnership, limited liability company or other entity through a merger or consolidation in which the surviving entity is Borrower, except for Permitted Acquisitions. As used herein, a "Permitted Acquisition" means any such acquisition, merger or consolidation which satisfies all of the following conditions, as determined by Bank in its sole discretion: (a) the purpose of such acquisition, merger or consolidation shall be to acquire a business in a similar or related line of business to that of Borrower; (b) Bank shall have received from Borrower such information regarding the terms and conditions of such acquisition, merger or consolidation as it shall reasonably require; (c) at the time of such acquisition, merger or consolidation, the entity whose stock, assets or business shall be acquired by, merged into or with, or consolidated with Borrower shall be profitable and accretive to Borrower's earnings; (d) Borrower shall provide to Bank a certification from one of Borrower's senior financial officers, in form and substance satisfactory to Bank, certifying that after giving effect to such acquisition, merger or consolidation, no covenant of this Agreement shall be violated; and (e) such acquisition, merger or consolidation shall comply with all applicable laws. ARTICLE VI ---------- EVENTS OF DEFAULT ----------------- SECTION 6.1 The occurrence of any of the following shall constitute an "Event of Default" under this Agreement: (a) Borrower shall fail to pay when due any principal, interest, fees or other amounts payable under any of the Loan Documents. (b) Any financial statement or certificate furnished to Bank in connection with, or any representation or warranty made by Borrower or any other party under this Agreement or any other Loan Document shall prove to be incorrect, false or misleading in any material respect when furnished or made. (c) Any default in the performance of or compliance with any obligation, agreement or other provision contained herein or in any other Loan Document (other than those referred to in subsections (a) and (b) above), and with respect to any such default which by its nature can be cured, such default shall continue for a period of twenty (20) days from its occurrence. 9 (d) Any default in the payment or performance of any obligation, or any defined event of default, under the terms of any contract or instrument (other than any of the Loan Documents) pursuant to which Borrower, any guarantor hereunder or any general partner or joint venturer in any Borrower which is a partnership or joint venture (with each such guarantor, general partner and/or joint venturer referred to herein as a "Third Party Obligor") has incurred any debt or other liability to any person or entity, including Bank. (e) The filing of a notice of judgment lien against Borrower or any Third Party Obligor; or the recording of any abstract of judgment against Borrower or any Third Party Obligor in any county in which Borrower or such Third Party Obligor has an interest in real property; or the service of a notice of levy and/or of a writ of attachment or execution, or other like process, against the assets of Borrower or any Third Party Obligor; or the entry of a judgment against Borrower or any Third Party Obligor. (f) Borrower or any Third Party Obligor shall become insolvent, or shall suffer or consent to or apply for the appointment of a receiver, trustee, custodian or liquidator of itself or any of its property, or shall generally fail to pay its debts as they become due, or shall make a general assignment for the benefit of creditors; Borrower or any Third Party Obligor shall file a voluntary petition in bankruptcy, or seeking reorganization, in order to effect a plan or other arrangement with creditors or any other relief under the Bankruptcy Reform Act, Title 11 of the United States Code, as amended or recodified from time to time ("Bankruptcy Code"), or under any state or federal law granting relief to debtors, whether now or hereafter in effect; or any involuntary petition or proceeding pursuant to the Bankruptcy Code or any other applicable state or federal law relating to bankruptcy, reorganization or other relief for debtors is filed or commenced against Borrower or any Third Party Obligor, or Borrower or any Third Party Obligor shall file an answer admitting the jurisdiction of the court and the material allegations of any involuntary petition; or Borrower or any Third Party Obligor shall be adjudicated a bankrupt, or an order for relief shall be entered against Borrower or any Third Party Obligor by any court of competent jurisdiction under the Bankruptcy Code or any other applicable state or federal law relating to bankruptcy, reorganization or other relief for debtors. (g) There shall exist or occur any event or condition which Bank in good faith believes impairs, or is substantially likely to impair, the prospect of payment or performance by Borrower of its obligations under any of the Loan Documents. (h) The death or incapacity of any individual Borrower or Third Party Obligor. The dissolution or liquidation of any Borrower or Third Party Obligor which is a corporation, partnership, joint venture or other type of entity; or Borrower or any such Third Party Obligor, or any of its directors, stockholders or members, shall take action seeking to effect the dissolution or liquidation of such Borrower or Third Party Obligor. (i) Any change in ownership of an aggregate of twenty-five percent (25%) or more of the common stock of Borrower. SECTION 6.2 REMEDIES. Upon the occurrence of any Event of Default: (a) all indebtedness of Borrower under each of the Loan Documents, any term thereof to the contrary notwithstanding, shall at Bank's option and without notice become immediately due and payable without presentment, demand, protest or notice of dishonor, all of which are hereby expressly waived by each Borrower; (b) the obligation, if any, of Bank to extend any further credit under any of 10 the Loan Documents shall immediately cease and terminate; and (c) Bank shall have all rights, powers and remedies available under each of the Loan Documents, or accorded by law, including, without limitation, the right to resort to any or all security for any credit subject hereto and to exercise any or all of the rights of a beneficiary or secured party pursuant to applicable law. All rights, powers and remedies of Bank may be exercised at any time by Bank and from time to time after the occurrence of an Event of Default, are cumulative and net exclusive, and shall be in addition to any other rights, powers or remedies provided by law or equity. ARTICLE VII ----------- MISCELLANEOUS ------------- SECTION 7.1 NO WAIVER. No delay, failure or discontinuance of Bank in exercising any right, power or remedy under any of the Loan Documents shall affect or operate as a waiver of such right, power or remedy; nor shall any single or partial exercise of any such right, power or remedy preclude, waive or otherwise affect any other or further exercise thereof or the exercise of any other right, power or remedy. Any waiver, permit, consent or approval of any kind by Bank of any breach of or default under any of the Loan Documents must be in writing and shall be effective only to the extent set forth in such writing. SECTION 7.2 NOTICES. All notices, requests and demands which any party is required or may desire to give to any other party under any provision of this Agreement must be in writing delivered to each party at the following address: BORROWER: EMRISE CORPORATION 9485 Haven Ave., Suite 100 Rancho Cucamonga, CA 91730 BANK: WELLS FARGO BANK, NATIONAL ASSOCIATION Inland Empire Regional Commercial Banking Office 4141 Inland Empire Blvd., Suite #350 Ontario, CA 91764 or to such other address as any party may designate by written notice to all other parties. Each such notice, request and demand shall be deemed given or made as follows: (a) if sent by hand delivery, upon delivery; (b) if sent by mail, upon the earlier of the date of receipt or three (3) days after deposit in the U.S. mail, first class and postage prepaid; and (c) if sent by telecopy, upon receipt. SECTION 7.3 COSTS, EXPENSES AND ATTORNEYS' FEES. Borrower shall pay to Bank immediately upon demand the full amount of all payments, advances, charges, costs and expenses, including reasonable attorneys' fees (to include outside counsel fees and all allocated costs of Bank's in-house counsel), expended or incurred by Bank in connection with the negotiation and preparation of this Agreement and the other Loan Documents, Bank's continued administration hereof and thereof, and the preparation of any amendments and waivers hereto and thereto, (b) the enforcement of Bank's rights and/or the collection of any amounts which become due to Bank under any of the Loan Documents, and (c) the prosecution or defense of any action in any way related to any of the Loan Documents, including, without limitation, any action for declaratory relief, whether incurred at the trial or appellate level, in an arbitration proceeding or otherwise, and including any of the foregoing incurred in connection with any bankruptcy proceeding (including, without limitation, any adversary proceeding, contested matter or motion brought by Bank or any other person) relating to any Borrower or any other person or entity. 11 SECTION 7.4 SUCCESSORS, ASSIGNMENT. This Agreement shall be binding upon and inure to the benefit of the heirs, executors, administrators, legal representatives, successors and assigns of the parties; PROVIDED, HOWEVER, that Borrower may not assign or transfer its interest hereunder without Bank's prior written consent. Bank reserves the right to sell, assign, transfer, negotiate or grant participations in all or any part of, or any interest in, Bank's rights and benefits under each of the Loan Documents. In connection therewith, Bank may disclose all documents and information which Bank now has or may hereafter acquire relating to any credit subject hereto, Borrower or its business, any guarantor hereunder or the business of such guarantor, or any collateral required hereunder. SECTION 7.5 ENTIRE AGREEMENT; AMENDMENT. This Agreement and the other Loan Documents constitute the entire agreement between Borrower and Bank with respect to each credit subject hereto and supersede all prior negotiations, communications, discussions and correspondence concerning the subject matter hereof. This Agreement may be amended or modified only in writing signed by each party hereto. SECTION 7.6 NO THIRD PARTY BENEFICIARIES. This Agreement is made and entered into for the sole protection and benefit of the parties hereto and their respective permitted successors and assigns, and no other person or entity shall be a third party beneficiary of, or have any direct or indirect cause of action or claim in connection with, this Agreement or any other of the Loan Documents to which it is not a party. SECTION 7.7 TIME. Time is of the essence of each and every provision of this Agreement and each other of the Loan Documents. SECTION 7.8 SEVERABILITY OF PROVISIONS. If any provision of this Agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity without invalidating the remainder of such provision or any remaining provisions of this Agreement. SECTION 7.9 COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which when executed and delivered shall be deemed to be an original, and all of which when taken together shall constitute one and the same Agreement. SECTION 7.10 GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of California. SECTION 7.11 ARBITRATION. (a) ARBITRATION. The parties hereto agree, upon demand by any party, to submit to binding arbitration all claims, disputes and controversies between or among them (and their respective employees, officers, directors, attorneys, and other agents), whether in tort, contract or otherwise arising out of or relating to in any way (i) the loan and related Loan Documents which are the subject of this Agreement and its negotiation, execution, collateralization, administration, repayment, modification, extension, substitution, formation, inducement, enforcement, default or termination; or (ii) requests for additional credit. 12 (b) GOVERNING RULES. Any arbitration proceeding will (i) proceed in a location in California selected by the American Arbitration Association ("AAA"); (ii) be governed by the Federal Arbitration Act (Title 9 of the United States Code), notwithstanding any conflicting choice of law provision in any of the documents between the parties; and (iii) be conducted by the AAA, or such other administrator as the parties shall mutually agree upon, in accordance with the AAA's commercial dispute resolution procedures, unless the claim or counterclaim is at least $1,000,000.00 exclusive of claimed interest, arbitration fees and costs in which case the arbitration shall be conducted in accordance with the AAA's optional procedures for large, complex commercial disputes (the commercial dispute resolution procedures or the optional procedures for large, complex commercial disputes to be referred to, as applicable, as the "Rules"). If there is any inconsistency between the terms hereof and the Rules, the terms and procedures set forth herein shall control. Any party who fails or refuses to submit to arbitration following a demand by any other party shall bear all costs and expenses incurred by such other party in compelling arbitration of any dispute. Nothing contained herein shall be deemed to be a waiver by any party that is a bank of the protections afforded to it under 12 U.S.C. ss.91 or any similar applicable state law. (c) NO WAIVER OF PROVISIONAL REMEDIES, SELF-HELP AND FORECLOSURE. The arbitration requirement does not limit the right of any party to (i) foreclose against real or personal property collateral; (ii) exercise self-help remedies relating to collateral or proceeds of collateral such as setoff or repossession; or (iii) obtain provisional or ancillary remedies such as replevin, injunctive relief, attachment or the appointment of a receiver, before during or after the pendency of any arbitration proceeding. This exclusion does not constitute a waiver of the right or obligation of any party to submit any dispute to arbitration or reference hereunder, including those arising from the exercise of the actions detailed in sections (i), (ii) and (iii) of this paragraph. (d) ARBITRATOR QUALIFICATIONS AND POWERS. Any arbitration proceeding in which the amount in controversy is $5,000,000.00 or less will be decided by a single arbitrator selected according to the Rules, and who shall not render an award of greater than $5,000,000.00. Any dispute in which the amount in controversy exceeds $5,000,000.00 shall be decided by majority vote of a panel of three arbitrators; PROVIDED, HOWEVER, that all three arbitrators must actively participate in all hearings and deliberations. The arbitrator will be a neutral attorney licensed in the State of California or a neutral retired judge of the state or federal judiciary of California, in either case with a minimum of ten years experience in the substantive law applicable to the subject matter of the dispute to be arbitrated. The arbitrator will determine whether or not an issue is arbitratable and will give effect to the statutes of limitation in determining any claim. In any arbitration proceeding the arbitrator will decide (by documents only or with a hearing at the arbitrator's discretion) any pre-hearing motions which are similar to motions to dismiss for failure to state a claim or motions for summary adjudication. The arbitrator shall resolve all disputes in accordance with the substantive law of California and may grant any remedy or relief that a court of such state could order or grant within the scope hereof and such ancillary relief as is necessary to make effective any award. The arbitrator shall also have the power to award recovery of all costs and fees, to impose sanctions and to take such other action as the arbitrator deems necessary to the same extent a judge could pursuant to the Federal Rules of Civil Procedure, the California Rules of CMI Procedure or other applicable law. Judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction. The institution and maintenance of an action for judicial relief or pursuit of a provisional or ancillary remedy shall not constitute a waiver of the right of any party, including the plaintiff, to submit the controversy or claim to arbitration if any other party contests such action for judicial relief. 13 (e) DISCOVERY. In any arbitration proceeding discovery will be permitted in accordance with the Rules. All discovery shall be expressly limited to matters directly relevant to the dispute being arbitrated and must be completed no later than 20 days before the hearing date and within 180 days of the filing of the dispute with the AAA. Any requests for an extension of the discovery periods, or any discovery disputes, will be subject to final determination by the arbitrator upon a showing that the request for discovery is essential for the party's presentation and that no alternative means for obtaining information is available. (f) CLASS PROCEEDINGS AND CONSOLIDATIONS. The resolution of any dispute arising pursuant to the terms of this Agreement shall be determined by a separate arbitration proceeding and such dispute shall not be consolidated with other disputes or included in any class proceeding. (g) PAYMENT OF ARBITRATION COSTS AND FEES. The arbitrator shall award all costs and expenses of the arbitration proceeding. (h) REAL PROPERTY COLLATERAL; JUDICIAL REFERENCE. Notwithstanding anything herein to the contrary, no dispute shall be submitted to arbitration if the dispute concerns indebtedness secured directly or indirectly, in whole or in part, by any real property unless (i) the holder of the mortgage, lien or security interest specifically elects in writing to proceed with the arbitration, or (ii) all parties to the arbitration waive any rights or benefits that might accrue to them by virtue of the single action rule statute of California, thereby agreeing that all indebtedness and obligations of the parties, and all mortgages, liens and security interests securing such indebtedness and obligations, shall remain fully valid and enforceable. If any such dispute is not submitted to arbitration, the dispute shall be referred to a referee in accordance with California Code of Civil Procedure Section 638 et seq., and this general reference agreement is intended to be specifically enforceable in accordance with said Section 638. A referee with the qualifications required herein for arbitrators shall be selected pursuant to the AAA's selection procedures. Judgment upon the decision rendered by a referee shall be entered in the court in which such proceeding was commenced in accordance with California Code of Civil Procedure Sections 644 and 645. (i) MISCELLANEOUS. To the maximum extent practicable, the AAA, the arbitrators and the parties shall take all action required to conclude any arbitration proceeding within 180 days of the filing of the dispute with the AAA. No arbitrator or other party to an arbitration proceeding may disclose the existence, content or results thereof, except for disclosures of information by a party required in the ordinary course of its business or by applicable law or regulation. If more than one agreement for arbitration by or between the parties potentially applies to a dispute, the arbitration provision most directly related to the Loan Documents or the subject matter of the dispute shall control. This arbitration provision shall survive termination, amendment or expiration of any of the Loan Documents or any relationship between the parties. 14 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the day and year first written above. WELLS FARGO BANK, EMRISE CORPORATION NATIONAL ASSOCIATION By: /S/ Randolph D. Foote By: /S/ Joseph Hopper --------------------- ------------------- Randolph D. Foote Joseph Hopper Vice President Vice President 15 EX-10.2 3 emrise_10qex10-2.txt EXHIBIT 10.2 WELLS FARGO REVOLVING LINE OF CREDIT NOTE - -------------------------------------------------------------------------------- $9,000,000.00 ONTARIO, CALIFORNIA SEPTEMBER 1, 2005 FOR VALUE RECEIVED, the undersigned Emrise Corporation ("Borrower") promises to pay to the order of WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank") at its office at INLAND EMPIRE RCBO, 4141 INLAND EMPIRE BLVD., SUITE #350, ONTARIO, CA 91764, or at such other place as the holder hereof may designate, in lawful money of the United States of America and in immediately available funds, the principal sum of $9,000,000.00, or so much thereof as may be advanced and be outstanding, with interest thereon, to be computed on each advance from the date of its disbursement as set forth herein. 1. INTEREST: 1.1 INTEREST. The outstanding principal balance of this Note shall bear interest (computed on the basis of a 360-day year, actual days elapsed) at a rate per annum equal to the Prime Rate in effect from time to time. The "Prime Rate" is a base rate that Bank from time to time establishes and which serves as the basis upon which effective rates of interest are calculated for those loans making reference thereto. Each change in the rate of interest hereunder shall become effective on the date each Prime Rate change is announced within Bank. 1.2 PAYMENT OF INTEREST. Interest accrued on this Note shall be payable on the 1st day of each month, commencing October 1, 2005. 1.3 DEFAULT INTEREST. From and after the maturity date of this Note, or such earlier date as all principal owing hereunder becomes due and payable by acceleration or otherwise, the outstanding principal balance of this Note shall bear interest until paid in full at an increased rate per annum (computed on the basis of a 360-day year, actual days elapsed) equal to 4% above the rate of interest from time to time applicable to this Note. 2. BORROWING AND REPAYMENT: 2.1 BORROWING AND REPAYMENT. Borrower may from time to time during the term of this Note borrow, partially or wholly repay its outstanding borrowings, and reborrow, subject to all of the limitations, terms and conditions of this Note and of the Credit Agreement between Borrower and Bank defined below; provided however, that the total outstanding borrowings under this Note shall not at any time exceed the principal amount stated above. The unpaid principal balance of this obligation at any time shall be the total amounts advanced hereunder by the holder hereof less the amount of principal payments made hereon by or for any Borrower, which balance may be endorsed hereon from time to time by the holder. The outstanding principal balance of this Note shall be due and payable in full on SEPTEMBER 1, 2006. 2.2 ADVANCES. Advances hereunder, to the total amount of the principal sum available hereunder, may be made by the holder at the oral or written request of (a) RANDOLPH D. FOOTE, CARMINE OLIVA, SID SANANIKONE, any one acting alone, who are authorized to request advances and direct the disposition of any advances until written notice of the revocation of such authority is received by the holder at the office designated above, or (b) any person, with respect to advances deposited to the credit of any deposit account of any Borrower, which advances, when so deposited, shall be conclusively presumed to have been made to or for the benefit of each Borrower regardless of the fact that persons other than those authorized to request advances may have authority to draw against such account. The holder shall have no obligation to determine whether any person requesting an advance is or has been authorized by any Borrower. 2.3 APPLICATION OF PAYMENT. Each payment made on this Note shall be credited first, to any interest then due and second, to the outstanding principal balance hereof. 3. EVENTS OF DEFAULT: This Note is made pursuant to and is subject to the terms and conditions of that certain Credit Agreement between Borrower and Bank dated as of SEPTEMBER 1, 2005, as amended from time to time (the "Credit Agreement"). Any default in the payment or performance of any obligation under this Note, or any defined event of default under the Credit Agreement, shall constitute an "Event of Default" under this Note. 4. MISCELLANEOUS: 4.1 REMEDIES. Upon the occurrence of any Event of Default, the holder of this Note, at the holder's option, may declare all sums of principal and interest outstanding hereunder to be immediately due and payable without presentment, demand, notice of nonperformance, notice of protest, protest or notice of dishonor, all of which are expressly waived by each Borrower, and the obligation, if any, of the holder to extend any further credit hereunder shall immediately cease and terminate. Each Borrower shall pay to the holder immediately upon demand the full amount of all payments, advances, charges, costs and expenses, including reasonable attorneys' fees (to include outside counsel fees and all allocated costs of the holders in-house counsel), expended or incurred by the holder in connection with the enforcement of the holders rights and/or the collection of any amounts which become due to the holder under this Note, and the prosecution or defense of any action in any way related to this Note, including without limitation, any action for declaratory relief, whether incurred at the trial or appellate level, in an arbitration proceeding or otherwise, and including any of the foregoing incurred in connection with any bankruptcy proceeding (including without limitation, any adversary proceeding, contested matter or motion brought by Bank or any other person) relating to any Borrower or any other person or entity. 4.2 OBLIGATIONS JOINT AND SEVERAL. Should more than one person or entity sign this Note as a Borrower, the obligations of each such Borrower shall be joint and several. 4.3 GOVERNING LAW. This Note shall be governed by and construed in accordance with the laws of the State of California. IN WITNESS WHEREOF, the undersigned has executed this Note as of the date first written above. Emrise Corporation By /S/ Randolph D. Foote ---------------------------------------------------------------- Randolph D. Foote, Vice President, Chief Financial Officer, Secretary EX-10.3 4 emrise_10qex10-3.txt EXHIBIT 10.3 SECURITY AGREEMENT WELLS FARGO EQUIPMENT - -------------------------------------------------------------------------------- 1. GRANT OF SECURITY INTEREST. For valuable consideration, the undersigned EMRISE CORPORATION, or any of them ("Debtor"), hereby grants and transfers to WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank") a security interest in all goods, tools, machinery, furnishings, furniture and other equipment, now or at any time hereafter, and prior to the termination hereof, owned or acquired by Debtor, wherever located, whether in the possession of Debtor or any other person and whether located on Debtor's property or elsewhere, and all improvements, replacements, accessions and additions thereto and embedded software included therein (collectively called "Collateral"), together with whatever is receivable or received when any of the Collateral or proceeds thereof are sold, leased, collected, exchanged or otherwise disposed of, whether such disposition is voluntary or involuntary, including without limitation, (a) all accounts, contract rights, chattel paper (whether electronic or tangible), instruments, promissory notes, documents, general intangibles, payment intangibles and other rights to payment of every kind now or at any time hereafter arising from any such sale, lease, collection, exchange or other disposition of any of the foregoing, (b) all rights to payment, including returned premiums, with respect to any insurance relating to any of the foregoing, and (c) all rights to payment with respect to any claim or cause of action affecting or relating to any of the foregoing (hereinafter called "Proceeds"). 2. OBLIGATIONS SECURED. The obligations secured hereby are the payment and performance of: (a) all present and future Indebtedness of Debtor to Bank; (b) all obligations of Debtor and rights of Bank under this Agreement; and (c) all present and future obligations of Debtor to Bank of other kinds. The word "Indebtedness" is used herein in its most comprehensive sense and includes any and all advances, debts, obligations and liabilities of Debtor, or any of them, heretofore, now or hereafter made, incurred or created, whether voluntary or involuntary and however arising, whether due or not due, absolute or contingent, liquidated or unliquidated, determined or undetermined, and whether Debtor may be liable individually or jointly, or whether recovery upon such Indebtedness may be or hereafter becomes unenforceable. 3. TERMINATION. This Agreement will terminate upon the performance of all obligations of Debtor to Bank, including without limitation, the payment of all indebtedness of Debtor to Bank, and the termination of all commitments of Bank to extend credit to Debtor, existing at the time Bank receives written notice from Debtor of the termination of this Agreement. 4. OBLIGATIONS OF BANK. Bank has no obligation to make any loans hereunder. Any money received by Bank in respect of the Collateral may be deposited, at Bank's option, into a non-interest bearing account over which Debtor shall have no control, and the same shall, for all purposes, be deemed Collateral hereunder. 5. REPRESENTATIONS AND WARRANTIES. Debtor represents and warrants to Bank that: (a) Debtor's legal name is exactly as set forth on the first page of this Agreement, and all of Debtor's organizational documents or agreements delivered to Bank are complete and accurate in every respect; (b) Debtor is the owner and has possession or control of the Collateral and Proceeds; (c) Debtor has the exclusive right to grant a security interest in the Collateral and Proceeds; (d) all Collateral and Proceeds are genuine, free from liens, adverse claims, setoffs, default, prepayment, defenses and conditions precedent of any kind or character, except the lien created hereby or as otherwise agreed to by Bank, or heretofore disclosed by Debtor to Bank, in writing; (e) all statements contained herein are true and complete in all material respects; (f) no financing statement covering any of the Collateral or Proceeds, and naming any secured party other than Bank, is on file in any public office; and (g) Debtor is not in the business of selling goods of the kind included within the Collateral subject to this Agreement, and Debtor acknowledges that no sale or other disposition of any Collateral, including without limitation, any Collateral which Debtor may deem to be surplus, has been or shall be consented to or acquiesced in by Bank, except as specifically set forth in writing by Bank. 6. COVENANTS OF DEBTOR. 6.1 Debtor Agrees in general: (a) to pay Indebtedness secured hereby when due; (b) to indemnify Bank against all losses, claims, demands, liabilities and expenses of every kind caused by property subject hereto; (c) to pay all costs and expenses, including reasonable attorneys' fees, incurred by Bank in the perfection and preservation of the Collateral or Bank's interest therein and/or the realization, enforcement and exercise of Bank's rights, powers and remedies hereunder; (d) to permit Bank to exercise its powers; (e) to execute and deliver such documents as Bank deems necessary to create, perfect and continue the security interests contemplated hereby; (f) not to change its name, and as applicable, its chief executive office, its principal residence or the jurisdiction in which it is organized and/or registered without giving Bank prior written notice thereof; (g) not to change the places where Debtor keeps any Collateral or Debtor's records concerning the Collateral and Proceeds without giving Bank prior written notice of the address to which Debtor is moving same; and (h) to cooperate with Bank in perfecting all security interests granted herein and in obtaining such agreements from third parties as Bank deems necessary, proper or convenient in connection with the preservation, perfection or enforcement of any of its rights hereunder. 6.2 Debtor agrees with regard to the Collateral and Proceeds, unless Bank agrees otherwise in writing: (a) that Bank is authorized to file financing statements in the name of Debtor to perfect Bank's security interest in Collateral and Proceeds; (b) to insure the Collateral with Bank named as loss payee, in form, substance and amounts, under agreements, against risks and liabilities, and with insurance companies satisfactory to Bank; (c) to operate the Collateral in accordance with all applicable statutes, rules and regulations relating to the use and control thereof, and not to use the Collateral for any unlawful purpose or in any way that would void any insurance required to be carried in connection therewith; (d) not to permit any security interest in or lien on the Collateral or Proceeds, including without limitation, liens arising from repairs to or storage of the Collateral, except in favor of Bank; (e) to pay when due all license fees, registration fees and other charges in connection with any Collateral; (f) not to remove the Collateral from Debtors premises except in the ordinary course of Debtor's business; (g) not to sell, hypothecate or otherwise dispose of, nor permit the transfer by operation of law of, any of the Collateral or Proceeds or any interest therein; (h) not to rent, lease or charter the Collateral; (i) to permit Bank to inspect the Collateral at any time; (j) to keep, in accordance with generally accepted accounting principles, complete and accurate records regarding all Collateral and Proceeds, and to permit Bank to inspect the same and make copies thereof at any reasonable time; (k) if requested by Bank, to receive and use reasonable diligence to collect Proceeds, in trust and as the property of Bank, and to immediately endorse as appropriate and deliver such Proceeds to Bank daily in the exact form in which they are received together with a collection report in form satisfactory to Bank; (l) not to commingle Proceeds or collections thereunder with other property; (m) to give only normal allowances and credits and to advise Bank thereof immediately in writing if they affect any Collateral or Proceeds in any material respect; (n) in the event Bank elects to receive payments of Proceeds hereunder, to pay all expenses incurred by Bank in connection therewith, including expenses of accounting, correspondence, collection efforts, reporting to account or contract debtors, filing, recording, record keeping and expenses incidental thereto; and (o) to provide any service and do any other acts which may be necessary to maintain, preserve and protect all Collateral and, as appropriate and applicable, to keep the Collateral in good and saleable condition and repair, to deal with the Collateral in accordance with the standards and practices adhered to generally by owners of like property, and to keep all Collateral and Proceeds free and clear of all defenses, rights of offset and counterclaims. 7. POWERS OF BANK. Debtor appoints Bank its true attorney-in-fact to perform any of the following powers, which are coupled with an interest, are irrevocable until termination of this Agreement and may be exercised from time to time by Bank's officers and employees, or any of them, whether or not Debtor is in default: (a) to perform any obligation of Debtor hereunder in Debtor's name or otherwise; (b) to give notice to account debtors or others of Bank's rights in the Collateral and Proceeds, to enforce or forebear from enforcing the same and make extension or modification agreements with respect thereto; (c) to release persons liable on Proceeds and to give receipts and acquittances and compromise disputes in connection therewith; (d) to release or substitute security; (e) to resort to security in any order; (f) to prepare, execute, file, record or deliver notes, assignments, schedules, designation statements, financing statements, continuation statements, termination statements, statements of assignment, applications for registration or like papers to perfect, preserve or release Bank's interest in the Collateral and Proceeds; (g) to receive, open and read mail addressed to Debtor; (h) to take cash, instruments for the payment of money and other property to which Bank is entitled; (i) to verify facts concerning the Collateral and Proceeds by inquiry of obligors thereon, or otherwise, in its own name or a fictitious name; (j) to endorse, collect, deliver and receive payment under instruments for the payment of money constituting or relating to Proceeds; (k) to prepare, adjust, execute, deliver and receive payment under insurance claims, and to collect and receive payment 2 of and endorse any instrument in payment of loss or returned premiums or any other insurance refund or return, and to apply such amounts received by Bank, at Bank's sole option, toward repayment of the indebtedness or replacement of the Collateral; (l) to exercise all rights, powers and remedies which Debtor would have, but for this Agreement, with respect to all Collateral and Proceeds subject hereto; (m) to enter onto Debtor's premises in inspecting the Collateral; and (n) to do all acts and things and execute all documents in the name of Debtor or otherwise, deemed by Bank as necessary, proper and convenient in connection with the preservation, perfection or enforcement of its rights hereunder. 8. PAYMENT OF PREMIUMS, TAXES, CHARGES, LIENS AND ASSESSMENTS. Debtor agrees to pay, prior to delinquency, all insurance premiums, taxes, charges, liens and assessments against the Collateral and Proceeds, and upon the failure of Debtor to do so, Bank at its option may pay any of them and shall be the sole judge of the legality or validity thereof and the amount necessary to discharge the same. Any such payments made by Bank shall be obligations of Debtor to Bank, due and payable immediately upon demand, together with interest at a rate determined in accordance with the provisions of this Agreement, and shall be secured by the Collateral and Proceeds, subject to all terms and conditions of this Agreement. 9. EVENTS OF DEFAULT. The occurrence of any of the following shall constitute an "Event of Default" under this Agreement: (a) any default in the payment or performance of any obligation, or any defined event of default, under (i) any contract or instrument evidencing any Indebtedness, or (ii) any other agreement between Debtor and Bank, including without limitation any loan agreement, relating to or executed in connection with any Indebtedness; (b) any representation or warranty made by Debtor herein shall prove to be incorrect, false or misleading in any material respect when made; (c) Debtor shall fail to observe or perform any obligation or agreement contained herein; (d) any impairment of the rights of Bank in any Collateral or Proceeds or any attachment or like levy on any property of Debtor; and (e) Bank, in good faith, believes any or all of the Collateral and/or Proceeds to be in danger of misuse, dissipation, commingling, loss, theft, damage or destruction, or otherwise in jeopardy or unsatisfactory in character or value. 10. REMEDIES. Upon the occurrence of any Event of Default, Bank shall have the right to declare immediately due and payable all or any Indebtedness secured hereby and to terminate any commitments to make loans or otherwise extend credit to Debtor. Bank shall have all other rights, powers, privileges and remedies granted to a secured party upon default under the California Uniform Commercial Code or otherwise provided by law, including without limitation, the right (a) to contact all persons obligated to Debtor on any Collateral or Proceeds and to instruct such persons to deliver all Collateral and/or Proceeds directly to Bank, and (b) to sell, lease, license or otherwise dispose of any or all Collateral. All rights, powers, privileges and remedies of Bank shall be cumulative. No delay, failure or discontinuance of Bank in exercising any right, power, privilege or remedy hereunder shall affect or operate as a waiver of such right, power, privilege or remedy; nor shall any single or partial exercise of any such right, power, privilege or remedy preclude, waive or otherwise affect any other or further exercise thereof or the exercise of any other right, power, privilege or remedy. Any waiver, permit, consent or approval of any kind by Bank of any default hereunder, or any such waiver of any provisions or conditions hereof, must be in writing and shall be effective only to the extent set forth in writing. It is agreed that public or private sales or other dispositions, for cash or on credit, to a wholesaler or retailer or investor, or user of property of the types subject to this Agreement, or public auctions, are all commercially reasonable since differences in the prices generally realized in the different kinds of dispositions are ordinarily offset by the differences in the costs and credit risks of such dispositions. While an Event of Default exists: (a) Debtor will deliver to Bank from time to time, as requested by Bank, current lists of all Collateral and Proceeds; (b) Debtor will not dispose of any Collateral or Proceeds except on terms approved by Bank; (c) at Bank's request, Debtor will assemble and deliver all Collateral and Proceeds, and books and records pertaining thereto, to Bank at a reasonably convenient place designated by Bank; and (d) Bank may, without notice to Debtor, enter onto Debtor's premises and take possession of the Collateral. Debtor further agrees that Bank shall have no obligation to process or prepare any Collateral for sale or other disposition. 11. DISPOSITION OF COLLATERAL AND PROCEEDS; TRANSFER OF INDEBTEDNESS. In disposing of Collateral hereunder, Bank may disclaim all warranties of title, possession, quiet enjoyment and the like. Any proceeds of any disposition of any Collateral or Proceeds, or any part thereof, may be applied by Bank to the payment of expenses incurred by Bank in connection with the foregoing, including reasonable attorneys' fees, and the balance of such proceeds may be applied by Bank toward the payment of the Indebtedness in such order of application as Bank may from time to time elect. Upon the transfer of all or any part of the Indebtedness, Bank may transfer all or any part of the Collateral or Proceeds and shall be fully discharged thereafter from all liability and responsibility 3 with respect to any of the foregoing so transferred, and the transferee shall be vested with all rights and powers of Bank hereunder with respect to any of the foregoing so transferred; but with respect to any Collateral or Proceeds not so transferred Bank shall retain all rights, powers, privileges and remedies herein given. 12. STATUTE OF LIMITATIONS. Until all Indebtedness shall have been paid in full and all commitments by Bank to extend credit to Debtor have been terminated, the power of sale or other disposition and all other rights, powers, privileges and remedies granted to Bank hereunder shall continue to exist and may be exercised by Bank at any time and from time to time irrespective of the fact that the Indebtedness or any part thereof may have become barred by any statute of limitations, or that the personal liability of Debtor may have ceased, unless such liability shall have ceased due to the payment in full of all Indebtedness secured hereunder. 13. MISCELLANEOUS. When there is more than one Debtor named herein: (a) the word "Debtor" shall mean all or any one or more of them as the context requires; (b) the obligations of each Debtor hereunder are joint and several; and (c) until all Indebtedness shall have been paid in full, no Debtor shall have any right of subrogation or contribution, and each Debtor hereby waives any benefit of or right to participate in any of the Collateral or Proceeds or any other security now or hereafter held by Bank. Debtor hereby waives any right to require Bank to (i) proceed against Debtor or any other person, (ii) proceed against or exhaust any security from Debtor or any other person, (iii) perform any obligation of Debtor with respect to any Collateral or Proceeds, and (d) make any presentment or demand, or give any notice of nonpayment or nonperformance, protest, notice of protest or notice of dishonor hereunder or in connection with any Collateral or Proceeds. Debtor further waives any right to direst the application of payments or security for any Indebtedness of Debtor or indebtedness of customers of Debtor. 14. NOTICES. All notices, requests and demands required under this Agreement must be in writing, addressed to Bank at the address specified in any other loan documents entered into between Debtor and Bank and to Debtor at the address of its chief executive office (or principal residence, if applicable) specified below or to such other address as any party may designate by written notice to each other party, and shall be deemed to have been given or made as follows: (a) if personally delivered, upon delivery; (b) if sent by mail, upon the earlier of the date of receipt or 3 days after deposit in the U. S. mail, first class and postage prepaid; and (c) if sent by telecopy, upon receipt. 15. COSTS, EXPENSES AND ATTORNEYS' FEES. Debtor shall pay to Bank immediately upon demand the full amount of all payments, advances, charges, costs and expenses, including reasonable attorneys' fees (to include outside counsel fees and all allocated costs of Bank's in-house counsel), expended or incurred by Bank in exercising any right, power, privilege or remedy conferred by this Agreement or in the enforcement thereof, whether incurred at the trial or appellate level, in an arbitration proceeding or otherwise, and including any of the foregoing incurred in connection with any bankruptcy proceeding (including without limitation, any adversary proceeding, contested matter or motion brought by Bank or any other person) relating to Debtor or in any way affecting any of the Collateral or Bank's ability to exercise any of its rights or remedies with respect thereto. All of the foregoing shall be paid by Debtor with interest from the date of demand until paid in full at a rate per annum equal to the greater of ten percent (10%) or Bank's Prime Rate in effect from time to time. 16. SUCCESSORS; ASSIGNS; AMENDMENT. This Agreement shall be binding upon and inure to the benefit of the heirs, executors, administrators, legal representatives, successors and assigns of the parties, and may be amended or modified only in writing signed by Bank and Debtor. 17. OBLIGATIONS OF MARRIED PERSONS. Any married person who signs this Agreement as Debtor hereby expressly agrees that recourse may be had against his or her separate property for all his or her Indebtedness to Bank secured by the Collateral and Proceeds under this Agreement. 18. SEVERABILITY OF PROVISIONS. If any provision of this Agreement shall be held to be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or any remaining provisions of this Agreement. 4 19. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of California. Debtor warrants that Debtor is an organization registered under the laws of Delaware. Debtor warrants that its chief executive office (or principal residence, if applicable) is located at the following address: 9485 HAVEN AVENUE, SUITE 100, RANCHO CUCAMONGA, CA 91730. Debtor warrants that the Collateral (except goods in transit) is located or domiciled at the following additional addresses: 11938 HUNTLEY DRIVE, RANCHO CUCAMONGA, CA 91730; 894 FAULSTICH COURT, SAN JOSE, CA 95112 IN WITNESS WHEREOF, this Agreement has been duly executed as of SEPTEMBER 1, 2005. Emrise Corporation By /S/ Randolph D. Foote -------------------------------------------------- Randolph D. Foote, Vice President, Chief Financial Officer, Secretary EX-10.4 5 emrise_10qex10-4.txt EXHIBIT 10.4 CONTINUING SECURITY AGREEMENT WELLS FARGO RIGHTS TO PAYMENT AND INVENTORY - -------------------------------------------------------------------------------- 1. GRANT OF SECURITY INTEREST. For valuable consideration, the undersigned Emrise Corporation, or any of them ("Debtor"), hereby grants and transfers to WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank") a security interest in all accounts, deposit accounts, chattel paper (whether electronic or tangible), instruments, promissory notes, documents, general intangibles, payment intangibles, software, letter of credit rights, health-care insurance receivables and other rights to payment (collectively called "Rights to Payments"), now existing or at any time hereafter, and prior to the termination hereof, arising (whether they arise from the sale, lease or other disposition of inventory or from performance of contracts for service, manufacture, construction, repair or otherwise or from any other source whatsoever), including all securities, guaranties, warranties, indemnity agreements, insurance policies, supporting obligations and other agreements pertaining to the same or the property described therein, and in all goods returned by or repossessed from Debtor's customers, together with a security interest in all inventory, goods held for sale or lease or to be furnished under contracts for service, goods so leased or furnished, raw materials, component parts and embedded software, work in process or materials used or consumed in Debtor's business and all warehouse receipts, bills of lading and other documents evidencing goods owned or acquired by Debtor, and all goods covered thereby, now or at any time hereafter, and prior to the termination hereof, owned or acquired by Debtor, wherever located, and all products thereof (collectively called "Inventory"), whether in the possession of Debtor, warehousemen, bailees or any other person, or in process of delivery and whether located at Debtor's places of business or elsewhere (with all Rights to Payment and Inventory referred to herein collectively as the "Collateral"), together with whatever is receivable or received when any of the Collateral or proceeds thereof are sold, leased, collected, exchanged or otherwise disposed of, whether such disposition is voluntary or involuntary, including without limitation, all rights to payment, including returned premiums, with respect to any insurance relating to any of the foregoing, and all rights to payment with respect to any claim or cause of action affecting or relating to any of the foregoing (hereinafter called "Proceeds"). 2. OBLIGATIONS SECURED. The obligations secured hereby are the payment and performance of: (a) all present and future Indebtedness of Debtor to Bank; (b) all obligations of Debtor and rights of Bank under this Agreement; and (c) all present and future obligations of Debtor to Bank of other kinds. The word "Indebtedness" is used herein in its most comprehensive sense and includes any and all advances, debts, obligations and liabilities of Debtor, or any of them, heretofore, now or hereafter made, incurred or created, whether voluntary or involuntary and however arising, whether due or not due, absolute or contingent, liquidated or unliquidated, determined or undetermined, and whether Debtor may be liable individually or jointly, or whether recovery upon such Indebtedness may be or hereafter becomes unenforceable. 3. TERMINATION. This Agreement will terminate upon the performance of all obligations of Debtor to Bank, including without limitation, the payment of all Indebtedness of Debtor to Bank, and the termination of all commitments of Bank to extend credit to Debtor, existing at the time Bank receives written notice from Debtor of the termination of this Agreement. 4. OBLIGATIONS OF BANK. Bank has no obligation to make any loans hereunder. Any money received by Bank in respect of the Collateral may be deposited, at Bank's option, into a non-interest bearing account over which Debtor shall have no control, and the same shall, for all purposes, be deemed Collateral hereunder. 5. REPRESENTATIONS AND WARRANTIES. Debtor represents and warrants to Bank that: (a) Debtor's legal name is exactly as set forth on the first page of this Agreement, and all of Debtor's organizational documents or agreements delivered to Bank are complete and accurate in every respect; (b) Debtor is the owner and has possession or control of the Collateral and Proceeds; (c) Debtor has the exclusive right to grant a security interest in the Collateral and Proceeds; (d) all Collateral and Proceeds are genuine, free from liens, adverse claims, setoffs, default, prepayment, defenses and conditions precedent of any kind or character, except the lien created hereby or as otherwise agreed to by Bank, or heretofore disclosed by Debtor to Bank, in writing; (e) all statements contained herein and, where applicable, in the Collateral are true and complete in all material respects; (f) no financing statement covering any of the Collateral or Proceeds, and naming any secured party other than Bank, is on file in any public office; (g) all persons appearing to be obligated on Rights to Payment and Proceeds have authority and capacity to contract and are bound as they appear to be; (h) all property subject to chattel paper has been properly registered and filed in compliance with law and to perfect the interest of Debtor in such property; and (i) all Rights to Payment and Proceeds comply with all applicable laws concerning form, content and manner of preparation and execution, including where applicable Federal Reserve Regulation Z and any State consumer credit laws. 6. COVENANTS OF DEBTOR. 6.1 Debtor Agrees in general: (a) to pay Indebtedness secured hereby when due; (b) to indemnify Bank against all losses, claims, demands, liabilities and expenses of every kind caused by property subject hereto; (c) to pay all costs and expenses, including reasonable attorneys' fees, incurred by Bank in the perfection and preservation of the Collateral or Bank's interest therein and/or the realization, enforcement and exercise of Bank's rights, powers and remedies hereunder; (d) to permit Bank to exercise its powers; (e) to execute and deliver such documents as Bank deems necessary to create, perfect and continue the security interests contemplated hereby; (f) not to change its name, and as applicable, its chief executive office, its principal residence or the jurisdiction in which it is organized and/or registered without giving Bank prior written notice thereof; (g) not to change the places where Debtor keeps any Collateral or Debtor's records concerning the Collateral and Proceeds without giving Bank prior written notice of the address to which Debtor is moving same; and (h) to cooperate with Bank in perfecting all security interests granted herein and in obtaining such agreements from third parties as Bank deems necessary, proper or convenient in connection with the preservation, perfection or enforcement of any of its rights hereunder. 6.2 Debtor agrees with regard to the Collateral and Proceeds, unless Bank agrees otherwise in writing: (a) that Bank is authorized to file financing statements in the name of Debtor to perfect Bank's security interest in Collateral and Proceeds; (b) to insure Inventory and, where applicable, Rights to Payment with Bank named as loss payee, in form, substance and amounts, under agreements, against risks and liabilities, and with insurance companies satisfactory to Bank; (c) not to use any Inventory for any unlawful purpose or in any way that would void any insurance required to be carried in connection therewith; (d) not to remove Inventory from Debtor's premises except in the ordinary course of Debtor's business; (e) not to permit any security interest in or lien on the Collateral or Proceeds, including without limitation, liens arising from the storage of Inventory, except in favor of Bank; (f) not to sell, hypothecate or otherwise dispose of, nor permit the transfer by operation of law of, any of the Collateral or Proceeds or any interest therein, except sales of Inventory to buyers in the ordinary course of Debtor's business; (g) to furnish reports to Bank of all acquisitions, returns, sales and other dispositions of the Inventory in such form and detail and at such times as Bank may require; (h) to permit Bank to inspect the Collateral at any time; (i) to keep, in accordance with generally accepted accounting principles, complete and accurate records regarding all Collateral and Proceeds, and to permit Bank to inspect the same and make copies thereof at any reasonable time; (j) If requested by Bank, to receive and use reasonable diligence to collect Rights to Payment and Proceeds, in trust and as the property of Bank, and to immediately endorse as appropriate and deliver such Rights to Payment and Proceeds to Bank daily in the exact form in which they are received together with a collection report in form satisfactory to Bank; (k) net to commingle Rights to Payment, Proceeds or collections thereunder with other property; (I) to give only normal allowances and credits and to advise Bank thereof immediately in writing if they affect any Rights to Payment or Proceeds in any material respect; (m) on demand, to deliver to Bank returned property resulting from, or payment equal to, such allowances or credits on any Rights to Payment or Proceeds or to execute such documents and do such other things as Bank may reasonably request for the purpose of perfecting, preserving and enforcing its security interest in such returned property; (n) from time to time, when requested by Bank, to prepare and deliver a schedule of all Collateral and Proceeds subject to this Agreement and to assign in writing and deliver to Bank all accounts, contracts, leases and other chattel paper, instruments, documents and other evidences thereof; (o) in the event Bank elects to receive payments of Rights to Payment or Proceeds hereunder, to pay all expenses incurred by Bank in connection therewith, including expenses of accounting, correspondence, collection efforts, reporting to account or contract debtors, filing, recording, record keeping and expenses incidental thereto; and (p) to provide any service and do any other acts which may be necessary to maintain, preserve and protect all Collateral and, as appropriate and applicable, to keep all Collateral in good and saleable condition in accordance with the standards and practices adhered to generally by users and manufacturers of like property, and to keep all Collateral and Proceeds free and clear of all defenses, rights of offset and counterclaims. 2 7. POWERS OF BANK. Debtor appoints Bank its true attorney-in-fact to perform any of the following powers, which are coupled with an interest, are irrevocable until termination of this Agreement and may be exercised from time to time by Bank's officers and employees, or any of them, whether or not Debtor is in default: (a) to perform any obligation of Debtor hereunder in Debtor's name or otherwise; (b) to give notice to account debtors or others of Bank's rights In the Collateral and Proceeds, to enforce or forebear from enforcing the same and make extension or modification agreements with respect thereto; (c) to release persons liable on Proceeds and to give receipts and acquittances and compromise disputes in connection therewith; (d) to release or substitute security; (e) to resort to security in any order; (f) to prepare, execute, file, record or deliver notes, assignments, schedules, designation statements, financing statements, continuation statements, termination statements, statements of assignment, applications for registration or like papers to perfect, preserve or release Bank's interest in the Collateral and Proceeds; (g) to receive, open and read mail addressed to Debtor; (h) to take cash, instruments for the payment of money and other property to which Bank is entitled; (i) to verify facts concerning the Collateral and Proceeds by inquiry of obligors thereon, or otherwise, in its own name or a fictitious name; (j) to endorse, collect, deliver and receive payment under instruments for the payment of money constituting or relating to Proceeds; (k) to prepare, adjust, execute, deliver and receive payment under insurance claims, and to collect and receive payment of and endorse any instrument in payment of loss or returned premiums or any other insurance refund or return, and to apply such amounts received by Bank, at Bank's sole option, toward repayment of the Indebtedness or replacement of the Collateral; (l) to exercise all rights, powers and remedies which Debtor would have, but for this Agreement, with respect to all Collateral and Proceeds subject hereto; (m) to enter onto Debtors premises in inspecting the Collateral; (n) to make withdrawals from and to close deposit accounts or other accounts with any financial institution, wherever located, into which Proceeds may have been deposited, and to apply funds so withdrawn to payment of the Indebtedness; (o) to preserve or release the interest evidenced by chattel paper to which Bank is entitled hereunder and to endorse and deliver any evidence of title incidental thereto; and (p) to do all acts and things and execute all documents in the name of Debtor or otherwise, deemed by Bank as necessary, proper and convenient in connection with the preservation, perfection or enforcement of its rights hereunder. 8. PAYMENT OF PREMIUMS, TAXES, CHARGES, LIENS AND ASSESSMENTS. Debtor agrees to pay, prior to delinquency, all insurance premiums, taxes, charges, liens and assessments against the Collateral and Proceeds, and upon the failure of Debtor to do so, Bank at its option may pay any of them and shall be the sole judge of the legality or validity thereof and the amount necessary to discharge the same. Any such payments made by Bank shall be obligations of Debtor to Bank, due and payable immediately upon demand, together with interest at a rate determined in accordance with the provisions of this Agreement, and shall be secured by the Collateral and Proceeds, subject to all terms and conditions of this Agreement. 9. EVENTS OF DEFAULT. The occurrence of any of the following shall constitute an "Event of Default" under this Agreement: (a) any default in the payment or performance of any obligation, or any defined event of default, under (i) any contract or instrument evidencing any indebtedness, or (ii) any other agreement between Debtor and Bank, including without limitation any loan agreement, relating to or executed in connection with any Indebtedness; (b) any representation or warranty made by Debtor herein shall prove to be incorrect, false or misleading in any material respect when made; (c) Debtor shall fail to observe or perform any obligation or agreement contained herein; (d) any impairment of the rights of Bank in any Collateral or Proceeds or any attachment or like levy on any property of Debtor; and (e) Bank, in good faith, believes any or all of the Collateral and/or Proceeds to be in danger of misuse, dissipation, commingling, loss, theft, damage or destruction, or otherwise in jeopardy or unsatisfactory in character or value. 10. REMEDIES. Upon the occurrence of any Event of Default, Bank shall have the right to declare immediately due and payable all or any Indebtedness secured hereby and to terminate any commitments to make loans or otherwise extend credit to Debtor. Bank shall have all other rights, powers, privileges and remedies granted to a secured party upon default under the California Uniform Commercial Code or otherwise provided by law, including without limitation, the right (a) to contact all persons obligated to Debtor on any Collateral or Proceeds and to instruct such persons to deliver all Collateral and/or Proceeds directly to Bank, and (b) to sell, lease, license or otherwise dispose of any or all Collateral. All rights, powers, privileges and remedies of Bank shall be cumulative. No delay, failure or discontinuance of Bank in exercising any right, power, privilege or remedy hereunder shall affect or operate as a waiver of such right, power, privilege or remedy; nor shall any single or partial exercise of any such right, power, privilege or remedy preclude, waive or otherwise affect any other or further exercise thereof or the exercise of any other right, power, 3 privilege or remedy. Any waiver, permit, consent or approval of any kind by Bank of any default hereunder, or any such waiver of any provisions or conditions hereof, must be in writing and shall be effective only to the extent set forth in writing. It is agreed that public or private sales or other dispositions, for cash or on credit, to a wholesaler or retailer or investor, or user of property of the types subject to this Agreement, or public auctions, are all commercially reasonable since differences in the prices generally realized in the different kinds of dispositions are ordinarily offset by the differences in the costs and credit risks of such dispositions. While an Event of Default exists: (a) Debtor will deliver to Bank from time to time, as requested by Bank, current lists of all Collateral and Proceeds; (b) Debtor will not dispose of any Collateral or Proceeds except on terms approved by Bank; (c) at Bank's request, Debtor will assemble and deliver all Collateral and Proceeds, and books and records pertaining thereto, to Bank at a reasonably convenient place designated by Bank; and (d) Bank may, without notice to Debtor, enter onto Debtor's premises and take possession of the Collateral. With respect to any sale by Bank of any Collateral subject to this Agreement, Debtor hereby expressly grants to Bank the right to sell such Collateral using any or all of Debtor's trademarks, trade names, trade name rights and/or proprietary labels or marks. Debtor further agrees that Bank shall have no obligation to process or prepare any Collateral for sale or other disposition. 11. DISPOSITION OF COLLATERAL AND PROCEEDS; TRANSFER OF INDEBTEDNESS. In disposing of Collateral hereunder, Bank may disclaim all warranties of title, possession, quiet enjoyment and the like. Any proceeds of any disposition of any Collateral or Proceeds, or any part thereof, may be applied by Bank to the payment of expenses incurred by Bank in connection with the foregoing, including reasonable attorneys' fees, and the balance of such proceeds may be applied by Bank toward the payment of the Indebtedness in such order of application as Bank may from time to time elect. Upon the transfer of all or any part of the Indebtedness, Bank may transfer all or any part of the Collateral or Proceeds and shall be fully discharged thereafter from all liability and responsibility with respect to any of the foregoing so transferred, and the transferee shall be vested with all rights and powers of Bank hereunder with respect to any of the foregoing so transferred; but with respect to any Collateral or Proceeds not so transferred Bank shall retain all rights, powers, privileges and remedies herein given. 12. STATUTE OF LIMITATIONS. Until all Indebtedness shall have been paid in full and all commitments by Bank to extend credit to Debtor have been terminated, the power of sale or other disposition and all other rights, powers, privileges and remedies granted to Bank hereunder shall continue to exist and may be exercised by Bank at any time and from time to time irrespective of the fact that the Indebtedness or any part thereof may have become barred by any statute of limitations, or that the personal liability of Debtor may have ceased, unless such liability shall have ceased due to the payment in full of all Indebtedness secured hereunder. 13. MISCELLANEOUS. When there is more than one Debtor named herein: (a) the word "Debtor" shall mean all or any one or more of them as the context requires; (b) the obligations of each Debtor hereunder are joint and several; and (c) until all Indebtedness shall have been paid in full, no Debtor shall have any right of subrogation or contribution, and each Debtor hereby waives any benefit of or right to participate in any of the Collateral or Proceeds or any other security now or hereafter held by Bank. Debtor hereby waives any right to require Bank to (i) proceed against Debtor or any other person, (ii) proceed against or exhaust any security from Debtor or any other person, (iii) perform any obligation of Debtor with respect to any Collateral or Proceeds, and (d) make any presentment or demand, or give any notice of nonpayment or nonperformance, protest, notice of protest or notice of dishonor hereunder or in connection with any Collateral or Proceeds. Debtor further waives any right to direct the application of payments or security for any Indebtedness of Debtor or indebtedness of customers of Debtor. 14. NOTICES. All notices, requests and demands required under this Agreement must be in writing, addressed to Bank at the address specified in any other loan documents entered into between Debtor and Bank and to Debtor at the address of its chief executive office (or principal residence, if applicable) specified below or to such other address as any party may designate by written notice to each other party, and shall be deemed to have been given or made as follows: (a) if personally delivered, upon delivery; (b) if sent by mail, upon the earlier of the date of receipt or 3 days after deposit in the U.S. mail, first class and postage prepaid; and (c) if sent by telecopy, upon receipt. 4 15. COSTS, EXPENSES AND ATTORNEYS' FEES. Debtor shall pay to Bank immediately upon demand the full amount of all payments, advances, charges, costs and expenses, including reasonable attorneys' fees (to include outside counsel fees and all allocated costs of Bank's in-house counsel), expended or incurred by Bank in exercising any right, power, privilege or remedy conferred by this Agreement or in the enforcement thereof, whether incurred at the trial or appellate level, in an arbitration proceeding or otherwise, and including any of the foregoing incurred in connection with any bankruptcy proceeding (including without limitation, any adversary proceeding, contested matter or motion brought by Bank or any other person) relating to Debtor or in any way affecting any of the Collateral or Bank's ability to exercise any of its rights or remedies with respect thereto. All of the foregoing shall be paid by Debtor with interest from the date of demand until paid in full at a rate per annum equal to the greater of ten percent (10%) or Bank's Prime Rate in effect from time to time. 16. SUCCESSORS; ASSIGNS; AMENDMENT. This Agreement shall be binding upon and inure to the benefit of the heirs, executors, administrators, legal representatives, successors and assigns of the parties, and may be amended or modified only in writing signed by Bank and Debtor. 17. OBLIGATIONS OF MARRIED PERSONS. Any married person who signs this Agreement as Debtor hereby expressly agrees that recourse may be had against his or her separate property for all his or her Indebtedness to Bank secured by the Collateral and Proceeds under this Agreement. 18. SEVERABILITY OF PROVISIONS. If any provision of this Agreement shall be held to be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or any remaining provisions of this Agreement. 19. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of California. Debtor warrants that Debtor is an organization registered under the laws of Delaware. Debtor warrants that its chief executive office (or principal residence, if applicable) is located at the following address: 9485 HAVEN AVENUE, SUITE 100, RANCHO CUCAMONGA, CA 91730 Debtor warrants that the Collateral (except goods in transit) is located or domiciled at the following additional addresses: 11938 HUNTLEY DRIVE, RANCHO CUCAMONGA, CA 91730; 894 FAULSTICH COURT, SAN JOSE, CA 95112 IN WITNESS WHEREOF, this Agreement has been duty executed as of SEPTEMBER 1, 2005. Emrise Corporation By /S/ Randolph D. Foote -------------------------------------------------- Randolph D. Foote, Vice President, Chief Financial Officer, Secretary EX-10.5 6 emrise_10qex10-5.txt EXHIBIT 10.5 WELLS FARGO CONTINUING GUARANTY - -------------------------------------------------------------------------------- TO: WELLS FARGO BANK, NATIONAL ASSOCIATION 1. GUARANTY; DEFINITIONS. In consideration of any credit or other financial accommodation heretofore, now or hereafter extended or made to EMRISE CORPORATION ("Borrowers"), or any of them, by WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank"), and for other valuable consideration, the undersigned CXR TELCOM Corporation ("Guarantor"), jointly and severally unconditionally guarantees and promises to pay to Bank or order, on demand in lawful money of the United States of America and in immediately available funds, any and all Indebtedness of any of the Borrowers to Bank. The term "Indebtedness" is used herein in its most comprehensive sense and includes any and all advances, debts, obligations and liabilities of Borrowers, or any of them, heretofore, now or hereafter made, incurred or created, whether voluntary or involuntary and however arising, whether due or not due, absolute or contingent, liquidated or unliquidated, determined or undetermined, and whether Borrowers may be liable individually or jointly with others, or whether recovery upon such Indebtedness may be or hereafter becomes unenforceable. This Guaranty is a guaranty of payment and not collection. 2. MAXIMUM LIABILITY; SUCCESSIVE TRANSACTIONS; REVOCATION; OBLIGATION UNDER OTHER GUARANTIES. The liability of Guarantor shall not exceed at any time the sum of $9,000,000,00 for principal, plus all interest thereon and costs and expenses pertaining to the enforcement of this Guaranty and/or the collection of the Indebtedness of any of the Borrowers to Bank. Notwithstanding the foregoing, Bank may permit the Indebtedness of Borrowers to exceed Guarantor's liability. This is a continuing guaranty and all rights, powers and remedies hereunder shall apply to all past, present and future Indebtedness of each of the Borrowers to Bank, including that arising under successive transactions which shall either continue the Indebtedness, increase or decrease it, or from time to time create new Indebtedness after all or any prior Indebtedness has been satisfied, and notwithstanding the death, incapacity, dissolution, liquidation or bankruptcy of any of the Borrowers or Guarantor or any other event or proceeding affecting any of the Borrowers or Guarantor. This Guaranty shall not apply to any new Indebtedness created after actual receipt by Bank of written notice of its revocation as to such new Indebtedness; provided however, that loans or advances made by Bank to any of the Borrowers after revocation under commitments existing prior to receipt by Bank of such revocation, and extensions, renewals or modifications, of any kind, of Indebtedness incurred by any of the Borrowers or committed by Bank prior to receipt by Bank of such revocation, shall not be considered new Indebtedness. Any such notice must be sent to Bank by registered U.S. mail, postage prepaid, addressed to its office at INLAND EMPIRE RCBO, 4141 INLAND EMPIRE BLVD., SUITE #350, ONTARIO, CA 91764, or at such other address as Bank shall from time to time designate. Any payment by Guarantor with respect to the Indebtedness shall not reduce Guarantor's maximum obligation hereunder unless written notice to that effect is actually received by Bank at or prior to the time of such payment. The obligations of Guarantor hereunder shall be in addition to any obligations of Guarantor under any other guaranties of any liabilities or obligations of any of the Borrowers or any other persons heretofore or hereafter given to Bank unless said other guaranties are expressly modified or revoked in writing; and this Guaranty shall not, unless expressly herein provided, affect or invalidate any such other guaranties. 3. OBLIGATIONS JOINT AND SEVERAL; SEPARATE ACTIONS; WAIVER OF STATUTE OF LIMITATIONS; REINSTATEMENT OF LIABILITY. The obligations hereunder are joint and several and independent of the obligations of Borrowers, and a separate action or actions may be brought and prosecuted against Guarantor whether action is brought against any of the Borrowers or any other person, or whether any of the Borrowers or any other person is joined in any such action or actions. Guarantor acknowledges that this Guaranty is absolute and unconditional, there are no conditions precedent to the effectiveness of this Guaranty, and this Guaranty is in full force and effect and is binding on Guarantor as of the date written below, regardless of whether Bank obtains collateral or any guaranties from others or takes any other action contemplated by Guarantor. Guarantor waives the benefit of any statute of limitations affecting Guarantor's liability hereunder or the enforcement thereof, and Guarantor agrees that any payment of any Indebtedness or other act which shall toll any statute of limitations applicable thereto shall similarly operate to toll such statute of limitations applicable to Guarantor's liability hereunder. The liability of Guarantor hereunder shall be reinstated and revived and the rights of Bank shall continue if and to the extent that for any reason any amount at any time paid on account of any indebtedness guaranteed hereby is rescinded or must otherwise be restored by Bank, whether as a result of any proceedings in bankruptcy or reorganization or otherwise, all as though such amount had not been paid. The determination as to whether any amount so paid must be rescinded or restored shall be made by Bank in its sole discretion; provided however, that if Bank chooses to contest any such matter at the request of Guarantor, Guarantor agrees to indemnify and hold Bank harmless from and against all costs and expenses, including reasonable attorneys' fees, expended or incurred by Bank in connection therewith, including without limitation, in any litigation with respect thereto. 4. AUTHORIZATIONS TO BANK. Guarantor authorizes Bank either before or after revocation hereof, without notice to or demand on Guarantor, and without affecting Guarantor's liability hereunder, from time to time to: (a) alter, compromise, renew, extend, accelerate or otherwise change the time for payment of, or otherwise change the terms of, the Indebtedness or any portion thereof, including increase or decrease of the rate of interest thereon; (b) take and hold security for the payment of this Guaranty or the Indebtedness or any portion thereof, and exchange, enforce, waive, subordinate or release any such security; (c) apply such security and direct the order or manner of sale thereof, including without limitation, a non-judicial sale permitted by the terms of the controlling security agreement, mortgage or deed of trust, as Bank in its discretion may determine; (d) release or substitute any one or more of the endorsers or any other guarantors of the Indebtedness, or any portion thereof, or any other party thereto; and (e) apply payments received by Bank from any of the Borrowers to any Indebtedness of any of the Borrowers to Bank, in such order as Bank shall determine in its sole discretion, whether or not such Indebtedness is covered by this Guaranty, and Guarantor hereby waives any provision of law regarding application of payments which specifies otherwise. Bank may without notice assign this Guaranty in whole or in part. Upon Bank's request, Guarantor agrees to provide to Bank copies of Guarantor's financial statements. 5. REPRESENTATIONS AND WARRANTIES. Guarantor represents and warrants to Bank that: (a) this Guaranty is executed at Borrowers' request; (b) Guarantor shall not, without Bank's prior written consent, sell, lease, assign, encumber, hypothecate, transfer or otherwise dispose of all or a substantial or material part of Guarantor's assets other than in the ordinary course of Guarantor's business; (c) Bank has made no representation to Guarantor as to the creditworthiness of any of the Borrowers; and (d) Guarantor has established adequate means of obtaining from each of the Borrowers on a continuing basis financial and other information pertaining to Borrowers' financial condition. Guarantor agrees to keep adequately informed from such means of any facts, events or circumstances which might in any way affect Guarantor's risks hereunder, and Guarantor further agrees that Bank shall have no obligation to disclose to Guarantor any information or material about any of the Borrowers which is acquired by Bank in any manner. 6. GUARANTOR'S WAIVERS. 6.1 Guarantor waives any right to require Bank to: (a) proceed against any of the Borrowers or any other person; (b) marshal assets or proceed against or exhaust any security held from any of the Borrowers or any other person; (c) give notice of the terms, time and place of any public or private sale or other disposition of personal property security held from any of the Borrowers or any other person; (d) take any action or pursue any other remedy in Bank's power; or (e) make any presentment or demand for performance, or give any notice of nonperformance, protest, notice of protest or notice of dishonor hereunder or in connection with any obligations or evidences of indebtedness held by Bank as security for or which constitute in whole or in part the Indebtedness guaranteed hereunder, or in connection with the creation of new or additional Indebtedness. 6.2 Guarantor waives any defense to its obligations hereunder based upon or arising by reason of: (a) any disability or other defense of any of the Borrowers or any other person; (b) the cessation or limitation from any cause whatsoever, other than payment in full, of the Indebtedness of any of the Borrowers or any other person; (c) any lack of authority of any officer, director, partner, agent or other person acting or purporting to act on behalf of any of the Borrowers which is a corporation, partnership or other type of entity, or any defect in the formation of any such Borrower; (d) the application by any of the Borrowers of the proceeds of any Indebtedness for purposes other than the purposes represented by Borrowers to, or intended or understood by, Bank or Guarantor; (e) any act or omission by Bank which directly or indirectly results in or aids the discharge of any of the Borrowers or any portion of the Indebtedness by operation of law or otherwise, or which in any way impairs or suspends any rights or remedies of Bank against any of the Borrowers; (f) any 2 impairment of the value of any interest in any security for the Indebtedness or any portion thereof, including without limitation, the failure to obtain or maintain perfection or recordation of any interest in any such security, the release of any such security without substitution, and/or the failure to preserve the value of, or to comply with applicable law in disposing of, any such security; (g) any modification of the Indebtedness, in any form whatsoever, including any modification made after revocation hereof to any indebtedness incurred prior to such revocation, and including without limitation the renewal, extension, acceleration or other change in time for payment of, or other change in the terms of, the Indebtedness or any portion thereof, including increase or decrease of the rate of interest thereon: or (h) any requirement that Bank give any notice of acceptance of this Guaranty. Until all Indebtedness shall have been paid in full, Guarantor shall have no right of subrogation, and Guarantor waives any right to enforce any remedy which Bank now has or may hereafter have against any of the Borrowers or any other person, and waives any benefit of, or any right to participate in, any security now or hereafter held by Bank. Guarantor further waives all rights and defenses Guarantor may have arising out of (i) any election of remedies by Bank, even though that election of remedies, such as a non-judicial foreclosure with respect to any Security for any portion of the Indebtedness, destroys Guarantor's rights of subrogation or Guarantor's rights to proceed against any of the Borrowers for reimbursement, or (ii) any loss of rights Guarantor may suffer by reason of any rights, powers or remedies of any of the Borrowers in connection with any anti-deficiency laws or any other laws limiting, qualifying or discharging Borrowers' Indebtedness, whether by operation of Sections 726, 580a or 580d of the Code of Civil Procedure as from time to time amended, or otherwise, including any rights Guarantor may have to a Section 580a fair market value hearing to determine the size of a deficiency following any foreclosure sale or other disposition of any real property security for any portion of the Indebtedness. 7. BANK'S RIGHTS WITH RESPECT TO GUARANTOR'S PROPERTY IN BANK'S POSSESSION. In addition to all liens upon and rights of setoff against the monies, securities or other property of Guarantor given to Bank by law, Bank shall have a lien upon and a right of setoff against all monies, securities and other property of Guarantor now or hereafter in the possession of or on deposit with Bank, whether held in a general or special account or deposit or for safekeeping or otherwise, and every such lien and right of setoff may be exercised without demand upon or notice to Guarantor. No lien or right of setoff shall be deemed to have been waived by any act or conduct on the part of Bank, or by any neglect to exercise such right of setoff or to enforce such lien, or by any delay in so doing, and every right of setoff and lien shall continue in full force and effect until such right of setoff or lien is specifically waived or released by Bank in writing. 8. SUBORDINATION. Any indebtedness of any of the Borrowers now or hereafter held by Guarantor is hereby subordinated to the indebtedness of Borrowers to Bank. Such indebtedness of Borrowers to Guarantor is assigned to Bank as security for this Guaranty and the Indebtedness and, if Bank requests, shall be collected and received by Guarantor as trustee for Bank and paid over to Bank on account of the Indebtedness of Borrowers to Bank but without reducing or affecting in any manner the liability of Guarantor under the other provisions of this Guaranty. Any notes or other instruments now or hereafter evidencing such Indebtedness of any of the Borrowers to Guarantor shall be marked with a legend that the same are subject to this Guaranty and, if Bank so requests, shall be delivered to Bank. Bank is hereby authorized in the name of Guarantor from time to time to file financing statements and continuation statements and execute such other documents and take such other action as Bank deems necessary or appropriate to perfect, preserve and enforce its rights hereunder. 9. REMEDIES; NO WAIVER. All rights, powers and remedies of Bank hereunder are cumulative. No delay, failure or discontinuance of Bank in exercising any right, power or remedy hereunder shall affect or operate as a waiver of such right, power or remedy; nor shall any single or partial exercise of any such right, power or remedy preclude, waive or otherwise affect any other or further exercise thereof or the exercise of any other right, power or remedy. Any waiver, permit, consent or approval of any kind by bank of any breach of this Guaranty, or any such waiver of any provisions or conditions hereof, must be in writing and shall be effective only to the extent set forth in writing. 10. COSTS, EXPENSES AND ATTORNEYS' FEES. Guarantor shall pay to Bank immediately upon demand the full amount of all payments, advances, charges, costs and expenses, including reasonable attorneys' fees (to include outside counsel fees and all allocated costs of Bank's in-house counsel), expended or incurred by Bank in connection with the enforcement of any of Bank's rights, powers or remedies and/or the collection of any amounts which become due to Bank under this Guaranty, and the prosecution or defense of any action in any way related to this Guaranty, whether incurred at the trial or appellate level, in an 3 arbitration proceeding or otherwise, and including any of the foregoing incurred in connection with any bankruptcy proceeding (including without limitation, any adversary proceeding, contested matter or motion brought by Bank or any other person) relating to Guarantor or any other person or entity. All of the foregoing shall be paid by Guarantor with interest from the date of demand until paid in full at a rate per annum equal to the greater of ten percent (10%) or Bank's Prime Rate in effect from time to time. 11. SUCCESSORS; ASSIGNMENT. This Guaranty shall be binding upon and inure to the benefit of the heirs, executors, administrators, legal representatives, successors and assigns of the parties; provided however, that Guarantor may not assign or transfer any of its interests or rights hereunder without Bank's prior written consent. Guarantor acknowledges that Bank has the right to sell, assign, transfer, negotiate or grant participations in all or any part of, or any interest in, any Indebtedness of Borrowers to Bank and any obligations with respect thereto, including this Guaranty. In connection therewith, Bank may disclose all documents and information which Bank now has or hereafter acquires relating to Guarantor and/or this Guaranty, whether furnished by Borrowers, Guarantor or otherwise. Guarantor further agrees that Bank may disclose such documents and information to Borrowers. 12. AMENDMENT. This Guaranty may be amended or modified only in writing signed by Bank and Guarantor. 13. OBLIGATIONS OF MARRIED PERSONS. Any married person who signs this Guaranty as a Guarantor hereby expressly agrees that recourse may be had against his or her separate property for all his or her obligations under this Guaranty. 14. APPLICATION OF SINGULAR AND PLURAL. In all cases where there is but a single Borrower, then all words used herein in the plural shall be deemed to have been used in the singular where the context and construction so require; and when there is more than one Borrower named herein, or when this Guaranty is executed by more than one Guarantor, the word "Borrowers" and the word "Guarantor" respectively shall mean all or any one or more of them as the context requires. 15. UNDERSTANDING WITH RESPECT TO WAIVERS; SEVERABILITY OF PROVISIONS. Guarantor warrants and agrees that each of the waivers set forth herein is made with Guarantor's full knowledge of its significance and consequences, and that under the circumstances, the waivers are reasonable and not contrary to public policy or law. If any waiver or other provision of this Agreement shall be held to be prohibited by or invalid under applicable public policy or law, such waiver or other provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such waiver or other provision or any remaining provisions of this Agreement. 16. GOVERNING LAW. This Guaranty shall be governed by and construed in accordance with the laws of the State of California. 17. ARBITRATION. 17.1 ARBITRATION. The parties hereto agree, upon demand by any party, to submit to binding arbitration all claims, disputes and controversies between or among them (and their respective employees, officers, directors, attorneys, and other agents), whether in tort, contract or otherwise arising out of or relating to in any way (a) the loan and related loan and security documents which are the subject of this Guaranty and its negotiation, execution, collateralization, administration, repayment, modification, extension, substitution, formation, inducement, enforcement, default or termination; or (b) requests for additional credit. 17.2 GOVERNING RULES. Any arbitration proceeding will (a) proceed in a location in California selected by the American Arbitration Association ("AAA"); (b) be governed by the Federal Arbitration Act (Title 9 of the United States Code), notwithstanding any conflicting choice of law provision in any of the documents between the parties; and (c) be conducted by the AAA, or such other administrator as the parties shall mutually agree upon, in accordance with the AAA's commercial dispute resolution procedures, unless the claim or counterclaim is at least $1,000,000.00 exclusive of claimed Interest, arbitration fees and costs in which case the arbitration shall be conducted in accordance with the AAA's optional procedures for large, complex commercial disputes (the commercial 4 dispute resolution procedures or the optional procedures for large, complex commercial disputes to be referred to, as applicable, as the "Rules"). If there is any inconsistency between the terms hereof and the Rules, the terms and procedures set forth herein shall control. Any party who fails or refuses to submit to arbitration following a demand by any other party shall bear all costs and expenses incurred by such other party in compelling arbitration of any dispute. Nothing contained herein shall be deemed to be a waiver by any party that is a bank of the protections afforded to it under 12 U.S.C. ss.91 or any similar applicable state law. 17.3 NO WAIVER OF PROVISIONAL REMEDIES, SELF-HELP AND FORECLOSURE. The arbitration requirement does not limit the right of any party to (a) foreclose against real or personal property collateral; (b) exercise self-help remedies relating to collateral or proceeds of collateral such as setoff or repossession; or (c) obtain provisional or ancillary remedies such as replevin, injunctive relief, attachment or the appointment of a receiver, before during or after the pendency of any arbitration proceeding. This exclusion does not constitute a waiver of the right or obligation of any party to submit any dispute to arbitration or reference hereunder, including those arising from the exercise of the actions detailed in sections (a), (b) and (c) of this paragraph. 17.4 ARBITRATOR QUALIFICATIONS AND POWERS. Any arbitration proceeding in which the amount in controversy is $5,000,000.00 or less will be decided by a single arbitrator selected according to the Rules, and who shall not render an award of greater than $5,000,000.00. Any dispute in which the amount in controversy exceeds $5,000,000.00 shall be decided by majority vote of a panel of three arbitrators; provided however, that all three arbitrators must actively participate in all hearings and deliberations. The arbitrator will be a neutral attorney licensed in the State of California or a neutral retired judge of the state or federal judiciary of California, in either case with a minimum of ten years experience in the substantive law applicable to the subject matter of the dispute to be arbitrated. The arbitrator will determine whether or not an issue is arbitratable and will give effect to the statutes of limitation in determining any claim. In any arbitration proceeding the arbitrator will decide (by documents only or with a hearing at the arbitrator's discretion) any pre-hearing motions which are similar to motions to dismiss for failure to state a claim or motions for summary adjudication. The arbitrator shall resolve all disputes in accordance with the substantive law of California and may grant any remedy or relief that a court of such state could order or grant within the scope hereof and such ancillary relief as is necessary to make effective any award. The arbitrator shall also have the power to award recovery of all costs and fees, to impose sanctions and to take such other action as the arbitrator deems necessary to the same extent a judge could pursuant to the Federal Rules of Civil Procedure, the California Rules of Civil Procedure or other applicable law. Judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction. The institution and maintenance of an action for judicial relief or pursuit of a provisional or ancillary remedy shall not constitute a waiver of the right of any party, including the plaintiff, to submit the controversy or claim to arbitration if any other party contests such action for judicial relief. 17.5 DISCOVERY. In any arbitration proceeding discovery will be permitted in accordance with the Rules. All discovery shall be expressly limited to matters directly relevant to the dispute being arbitrated and must be completed no later than 20 days before the hearing date and within 180 days of the filing of the dispute with the AAA. Any requests for an extension of the discovery periods, or any discovery disputes, will be subject to final determination by the arbitrator upon a showing that the request for discovery is essential for the party's presentation and that no alternative means for obtaining information is available. 17.6 CLASS PROCEEDINGS AND CONSOLIDATIONS. The resolution of any dispute arising pursuant to the terms of this Guaranty shall be determined by a separate arbitration proceeding and such dispute shall not be consolidated with other disputes or included in any class proceeding. 17.7 PAYMENT OF ARBITRATION COSTS AND FEES. The arbitrator shall award all costs and expenses of the arbitration proceeding. 17.8 REAL PROPERTY COLLATERAL; JUDICIAL REFERENCE. Notwithstanding anything herein to the contrary, no dispute shall be submitted to arbitration if the dispute concerns indebtedness secured directly or indirectly, in whole or in part, by any real property unless (a) the holder of the mortgage, lien or security interest specifically elects in writing to proceed with the 5 arbitration, or (b) all parties to the arbitration waive any rights or benefits that might accrue to them by virtue of the single action rule statute of California, thereby agreeing that all indebtedness and obligations of the parties, and all mortgages, liens and security interests securing such indebtedness and obligations, shall remain fully valid and enforceable. If any such dispute is not submitted to arbitration, the dispute shall be referred to a referee in accordance with California Code of Civil Procedure Section 638 et seq., and this general reference agreement is intended to be specifically enforceable in accordance with said Section 638. A referee with the qualifications required herein for arbitrators shall be selected pursuant to the AAA's selection procedures. Judgment upon the decision rendered by a referee shall be entered in the court in which such proceeding was commenced in accordance with California Code of Civil Procedure Sections 644 and 645. 17.9 MISCELLANEOUS. To the maximum extent practicable, the AAA, the arbitrators and the parties shall take all action required to conclude any arbitration proceeding within 180 days of the filing of the dispute with the AAA. No arbitrator or other party to an arbitration proceeding may disclose the existence, content or results thereof, except for disclosures of information by a party required in the ordinary course of its business, by applicable law or regulation, or to the extent necessary to exercise any judicial review rights set forth herein. If more than one agreement for arbitration by or between the parties potentially applies to a dispute, the arbitration provision most directly related to the documents between the parties or the subject matter of the dispute shall control. This arbitration provision shall survive termination, amendment or expiration of any of the documents or any relationship between the parties. IN WITNESS WHEREOF, the undersigned Guarantor has executed this Guaranty as of SEPTEMBER 1, 2005. CXR Telcom Corporation By: /S/ Randolph D. Foote ---------------------------- Randolph D. Foote, Secretary 6 EX-10.6 7 emrise_10qex10-6.txt EXHIBIT 10.6 WELLS FARGO CONTINUING GUARANTY - -------------------------------------------------------------------------------- TO: WELLS FARGO BANK, NATIONAL ASSOCIATION 1. GUARANTY; DEFINITIONS. In consideration of any credit or other financial accommodation heretofore, now or hereafter extended or made to EMRISE CORPORATION ("Borrowers"), or any of them, by WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank"), and for other valuable consideration, the undersigned EMRISE ELECTRONICS CORPORATION ("Guarantor"), jointly and severally unconditionally guarantees and promises to pay to Bank or order, on demand in lawful money of the United States of America and in immediately available funds, any and all Indebtedness of any of the Borrowers to Bank. The term "Indebtedness" is used herein in its most comprehensive sense and includes any and all advances, debts, obligations and liabilities of Borrowers, or any of them, heretofore, now or hereafter made, incurred or created, whether voluntary or involuntary and however arising, whether due or not due, absolute or contingent, liquidated or unliquidated, determined or undetermined, and whether Borrowers may be liable Individually or jointly with others, or whether recovery upon such Indebtedness may be or hereafter becomes unenforceable. This Guaranty is a guaranty of payment and not collection. 2. MAXIMUM LIABILITY; SUCCESSIVE TRANSACTIONS; REVOCATION; OBLIGATION UNDER OTHER GUARANTIES. The liability of Guarantor shall not exceed at any time the sum of $9,000,000.00 for principal, plus all interest thereon and costs and expenses pertaining to the enforcement of this Guaranty and/or the collection of the Indebtedness of any of the Borrowers to Bank. Notwithstanding the foregoing, Bank may permit the Indebtedness of Borrowers to exceed Guarantor's liability. This is a continuing guaranty and all rights, powers and remedies hereunder shall apply to all past, present and future Indebtedness of each of the Borrowers to Bank, including that arising under successive transactions which shall either continue the Indebtedness, increase or decrease it, or from time to time create new Indebtedness after all or any prior Indebtedness has been satisfied, and notwithstanding the death, incapacity, dissolution, liquidation or bankruptcy of any of the Borrowers or Guarantor or any other event or proceeding affecting any of the Borrowers or Guarantor. This Guaranty shall not apply to any new Indebtedness created after actual receipt by Bank of written notice of its revocation as to such new Indebtedness; provided however, that loans or advances made by Bank to any of the Borrowers after revocation under commitments existing prior to receipt by Bank of such revocation, and extensions, renewals or modifications, of any kind, of Indebtedness incurred by any of the Borrowers or committed by Bank prior to receipt by Bank of such revocation, shall not be considered new Indebtedness. Any such notice must be sent to Bank by registered U.S. mail, postage prepaid, addressed to its office at INLAND EMPIRE RCBO, 4141 INLAND EMPIRE BLVD., SUITE #350, ONTARIO, CA 91764, or at such other address as Bank shall from time to time designate. Any payment by Guarantor with respect to the indebtedness shall not reduce Guarantors maximum obligation hereunder unless written notice to that effect is actually received by Bank at or prior to the time of such payment. The obligations of Guarantor hereunder shall be in addition to any obligations of Guarantor under any other guaranties of any liabilities or obligations of any of the Borrowers or any other persons heretofore or hereafter given to Bank unless said other guaranties are expressly modified or revoked in writing; and this Guaranty shall not, unless expressly herein provided, affect or invalidate any such other guaranties. 3. OBLIGATIONS JOINT AND SEVERAL; SEPARATE ACTIONS; WAIVER OF STATUTE OF LIMITATIONS; REINSTATEMENT OF LIABILITY. The obligations hereunder are joint and several and independent of the obligations of Borrowers, and a separate action or actions may be brought and prosecuted against Guarantor whether action is brought against any of the Borrowers or any other person, or whether any of the Borrowers or any other person is joined in any such action or actions. Guarantor acknowledges that this Guaranty is absolute and unconditional, there are no conditions precedent to the effectiveness of this Guaranty, and this Guaranty is in full force and effect and is binding on Guarantor as of the date written below, regardless of whether Bank obtains collateral or any guaranties from others or takes any other action contemplated by Guarantor. Guarantor waives the benefit of any statute of limitations affecting Guarantor's liability hereunder or the enforcement thereof, and Guarantor agrees that any payment of any indebtedness or other act which shall toll any statute of limitations applicable thereto shall similarly operate to toll such statute of limitations applicable to Guarantor's liability hereunder. The liability of Guarantor hereunder shall be reinstated and revived and the rights of Bank shall continue if and to the extent that for any reason any amount at any time paid on account of any Indebtedness guaranteed hereby is rescinded or must otherwise be restored by Bank, whether as a result of any proceedings in bankruptcy or reorganization or otherwise, all as though such amount had not been paid. The determination as to whether any amount so paid must be rescinded or restored shall be made by Bank in its sole discretion; provided however, that if Bank chooses to contest any such matter at the request of Guarantor, Guarantor agrees to indemnify and hold Bank harmless from and against all costs and expenses, including reasonable attorneys' fees, expended or incurred by Bank in connection therewith, including without limitation, in any litigation with respect thereto. 4. AUTHORIZATIONS TO BANK. Guarantor authorizes Bank either before or after revocation hereof, without notice to or demand on Guarantor, and without affecting Guarantor's liability hereunder, from time to time to: (a) alter, compromise, renew, extend, accelerate or otherwise change the time for payment of, or otherwise change the terms of, the Indebtedness or any portion thereof, including increase or decrease of the rate of interest thereon; (b) take and hold security for the payment of this Guaranty or the indebtedness or any portion thereof, and exchange, enforce, waive, subordinate or release any such security; (c) apply such security and direct the order or manner of sale thereof, including without limitation, a non-judicial sale permitted by the terms of the controlling security agreement, mortgage or deed of trust, as Bank in its discretion may determine; (d) release or substitute any one or more of the endorsers or any other guarantors of the Indebtedness, or any portion thereof, or any other party thereto; and (e) apply payments received by Bank from any of the Borrowers to any Indebtedness of any of the Borrowers to Bank, in such order as Bank shall determine in its sole discretion, whether or not such Indebtedness is covered by this Guaranty, and Guarantor hereby waives any provision of law regarding application of payments which specifies otherwise. Bank may without notice assign this Guaranty in whole or in part. Upon Bank's request, Guarantor agrees to provide to Bank copies of Guarantor's financial statements. 5. REPRESENTATIONS AND WARRANTIES. Guarantor represents and warrants to Bank that: (a) this Guaranty is executed at Borrowers' request; (b) Guarantor shall not, without Bank's prior written consent, sell, lease, assign, encumber, hypothecate, transfer or otherwise dispose of all or a substantial or material part of Guarantors assets other than in the ordinary course of Guarantor's business; (c) Bank has made no representation to Guarantor as to the creditworthiness of any of the Borrowers; and (d) Guarantor has established adequate means of obtaining from each of the Borrowers on a continuing basis financial and other information pertaining to Borrowers' financial condition. Guarantor agrees to keep adequately informed from such means of any facts, events or circumstances which might in any way affect Guarantor's risks hereunder, and Guarantor further agrees that Bank shall have no obligation to disclose to Guarantor any information or material about any of the Borrowers which is acquired by Bank in any manner. 6. GUARANTOR'S WAIVERS. 6.1 Guarantor waives any right to require Bank to: (a) proceed against any of the Borrowers or any other person; (b) marshal assets or proceed against or exhaust any security held from any of the Borrowers or any other person; (c) give notice of the terms, time and place of any public or private sale or other disposition of personal property security held from any of the Borrowers or any other person; (d) take any action or pursue any other remedy in Bank's power; or (e) make any presentment or demand for performance, or give any notice of nonperformance, protest, notice of protest or notice of dishonor hereunder or in connection with any obligations or evidences of indebtedness held by Bank as security for or which constitute in whole or in part the Indebtedness guaranteed hereunder, or in connection with the creation of new or additional Indebtedness. 6.2 Guarantor waives any defense to its obligations hereunder based upon or arising by reason of: (a) any disability or other defense of any of the Borrowers or any other person; (b) the cessation or limitation from any cause whatsoever, other than payment in full, of the Indebtedness of any of the Borrowers or any other person; (c) any lack of authority of any officer, director, partner, agent or other person acting or purporting to act on behalf of any of the Borrowers which is a corporation, partnership or other type of entity, or any defect in the formation of any such Borrower; (d) the application by any of the Borrowers of the proceeds of any Indebtedness for purposes other 2 than the purposes represented by Borrowers to, or intended or understood by, Bank or Guarantor, (e) any act or omission by Bank which directly or indirectly results in or aids the discharge of any of the Borrowers or any portion of the indebtedness by operation of law or otherwise, or which in any way impairs or suspends any rights or remedies of Bank against any of the Borrowers; (f) any impairment of the value of any interest in any security for the indebtedness or any portion thereof, including without limitation, the failure to obtain or maintain perfection or recordation of any interest in any such security, the release of any such security without substitution, and/or the failure to preserve the value of, or to comply with applicable law in disposing of, any such security; (g) any modification of the Indebtedness, in any form whatsoever, including any modification made after revocation hereof to any indebtedness incurred prior to such revocation, and including without limitation the renewal, extension, acceleration or other change in time for payment of, or other change in the terms of, the Indebtedness or any portion thereof, including increase or decrease of the rate of interest thereon; or (h) any requirement that Bank give any notice of acceptance of this Guaranty. Until all Indebtedness shall have been paid in full, Guarantor shall have no right of subrogation, and Guarantor waives any right to enforce any remedy which Bank now has or may hereafter have against any of the Borrowers or any other person, and waives any benefit of, or any right to participate in, any security now or hereafter held by Bank. Guarantor further waives all rights and defenses Guarantor may have arising out of (i) any election of remedies by Bank, even though that election of remedies, such as a non judicial foreclosure with respect to any security for any portion of the Indebtedness, destroys Guarantor's rights of subrogation or Guarantor's rights to proceed against any of the Borrowers for reimbursement, or (ii) any loss of rights Guarantor may suffer by reason of any rights, powers or remedies of any of the Borrowers in connection with any anti-deficiency laws or any other laws limiting, qualifying or discharging Borrowers' Indebtedness, whether by operation of Sections 726, 580a or 580d of the Code of Civil Procedure as from time to time amended, or otherwise, including any rights Guarantor may have to a Section 580a fair market value hearing to determine the size of a deficiency following any foreclosure sale or other disposition of any real property security for any portion of the Indebtedness. 7. BANK'S RIGHTS WITH RESPECT TO GUARANTOR'S PROPERTY IN BANKS POSSESSION. In addition to all liens upon and rights of setoff against the monies, securities or other property of Guarantor given to Bank by law, Bank shall have a lien upon and a right of setoff against all monies, securities and other property of Guarantor now or hereafter in the possession of or on deposit with Bank, whether held in a general or special account or deposit or for safekeeping or otherwise, and every such lien and right of setoff may be exercised without demand upon or notice to Guarantor. No lien or right of setoff shall be deemed to have been waived by any act or conduct on the part of Bank, or by any neglect to exercise such right of setoff or to enforce such lien, or by any delay in so doing, and every right of setoff and lien shall continue in full force and effect until such right of setoff or lien is specifically waived or released by Bank in writing. 8. SUBORDINATION. Any Indebtedness of any of the Borrowers now or hereafter held by Guarantor is hereby subordinated to the indebtedness of Borrowers to Bank. Such Indebtedness of Borrowers to Guarantor is assigned to Bank as security for this Guaranty and the indebtedness and, if Bank requests, shall be collected and received by Guarantor as trustee for Bank and paid over to Bank on account of the Indebtedness of Borrowers to Bank but without reducing or affecting in any manner the liability of Guarantor under the other provisions of this Guaranty. Any notes or other instruments now or hereafter evidencing such Indebtedness of any of the Borrowers to Guarantor shall be marked with a legend that the same are subject to this Guaranty and, if Bank so requests, shall be delivered to Bank. Bank is hereby authorized in the name of Guarantor from time to time to file financing statements and continuation statements and execute such other documents and take such other action as Bank deems necessary or appropriate to perfect, preserve and enforce its rights hereunder. 9. REMEDIES; NO WAIVER. All rights, powers and remedies of Bank hereunder are cumulative. No delay, failure or discontinuance of Bank in exercising any right, power or remedy hereunder shall affect or operate as a waiver of such right, power or remedy; nor shall any single or partial exercise of any such right, power or remedy preclude, waive or otherwise affect any other or further exercise thereof or the exercise of any other right, power or remedy. Any waiver, permit, consent or approval of any kind by bank of any breach of this Guaranty, or any such waiver of any provisions or conditions hereof, must be in writing and shall be effective only to the extent set forth in writing. 10. COSTS, EXPENSES AND ATTORNEYS' FEES. Guarantor shall pay to Bank immediately upon demand the full amount of all payments, advances, charges, costs and expenses, including reasonable attorneys' fees (to include outside counsel fees and all allocated costs of Bank's in-house counsel), expended or incurred by Bank in connection with the enforcement of any of Bank's rights, powers or 3 remedies and/or the collection of any amounts which become due to Bank under this Guaranty, and the prosecution or defense of any action in any way related to this Guaranty, whether incurred at the trial or appellate level, in an arbitration proceeding or otherwise, and including any of the foregoing incurred in connection with any bankruptcy proceeding (including without limitation, any adversary proceeding, contested matter or motion brought by Bank or any other person) relating to Guarantor or any other person or entity. All of the foregoing shall be paid by Guarantor with interest from the date of demand until paid in full at a rate per annum equal to the greater of ten percent (10%) or Bank's Prime Rate in effect from time to time. 11. SUCCESSORS; ASSIGNMENT. This Guaranty shall be binding upon and inure to the benefit of the heirs, executors, administrators, legal representatives, successors and assigns of the parties; provided however, that Guarantor may not assign or transfer any of its interests or rights hereunder without Bank's prior written consent. Guarantor acknowledges that Bank has the right to sell, assign, transfer, negotiate or grant participations in all or any part of, or any interest in, any Indebtedness of Borrowers to Bank and any obligations with respect thereto, including this Guaranty. In connection therewith, Bank may disclose all documents and information which Bank now has or hereafter acquires relating to Guarantor and/or this Guaranty, whether furnished by Borrowers, Guarantor or otherwise. Guarantor further agrees that Bank may disclose such documents and information to Borrowers. 12. AMENDMENT. This Guaranty may be amended or modified only in writing signed by Bank and Guarantor. 13. OBLIGATIONS OF MARRIED PERSONS. Any married person who signs this Guaranty as a Guarantor hereby expressly agrees that recourse may be had against his or her separate property for all his or her obligations under this Guaranty. 14. APPLICATION OF SINGULAR AND PLURAL. In all cases where there is but a single Borrower, then all words used herein in the plural shall be deemed to have been used in the singular where the context and construction so require; and when there is more than one Borrower named herein, or when this Guaranty is executed by more than one Guarantor, the word "Borrowers" and the word "Guarantor" respectively shall mean all or any one or more of them as the context requires. 15. UNDERSTANDING WITH RESPECT TO WAIVERS; SEVERABILITY OF PROVISIONS. Guarantor warrants and agrees that each of the waivers set forth herein is made with Guarantor's full knowledge of its significance and consequences, and that under the circumstances, the waivers are reasonable and not contrary to public policy or law. If any waiver or other provision of this Agreement shall be held to be prohibited by or invalid under applicable public policy or law, such waiver or other provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such waiver or other provision or any remaining provisions of this Agreement. 16. GOVERNING LAW. This Guaranty shall be governed by and construed in accordance with the laws of the State of California. 17. ARBITRATION. 17.1 ARBITRATION. The parties hereto agree, upon demand by any party. to submit to binding arbitration all claims, disputes and controversies between or among them (and their respective employees, officers, directors, attorneys, and other agents), whether in tort, contract or otherwise arising out of or relating to in any way (a) the loan and related loan and security documents which are the subject of this Guaranty and its negotiation, execution, collateralization, administration, repayment, modification, extension, substitution, formation, inducement, enforcement, default or termination; or (b) requests for additional credit. 17.2 GOVERNING RULED. Any arbitration proceeding will (a) proceed in a location in California selected by the American Arbitration Association ("AAA"): (b) be governed by the Federal Arbitration Act (Title 9 of the United States Code), notwithstanding any conflicting choice of law provision in any of the documents between the parties; and (c) be conducted by the AAA, or such other 4 administrator as the parties shall mutually agree upon, in accordance with the AAA's commercial dispute resolution procedures, unless the claim or counterclaim is at least $1,000,000.00 exclusive of claimed interest, arbitration fees and costs in which case the arbitration shall be conducted in accordance with the AAA's optional procedures for large, complex commercial disputes (the commercial dispute resolution procedures or the optional procedures for large, complex commercial disputes to be referred to, as applicable, as the "Rules"). If there is any inconsistency between the terms hereof and the Rules, the terms and procedures set forth herein shall control. Any party who fails or refuses to submit to arbitration following a demand by any other party shall bear all costs and expenses incurred by such other party in compelling arbitration of any dispute. Nothing contained herein shall be deemed to be a waiver by any party that is a bank of the protections afforded to it under 12 U.S.C. ss.91 or any similar applicable state law. 17.3 NO WAIVER OF PROVISIONAL REMEDIES, SELF-HELP AND FORECLOSURE. The arbitration requirement does not limit the right of any party to (a) foreclose against real or personal property collateral; (b) exercise self-help remedies relating to collateral or proceeds of collateral such as setoff or repossession; or (c) obtain provisional or ancillary remedies such as replevin, injunctive relief, attachment or the appointment of a receiver, before during or after the pendency of any arbitration proceeding. This exclusion does not constitute a waiver of the right or obligation of any party to submit any dispute to arbitration or reference hereunder, including those arising from the exercise of the actions detailed in sections (a), (b) and (c) of this paragraph. 17.4 ARBITRATOR QUALIFICATIONS AND POWERS. Any arbitration proceeding in which the amount in controversy is $5,000,000.00 or less will be decided by a single arbitrator selected according to the Rules, and who shall not render an award of greater than $5.000,000.00. Any dispute in which the amount in controversy exceeds $5,000,000.00 shall be decided by majority vote of a panel of three arbitrators; provided however, that all three arbitrators must actively participate in all hearings and deliberations. The arbitrator will be a neutral attorney licensed in the State of California or a neutral retired judge of the state or federal judiciary of California. In either case with a minimum of ten years experience in the substantive law applicable to the subject matter of the dispute to be arbitrated. The arbitrator will determine whether or not an issue is arbitratable and will give effect to the statutes of limitation in determining any claim. In any arbitration proceeding the arbitrator will decide (by documents only or with a hearing at the arbitrator's discretion) any pre-hearing motions which are similar to motions to dismiss for failure to state a claim or motions for summary adjudication. The arbitrator shall resolve all disputes in accordance with the substantive law of California and may grant any remedy or relief that a court of such state could order or grant within the scope hereof and such ancillary relief as is necessary to make effective any award. The arbitrator shall also have the power to award recovery of all costs and fees, to impose sanctions and to take such other action as the arbitrator deems necessary to the same extent a judge could pursuant to the Federal Rules of Civil Procedure, the California Rules of Civil Procedure or other applicable law. Judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction. The institution and maintenance of an action for judicial relief or pursuit of a provisional or ancillary remedy shall not constitute a waiver of the right of any party, including the plaintiff, to submit the controversy or claim to arbitration if any other party contests such action for judicial relief. 17.5 DISCOVERY. In any arbitration proceeding discovery will be permitted in accordance with the Rules. All discovery shall be expressly limited to mailers directly relevant to the dispute being arbitrated and must be completed no later than 20 days before the hearing date and within 180 days of the filing of the dispute with the AAA. Any requests for an extension of the discovery periods, or any discovery disputes, will be subject to final determination by the arbitrator upon a showing that the request for discovery is essential for the party's presentation and that no alternative means for obtaining information is available. 17.6 CLASS PROCEEDINGS AND CONSOLIDATIONS. The resolution of any dispute arising pursuant to the terms of this Guaranty shall be determined by a separate arbitration proceeding and such dispute shall not be consolidated with other disputes or included in any class proceeding. 17.7 PAYMENT OF ARBITRATION COSTS AND FEES. The arbitrator shall award all costs and expenses of the arbitration proceeding. 17.8 REAL PROPERTY COLLATERAL; JUDICIAL REFERENCE. Notwithstanding anything herein to the contrary, no dispute shall be submitted to arbitration if the dispute concerns indebtedness secured directly or indirectly, in whole or in part, by any real property unless (a) the holder of the mortgage, lien or security interest specifically elects in writing to proceed with the 5 arbitration, or (b) all parties to the arbitration waive any rights or benefits that might accrue to them by virtue of the single action rule statute of California, thereby agreeing that all indebtedness and obligations of the parties, and all mortgages, liens and security interests securing such indebtedness and obligations, shall remain fully valid and enforceable. If any such dispute is not submitted to arbitration, the dispute shall be referred to a referee in accordance with California Code of Civil Procedure Section 638 et seq. and this general reference agreement is intended to be specifically enforceable in accordance with said Section 638. A referee with the qualifications required herein for arbitrators shall be selected pursuant to the AAA's selection procedures. Judgment upon the decision rendered by a referee shall be entered in the court in which such proceeding was commenced in accordance with California Code of Civil Procedure Sections 644 and 645. 17.9 MISCELLANEOUS. To the maximum extent practicable, the AAA, the arbitrators and the parties shall take all action required to conclude any arbitration proceeding within 180 days of the filing of the dispute with the AAA. No arbitrator or other party to an arbitration proceeding may disclose the existence, content or results thereof, except for disclosures of information by a party required in the ordinary course of its business, by applicable law or regulation, or to the extent necessary to exercise any judicial review rights set forth herein. If more than one agreement for arbitration by or between the parties potentially applies to a dispute, the arbitration provision most directly related to the documents between the parties or the subject matter of the dispute shall control. This arbitration provision shall survive termination, amendment or expiration of any of the documents or any relationship between the parties. IN WITNESS WHEREOF, the undersigned Guarantor has executed this Guaranty as of SEPTEMBER 1, 2005. Emrise Electronics Corporation By: /S/ Randolph D. Foote ---------------------------- Randolph D. Foote, Secretary 6 EX-10.7 8 emrise_10qex10-7.txt EXHIBIT 10.7 Recording Requested By, And After Recording, Return To: WELLS FARGO BANK, NATIONAL ASSOCIATION 201 Third Street 8th Floor San Francisco, CA 94103 Attn: Records Management/Team 2 - -------------------------------------------------------------------------------- AGREEMENT AND ACKNOWLEDGMENT OF SECURITY INTEREST THIS AGREEMENT AND ACKNOWLEDGMENT OF SECURITY INTEREST (this "Agreement") is entered into as of September 1, 2005, by and among WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank"), EMRISE CORPORATION ("Debtor") and Noel C. McDermott and Warren P. Yost ("Landlord"). WHEREAS, Bank has extended, or has agreed to extend, credit to Debtor on the condition, among others, that such credit be secured by a security interest in certain assets of Debtor (the "Collateral") described in the Security Agreement attached hereto as EXHIBIT A and incorporated herein by this reference (the "Security Agreement"), and all or a portion of the Collateral is now or may hereafter be located on that certain real property owned by Landlord in Santa Clara County, California, as more particularly described on EXHIBIT B attached hereto and incorporated herein by this reference (the "Property"); and WHEREAS, in extending or continuing to extend such credit to Debtor, Bank is relying on the acknowledgments, representations and agreements relating to the Collateral set forth herein. NOW, THEREFORE, Landlord, Debtor and Bank hereby acknowledge, represent and agree as follows: 1. LANDLORD'S ACKNOWLEDGMENT. Landlord acknowledges that the security interest of Bank in the Collateral is senior and superior to any claim or right in all or any portion thereof which Landlord now has or may at any time hereafter acquire. Landlord confirms that Landlord has not received notice from any person or entity other than Bank of any claim of right, title or interest in or to any of the Collateral. 2. NOTICE AND LICENSE. Landlord agrees to deliver to Bank, at the same time as delivery to Debtor, a copy of any notice given by Landlord to Debtor regarding any breach of, or limitation or termination of, any lease or other agreement between Debtor and Landlord relating to Debtor's use and possession of the Property. Subject to the terms and conditions of this Agreement, Landlord and, where applicable, Debtor agree that notwithstanding any failure by Debtor to perform under, or the termination of, any lease or other agreement between Debtor and Landlord relating to Debtor's use and possession of the Property: (a) Landlord will not dispose of the Collateral nor assert any right or interest therein unless it has first notified Bank in writing and has given Bank a reasonable opportunity to exercise Bank's rights in and to the collateral, and (b) Bank is hereby granted the right and license to enter upon the Property and to possess and use the Property to take possession of the Collateral and to exercise Bank's rights, powers and remedies with respect to the Collateral, including without limitation completing any work in process, removing any or all of the Collateral from the Property, and sorting, assembling, selling (including by auction sale held on the Property) and otherwise disposing of the Collateral in accordance with the terms and conditions of the Security Agreement, this Agreement and applicable law. 3. CONDITION. The rights and licenses granted to Bank herein are conditioned upon Bank's agreement to, and Bank hereby agrees to: (a) pay rent to Landlord at the times and at the daily rate paid by Debtor for the period commencing on the day Bank enters into possession of the Property and ending on the day Bank relinquishes possession thereof; and (b) reimburse Landlord for any damage to the Property, other than diminution in value thereof, actually caused by Bank's activities on the Property during its possession thereof. 4. INDEMNITY. Debtor agrees to indemnify and hold Landlord and Bank, and their respective partners, officers, directors, successors and assigns, harmless from and against any and all claims, actions, damages, costs, expenses (including reasonable attorneys' fees, to include Bank's outside counsel fees and all allocated costs of Bank's in-house counsel) and/or liability arising from or in any manner relating to Landlord's compliance with this Agreement and/or Bank's exercise of any of its rights hereunder. Debtor hereby irrevocably authorizes Landlord to comply with any instructions or directions which Bank may give to Landlord pursuant hereto and/or in connection with Bank's exercise of its rights, powers and remedies with respect to the Collateral. 5. NO WAIVER; AMENDMENTS. No delay, failure or discontinuance of Bank in exercising any right, power or remedy hereunder or under the Security Agreement shall affect such right, power or remedy; nor shall any single or partial exercise of any such right, power or remedy preclude, waive or otherwise affect the further exercise thereof or the exercise of any other right, power or remedy. The rights, powers and remedies of Bank hereunder are Cumulative and not exclusive. Any waiver, permit, consent or approval of any kind by Bank of any breach of or default under this Agreement, or any such waiver of any provisions or conditions hereof, must be in writing and shall be effective only to the extent set forth in such writing. This Agreement may be amended or modified only in writing signed by all parties hereto. 6. NOTICES. All notices, requests and demands required hereunder must be in writing, addressed to each party at the address specified below or to such other address as any party may designate by written notice to each other party, and shall be deemed to have been given or made as follows: (a) if personally delivered, upon delivery; (b) if sent by mail, upon the earlier of the date of receipt or three (3) days after deposit in the U.S. mail, first class and postage prepaid; and (c) if sent by telecopy, upon receipt. 7. GOVERNING LAW; SUCCESSORS, ASSIGNS. This Agreement shall be governed by and construed in accordance with the laws of the State of California, and shall be binding upon and inure to the benefit of the heirs, executors, administrators, legal representatives, successors and assigns of the parties. 2 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first written above. BANK: LANDLORD: WELLS FARGO BANK NATIONAL ASSOCIATION By: /s/ Noel C. McDermott --------------------------- Noel C. McDermott By: /s/ Joseph E. Hopper Address: ----------------------------------------- ---------------------- Title: Joseph E. Hopper, Vice President ---------------------- Address: 4141 Inland Empire Blvd, Suite #350 Ontario, CA 91764 By: /s/ Warren P. Yost --------------------------- Warren P. Yost Address: ---------------------- ---------------------- DEBTOR: EMRISE CORPORATION By: /s/ Randolph D. Foote ---------------------------------------- Title: Randolph D. Foote, Vice President Address: 9485 Haven Avenue, Suite 100 Rancho Cucamonga, CA 91730 OBTAIN NOTARY ACKNOWLEDGMENTS 3 EXHIBIT "A" CONTINUING SECURITY AGREEMENT WELLS FARGO RIGHTS TO PAYMENT AND INVENTORY - -------------------------------------------------------------------------------- 1. GRANT OF SECURITY INTEREST. For valuable consideration, the undersigned EMRISE CORPORATION, or any of them ("Debtor"), hereby grants and transfers to WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank") a security interest in all accounts, deposit accounts, chattel paper (whether electronic or tangible), instruments, promissory notes, documents, general intangibles, payment intangibles, software, letter of credit rights, health-care insurance receivables and other rights to payment (collectively called "Rights to Payments"), now existing or at any time hereafter, and prior to the termination hereof, arising (whether they arise from the sale, lease or other disposition of inventory or from performance of contracts for service, manufacture, construction, repair or otherwise or from any other source whatsoever), including all securities, guaranties, warranties, indemnity agreements, insurance policies, supporting obligations and other agreements pertaining to the same or the property described therein, and in all goods returned by or repossessed from Debtor's customers, together with a security interest in all inventory, goods held for sale or lease or to be furnished under contracts for service, goods so leased or furnished, raw materials, component parts and embedded software, work in process or materials used or consumed in Debtor's business and all warehouse receipts, bills of lading and other documents evidencing goods owned or acquired by Debtor, and all goods covered thereby, now or at any time hereafter, and prior to the termination hereof, owned or acquired by Debtor, wherever located, and all products thereof (collectively called "Inventory"), whether in the possession of Debtor, warehousemen, bailees or any other person, or in process of delivery and whether located at Debtor's places of business or elsewhere (with all Rights to Payment and Inventory referred to herein collectively as the "Collateral"), together with whatever is receivable or received when any of the Collateral or proceeds thereof are sold, leased, collected, exchanged or otherwise disposed of, whether such disposition is voluntary or involuntary, including without limitation, all rights to payment, including returned premiums, with respect to any insurance relating to any of the foregoing, and all rights to payment with respect to any claim or cause of action affecting or relating to any of the foregoing (hereinafter called "Proceeds"). 2. OBLIGATIONS SECURED. The obligations secured hereby are the payment and performance of: (a) all present and future Indebtedness of Debtor to Bank; (b) all obligations of Debtor and rights of Bank under this Agreement; and (c) all present and future obligations of Debtor to Bank of other kinds. The word "Indebtedness" is used herein in its most comprehensive sense and includes any and all advances, debts, obligations and liabilities of Debtor, or any of them, heretofore, now or hereafter made, incurred or created, whether voluntary or involuntary and however arising, whether due or not due, absolute or contingent, liquidated or unliquidated, determined or undetermined, and whether Debtor may be liable individually or jointly, or whether recovery upon such Indebtedness may be or hereafter becomes unenforceable. 3. TERMINATION. This Agreement will terminate upon the performance of all obligations of Debtor to Bank, including without limitation, the payment of all Indebtedness of Debtor to Bank, and the termination of all commitments of Bank to extend credit to Debtor, existing at the time Bank receives written notice from Debtor of the termination of this Agreement. 4. OBLIGATIONS OF BANK. Bank has no obligation to make any loans hereunder. Any money received by Bank in respect of the Collateral may be deposited, at Bank's option, into a non-interest bearing account over which Debtor shall have no control, and the same shall, for all purposes, be deemed Collateral hereunder. 5. REPRESENTATIONS AND WARRANTIES. Debtor represents and warrants to Bank that: (a) Debtors legal name is exactly as set forth on the first page of this Agreement, and all of Debtor's organizational documents or agreements delivered to Bank are complete and accurate in every respect; (b) Debtor is the owner and 4 has possession or control of the Collateral and Proceeds; (c) Debtor has the exclusive right to grant a security interest in the Collateral and Proceeds; (d) all Collateral and Proceeds are genuine, free from liens, adverse claims, setoffs, default, prepayment, defenses and conditions precedent of any kind or character, except the lien created hereby or as otherwise agreed to by Bank, or heretofore disclosed by Debtor to Bank, in writing; (e) all statements contained herein and, where applicable, in the Collateral are true and complete in all material respects; (f) no financing statement covering any of the Collateral or Proceeds, and naming any secured party other than Bank, is on file in any public office; (g) all persons appearing to be obligated on Rights to Payment and Proceeds have authority and capacity to contract and are bound as they appear to be; (h) all property subject to chattel paper has been properly registered and filed in compliance with law and to perfect the interest of Debtor in such property; and (i) all Rights to Payment and Proceeds comply with all applicable laws concerning form, content and manner of preparation and execution, including where applicable Federal Reserve Regulation Z and any State consumer credit laws. 6. COVENANTS OF DEBTOR. 6.1 Debtor Agrees in general: (a) to pay Indebtedness secured hereby when due; (b) to indemnify Bank against all losses, claims, demands, liabilities and expenses of every kind caused by property subject hereto; (c) to pay all costs and expenses, including reasonable attorneys' fees, incurred by Bank in the perfection and preservation of the Collateral or Bank's interest therein and/or the realization, enforcement and exercise of Bank's rights, powers and remedies hereunder; (d) to permit Bank to exercise its powers; (e) to execute and deliver such documents as Bank deems necessary to create, perfect and continue the security interests contemplated hereby; (f) not to change its name, and as applicable, its chief executive office, its principal residence or the jurisdiction in which it is organized and/or registered without giving Bank prior written notice thereof; (g) not to change the places where Debtor keeps any Collateral or Debtors records concerning the Collateral and Proceeds without giving Bank prior written notice of the address to which Debtor is moving same; and (h) to cooperate with Bank in perfecting all security interests granted herein and in obtaining such agreements from third parties as Bank deems necessary, proper or convenient in connection with the preservation, perfection or enforcement of any of its rights hereunder. 6.2 Debtor agrees with regard to the Collateral and Proceeds, unless Bank agrees otherwise in writing: (a) that Bank is authorized to file financing statements in the name of Debtor to perfect Bank's security interest in Collateral and Proceeds; (b) to insure Inventory and, where applicable, Rights to Payment with Bank named as loss payee, in form, substance and amounts, under agreements, against risks and liabilities, and with insurance companies satisfactory to Bank; (c) not to use any Inventory for any unlawful purpose or in any way that would void any insurance required to be carried in connection therewith; (d) not to remove Inventory from Debtor's premises except in the ordinary course of Debtor's business; (e) not to permit any security interest in or lien on the Collateral or Proceeds, including without limitation, liens arising from the storage of Inventory, except in favor of Bank; (f) not to sell, hypothecate or otherwise dispose of, nor permit the transfer by operation of law of, any of the Collateral or Proceeds or any interest therein, except sales of inventory to buyers in the ordinary course of Debtors business; (g) to furnish reports to Bank of all acquisitions, returns, sales and other dispositions of the Inventory in such form and detail and at such times as Bank may require; (h) to permit Bank to inspect the Collateral at any time; (i) to keep, in accordance with generally accepted accounting principles, complete and accurate records regarding all Collateral and Proceeds, and to permit Bank to inspect the same and make copies thereof at any reasonable time; (j) if requested by Bank, to receive and use reasonable diligence to collect Rights to Payment and Proceeds, in trust and as the property of Bank, and to immediately endorse as appropriate and deliver such Rights to Payment and Proceeds to Bank daily in the exact form in which they are received together with a collection report in form satisfactory to Bank; (k) not to commingle Rights to Payment, Proceeds or collections thereunder with other property; (l) to give only normal allowances and credits and to advise Bank thereof immediately in writing if they affect any 5 Rights to Payment or Proceeds in any material respect; (m) on demand, to deliver to Bank returned property resulting from, or payment equal to, such allowances or credits on any Rights to Payment or Proceeds or to execute such documents and do such other things as Bank may reasonably request for the purpose of perfecting, preserving and enforcing its security interest in such returned property; (n) from time to time, when requested by Bank, to prepare and deliver a schedule of all Collateral and Proceeds subject to this Agreement and to assign in writing and deliver to Bank all accounts, contracts, leases and other chattel paper, instruments, documents and other evidences thereof; (o) in the event Bank elects to receive payments of Rights to Payment or Proceeds hereunder, to pay all expenses incurred by Bank in connection therewith, including expenses of accounting, correspondence, collection efforts, reporting to account or contract debtors, filing, recording, record keeping and expenses incidental thereto; and (p) to provide any 6 EX-10.8 9 emrise_10qex10-8.txt EXHIBIT 10.8 DEBT PURCHASE AGREEMENT BETWEEN LLOYDS TSB COMMERCIAL FINANCE LIMITED AND PASCALL ELECTRONICS LIMITED REG. NO. 01316674 LLOYDS TSB COMMERCIAL FINANCE LIMITED DEBT PURCHASE AGREEMENT A. PARTIES ------- We, LLOYDS TSB COMMERCIAL FINANCE LIMITED of Boston House, The Little Green, Richmond, Surrey, TW9 1QE registered with number 733011 agree with you, the party referred to as the Client in the Client Particulars below, to enter into the following agreement. B. DATE ---- This agreement is made on the day the last of us executes it. C. DEFINED EXPRESSIONS ------------------- Except where the context otherwise requires, an expression set out in this Debt Purchase Agreement, including the General and Financial Particulars below, or in our Standard Terms and Conditions for the Purchase of Debts (the "Conditions") and which is included in condition 22 (Definitions) is to have the meaning given to it there. Reference to a clause is to a clause in this document. Reference to a condition is to a condition appearing in the Conditions which are supplied with and form an integral part of this agreement and are signed on behalf of each of us. D. AGREEMENT --------- D.1. During the currency of this Debt Purchase Agreement you agree to sell and we agree to buy all your Debts which are in existence on the Commencement Date or which arise after that date from Contracts of Sale with your Customers. Such sale and purchase shall be upon the terms set out both below and in the Conditions. D.2. On the Commencement Date you shall deliver to us an analysis in the form set out at Clause P detailing all Debts (except Non-Notifiable Debts) owed to you and unpaid on that date. You hereby assign such Debts to us absolutely. The ownership of any Debt existing at the Commencement Date shall vest in us upon completion of this Debt Purchase Agreement and the ownership of any Debt arising after the Commencement Date shall vest in us automatically upon such Debt coming into existence. Upon a Debt Vesting in us then its Related Rights shall also automatically vest in us. D.3. If Part I of the Financial Particulars below has been completed, then this Debt Purchase Agreement shall apply to all Domestic Debts payable in Sterling. D.4. If Part II of the Financial Particulars below has been completed, then this Debt Purchase Agreement shall apply to: (i) Non-Sterling Domestic Debts expressed in the Permitted Foreign Currencies stated in such Financial Particulars; and/or (ii) Foreign Debts stated in such Financial Particulars. -2- D.5. You have entered into this Debt Purchase Agreement on the basis that you have read and understood all of its terms (including the Conditions) and also have had the prior opportunity to take independent legal advice as to your and our respective rights and obligations. E. EXCLUSION OF PRIOR AGREEMENTS ----------------------------- The terms of this Debt Purchase Agreement (including the Conditions and any special terms and other terms set out below) are the only terms agreed between us. They exclude all earlier agreements, warranties and representations, express or implied, oral or in writing. F. COMMENCEMENT AND DURATION ------------------------- This agreement shall begin on the Commencement Date and shall continue for the Minimum Period. Both are specified in the General Particulars. Thereafter it shall continue until ended by either of us at any time giving to the other written notice of not less than the Notice Period, specified in the General Particulars, to expire at the end of any calendar month after the end of the Minimum Period. We shall also have the right immediately to terminate this agreement, by notice to you at any time following a Termination Event. G. THE GENERAL PARTICULARS ----------------------- G.1. Commencement Date The later of: (See clause F) (i) __________________; or (ii) the date on which we shall notify you that we are satisfied that the conditions precedent set out in clause L below headed "Conditions Precedent" have been fulfilled. G.2. Minimum Period: 24 months from the commencement date (See clause F) G.3. Notice Period: 3 months (See clause F) G.4. Additional Non Notifiable Debts: N/A (See Condition 4.1(k)) G.5. Your Payment Terms: 30 days nett and also some 45 days nett (See Condition 14.5(h)) G.6. Arrangement Fee: (pound)1,000 Debenture Charge (See Condition 11.1(a)) -3- G.7. Facility Fee: N/A (See Condition 11.1(g)) G.8. Notice of Assignment Provisions: No notice of assignment will be given (See Conditions 5.2, 5.3, or 5.4, 6.2(e), 14.4(k) and 14.5(g)) G.9. Funding Limit (see Conditions (pound)300,000 in respect of Sterling 9.2 and 9.4) funds in Use Accounts and the equivalent of (pound)600,000 in respect of the total debt balances on all Funds in Use Accounts in currencies other than Sterling H. FINANCIAL PARTICULARS --------------------- PART I FOR DOMESTIC DEBTS PAYABLE IN STERLING --------------------------------------------- H.1. Initial Payment Percentage: 90 per cent of the Notified Value of Approved (See Conditions 9.2 and 9.4) Debts. H.2. Discount Charge: 1.5 per cent above the Base Rate from time to (See Conditions 11.1(d), 11.5 and 11.8) time of Lloyds TSB Bank plc. H.3. Allowance: 2.5 per cent below the Base Rate from time to (See Conditions 9.6, 11.6 and 11.8) time of Lloyds TSB Bank plc. H.4. Funds Transmission Method: BACs/CHAPs (See Condition 11.1(e)) H.5. Funding Limit: (pound)900,000 (See Conditions 9.2 and 9.4) H.6. Service Charge: 0.15% (See Condition 11.1(b)) H.7. Minimum Annual Service Charge: (pound)7,500 (See Condition 11.1(c)) -4- H.8. Monitoring Fee: N/A (See Condition 11.1(f)) H.9. Date on which an unpaid Approved Debt 4 calendar months after the end of the month will automatically become a Disapproved in which the relevant invoice is dated. Debt (and any initial payment will have to be returned). (Condition 7.2(g)) -5-
I. FINANCIAL PARTICULARS PART II ----------------------------- FOREIGN DEBTS OR NON STERLING DOMESTIC DEBTS -------------------------------------------- - ------ ------------------------------ ------------------------ -------------------- -------------------- ------------- ------------- Applicable Conditions 1. 2. 3. 4. ("Con") or Clause ("Cl") Note 2 (see below) Note 2 (see below) Applies Applies - ------ ------------------------------ ------------------------ -------------------- -------------------- ------------- ------------- I.1. MARKETS OR TERRITORIES Con 21 - Definition of USA "Foreign Debt" and "Non Sterling Domestic Debt" - ------ ------------------------------ ------------------------ -------------------- -------------------- ------------- ------------- I.2. Permitted Foreign Currency Con 9.7 US$ - ------ ------------------------------ ------------------------ -------------------- -------------------- ------------- ------------- I.3. Initial Payment Percentage Con 9.2 and 9.4 90% - ------ ------------------------------ ------------------------ -------------------- -------------------- ------------- ------------- I.4. Discount Charge Con 11.5 1.5% plus cost of funds to LTSBCF - ------ ------------------------------ ------------------------ -------------------- -------------------- ------------- ------------- I.5. Allowance Con 9.2 and 9.4 2.5% below cost of funds to LTSBCF - ------ ------------------------------ ------------------------ -------------------- -------------------- ------------- ------------- I.6. Funds Transmission Charge Con 11.1(e) Standard Lloyds TSB fees to apply - ------ ------------------------------ ------------------------ -------------------- -------------------- ------------- ------------- I.7. Service Charge Con 11.1(b) 0.15% - ------ ------------------------------ ------------------------ -------------------- -------------------- ------------- ------------- I.8. Minimum Annual Service Charge Con 11.1(c) 7,500 - ------ ------------------------------ ------------------------ -------------------- -------------------- ------------- ------------- I.9. Monitoring Fee Con 11.1(f) N/A - ------ ------------------------------ ------------------------ -------------------- -------------------- ------------- ------------- I.10. Funding Limit (pound)600,000 Con 9.2 and 9.4 (pound)600,000 combined combined - ------ ------------------------------ ------------------------ -------------------- -------------------- ------------- ------------- I.11. Date on which an Approved Con 7.2(g) 4 calendar months Debt will Automatically after the end of become a Disapproved Debt the month in which the relevant invoice is dated. - ------ ------------------------------ ------------------------ -------------------- -------------------- ------------- ------------- THE FOLLOWING NOTES APPLY TO COLUMNS 1 TO 4 ABOVE WHERE SPECIFIED IN THE COLUMN HEADING. Note 1: Notice of assignment to us of your Debts and of your appointment as our agent to collect them will be given to your Customers. Note 2: No notice of assignment will be given.
-6- J. POWER OF ATTORNEY ----------------- You irrevocably appoint us and our directors, company secretary and officers from time to time jointly and each of them severally to be your attorneys for the purpose of: (a) perfecting our title to any Debts or Related Rights; and/or (b) securing the performance of any of your obligations, to us, or under a Contract of Sale and for these purposes your appointed attorneys may: (i) execute or sign deeds and documents; (ii) complete or endorse cheques and other instruments; (iii) institute or defend proceedings; (iv) complete and perform such other acts; (v) give notice of the Assignment of Debts to us; as we may in all cases reasonably consider necessary. K. DATA PROTECTION --------------- You are referred to Condition 19 of the Standard terms and Conditions incorporated in this Debt Purchase Agreement and, in particular to Conditions 19.1 and 19.2. L. CONDITIONS PRECEDENT -------------------- 1. Satisfactory reference from Venture on Xcel. 2. Satisfaction with Money Laundering requirements. 3. Assignment of credit insurance policies on all exports, Pascall and Xcel. 4. Professional Valuation on Plant and Machinery total value to be (pound)300,000 and there is to be a landlords' waiver on rent or a reserve made for the amounts due. 5. Legal opinion on Section 151 Financial assistance. 6. Sight of audited accounts to 18th March 2005 on Pascall Electronics and to 31 December 2004 on Xcel Power Systems. 7. Insurance certificates on public and aircraft liability. 8. Suitable wording from LTSB confirming that we have priority over the last (pound)200k guaranteed by Emrise to LTSB Bank of (pound)700,000. 9. SCM to be satisfied with reserves for warranty repairs on both companies. 10. SCM to be satisfied with allocation of cash from Rockwell Collins on the Pascall sales ledger. -7- M. SPECIAL TERMS ------------- 1. You will send us a copy of the invoice and proof of delivery (pound)50,000 (where required) where the invoice total (including VAT) exceeds 2. You will send us a copy of the credit note where the credit note (pound)25,000 total (including VAT) exceeds 3. Where the CRF facility is not the only facility provided (either to this (pound)2,550,000 client or its group of companies), total aggregated and consolidated limits (to either its parent, subsidiary or related companies) total
4. This agreement will be operated as follows: 1. Confirmation of waiver letters of non offset re "bill and hold", on both paid for and non paid for invoices, to avoid any possible set off. 2. Exclude Bharat invoices and prototype invoices. 3. Warranties reserve, as above. 4. Monthly listing of FOC repairs. 5. The initial haulier collecting from the Ryde premises is to sign for collection of goods. Chattel mortgages from both companies. N. OTHER TERMS ----------- 1. Export cap at 60% of combined Gross Sales Ledgers. 2. Debt turn less than 65 days. 3. Overall cap on funding at 125% of combined Gross Sales Ledger. O. CLIENT PARTICULARS ------------------ NAME: Pascall Electronics Limited INCORPORATED IN: England & Wales WITH COMPANIES REGISTRY NO: 01316674 -8- PRINCIPAL PLACE OF BUSINESS: Park Road Ryde Isle of Wight PO33 2BE TRADING STYLE (IF ANY) USED: REGISTERED ADDRESS: Brunswick Road Cobbs Wood Ashford Kent TN23 lEB -9- P. OFFER OF DEBTS ON COMMENCEMENT (CONDITION 3.1) ---------------------------------------------- Client No: ______________________ C.C. ____________________________ To: Lloyds TSB Commercial Finance Limited Date: _______________ From: Pascall Electronics Limited Schedule No: 1 ----------------------- Under the terms of the Agreement for the Purchase of Debts dated __________________, including in particular, Condition 3.1, we hereby offer to sell the debts shown in our Sales Ledger as set out below: This day Month to date --------------------- ---------------------- - ------------------------------------------------------------------------- --------------------- ---------------------- Sales ledger as at: Balance bfwd ------------------- --------------------- ---------------------- + Sales Invoices --------------------- ---------------------- - Sales Credit Notes ( ) --------------------- ---------------------- - Cash Received ( ) --------------------- ---------------------- - Discount Allowed +/- Adjustments : Contras : Inter co : Journals : B.D.W.O --------------------- ---------------------- --------------------- ---------------------- Total Net position per day/month --------------------- ---------------------- Balance agreed to aged debtors as at _____/_____/_____ --------------------- ---------------------- Total of Sales Ledger as at ........................(pound)_______________ Less Non Notifiable Debts..................(pound)_______________ Debts notified to LTSCBF as Agent: ____________________________________________ AUTHORISED SIGNATURE -10- This document has been executed as a deed by or on behalf of each of us to indicate our binding agreement to its terms. SIGNED and DELIVERED as a Deed on _____ day of _________________________ on behalf of LLOYDS TSB COMMERCIAL FINANCE LIMITED ) by: 1.** [ ] ) duly appointed attorney ) ) Attorney (s) for Lloyds TSB ) Commercial Finance Limited 2.** [ ] ) duly appointed attorney ) ) In the presence of: ) ) Signature: _______________________________________________________) ) Witness (only required if one Name:** _______________________________________________________) attorney signs) ) Occupation: _______________________________________________________) ) Address: _______________________________________________________) ) _______________________________________________________) SIGNED and DELIVERED as a Deed on 28th day of June 2005 PASCALL ELECTRONICS LIMITED acting by by you Signature of Director (a Director) and Signature of *Director/ a *Director / its Company Secretary Company Secretary KEY ** Insert Full Names * Delete as Applicable -11-
EX-10.9 10 emrise_10qex10-9.txt EXHIBIT 10.9 DEBT PURCHASE AGREEMENT BETWEEN LLOYDS TSB COMMERCIAL FINANCE LIMITED AND XCEL POWER SYSTEMS LIMITED REG. NO. 00575679 LLOYDS TSB COMMERCIAL FINANCE LIMITED DEBT PURCHASE AGREEMENT A. PARTIES ------- We, LLOYDS TSB COMMERCIAL FINANCE LIMITED of Boston House, The Little Green, Richmond, Surrey, TW9 1QE registered with number 733011 agree with you, the party referred to as the Client in the Client Particulars below, to enter into the following agreement. B. DATE ---- This agreement is made on the day the last of us executes it. C. DEFINED EXPRESSIONS ------------------- Except where the context otherwise requires, an expression set out in this Debt Purchase Agreement, including the General and Financial Particulars below, or in our Standard Terms and Conditions for the Purchase of Debts (the "Conditions") and which is included in condition 22 (Definitions) is to have the meaning given to it there. Reference to a clause is to a clause in this document. Reference to a condition is to a condition appearing in the Conditions which are supplied with and form an integral part of this agreement and are signed on behalf of each of us. D. AGREEMENT --------- D.1. During the currency of this Debt Purchase Agreement you agree to sell and we agree to buy all your Debts which are in existence on the Commencement Date or which arise after that date from Contracts of Sale with your Customers. Such sale and purchase shall be upon the terms set out both below and in the Conditions. D.2. On the Commencement Date you shall deliver to us an analysis in the form set out at Clause P detailing all Debts (except Non-Notifiable Debts) owed to you and unpaid on that date. You hereby assign such Debts to us absolutely. The ownership of any Debt existing at the Commencement Date shall vest in us upon completion of this Debt Purchase Agreement and the ownership of any Debt arising after the Commencement Date shall vest in us automatically upon such Debt coming into existence. Upon a Debt Vesting in us then its Related Rights shall also automatically vest in us. D.3. If Part I of the Financial Particulars below has been completed, then this Debt Purchase Agreement shall apply to all Domestic Debts payable in Sterling. D.4. If Part II of the Financial Particulars below has been completed, then this Debt Purchase Agreement shall apply to: (i) Non-Sterling Domestic Debts expressed in the Permitted Foreign Currencies stated in such Financial Particulars; and/or (ii) Foreign Debts stated in such Financial Particulars. -2- D.5. You have entered into this Debt Purchase Agreement on the basis that you have read and understood all of its terms (including the Conditions) and also have had the prior opportunity to take independent legal advice as to your and our respective rights and obligations. E. EXCLUSION OF PRIOR AGREEMENTS ----------------------------- The terms of this Debt Purchase Agreement (including the Conditions and any special terms and other terms set out below) are the only terms agreed between us. They exclude all earlier agreements, warranties and representations, express or implied, oral or in writing. F. COMMENCEMENT AND DURATION ------------------------- This agreement shall begin on the Commencement Date and shall continue for the Minimum Period. Both are specified in the General Particulars. Thereafter it shall continue until ended by either of us at any time giving to the other written notice of not less than the Notice Period, specified in the General Particulars, to expire at the end of any calendar month after the end of the Minimum Period. We shall also have the right immediately to terminate this agreement, by notice to you at any time following a Termination Event. G. THE GENERAL PARTICULARS ----------------------- G.1. Commencement Date The later of: (See clause F) (i) __________________; or (ii) the date on which we shall notify you that we are satisfied that the conditions precedent set out in clause L below headed "Conditions Precedent" have been fulfilled. G.2. Minimum Period: 24 months from the commencement date (See clause F) G.3. Notice Period: 3 months (See clause F) G.4. Additional Non Notifiable Debts: N/A (See Condition 4.1(k)) G.5. Your Payment Terms: 30 days nett and also 60 days nett (See Condition 14.5(h)) G.6. Arrangement Fee: (pound)1,000 Debenture Charge (See Condition 11.1(a)) -3- G.7. Facility Fee: N/A (See Condition 1.1(g)) G.8. Notice of Assignment Provisions: No notice of assignment will be given (See Conditions 5.2, 5.3, or 5.4, 6.2(e), 14.4(k) and 14.5(g)) G.9. Funding Limit (see Conditions (pound)900,000 in respect of Sterling 9.2 and 9.4) funds in Use Accounts and the equivalent of (pound)300,000 in respect of the total debt balances on all Funds in Use Accounts in currencies other than Sterling H. FINANCIAL PARTICULARS --------------------- PART I FOR DOMESTIC DEBTS PAYABLE IN STERLING --------------------------------------------- H.1. Initial Payment Percentage: 85 per cent of the Notified Value of Approved (See Conditions 9.2 and 9.4) Debts. H.2. Discount Charge: 1.5 per cent above the Base Rate from time to (See Conditions 11.1(d), 11.5 and 11.8) time of Lloyds TSB Bank plc. H.3. Allowance: 2.5 per cent below the Base Rate from time to (See Conditions 9.6, 11.6 and 11.8) time of Lloyds TSB Bank plc. H.4. Funds Transmission Method: BACs/CHAPs (See Condition 11.1(e)) H.5. Funding Limit: (pound)1,500,000 (See Conditions 9.2 and 9.4) H.6. Service Charge: 0.15% (See Condition 11.1(b)) H.7. Minimum Annual Service Charge: (pound)7,500 (See Condition 11.1(c)) -4- H.8. Monitoring Fee: N/A (See Condition 11.1(f)) H.9. Date on which an unpaid Approved Debt 4 calendar months after the end of the month will automatically become a Disapproved in which the relevant invoice is dated. Debt (and any initial payment will have to be returned). (Condition 7.2(g)) -5-
I. FINANCIAL PARTICULARS PART II ----------------------------- FOREIGN DEBTS OR NON STERLING DOMESTIC DEBTS -------------------------------------------- - ------ ------------------------------ ------------------------ -------------------- -------------------- ------------- ------------- Applicable Conditions 1. 2. 3. 4. ("Con") or Clause ("Cl") Note 2 (see below) Note 2 (see below) Applies Applies - ------ ------------------------------ ------------------------ -------------------- -------------------- ------------- ------------- I.1. MARKETS OR TERRITORIES Con 21 - Definition of Europe USA "Foreign Debt" and "Non Sterling Domestic Debt" - ------ ------------------------------ ------------------------ -------------------- -------------------- ------------- ------------- I.2. Permitted Foreign Currency Con 9.7 (pound) US$ - ------ ------------------------------ ------------------------ -------------------- -------------------- ------------- ------------- I.3. Initial Payment Percentage Con 9.2 and 9.4 85% 85% - ------ ------------------------------ ------------------------ -------------------- -------------------- ------------- ------------- I.4. Discount Charge Con 11.5 1.5% plus cost of 1.5% plus cost of funds to LTSBCF funds to LTSBCF - ------ ------------------------------ ------------------------ -------------------- -------------------- ------------- ------------- I.5. Allowance Con 9.2 and 9.4 2.5% below cost of 2.5% below cost of funds to LTSBCF funds to LTSBCF - ------ ------------------------------ ------------------------ -------------------- -------------------- ------------- ------------- I.6. Funds Transmission Charge Con 11.1(e) Standard Lloyds TSB Standard Lloyds TSB fees to apply fees to apply - ------ ------------------------------ ------------------------ -------------------- -------------------- ------------- ------------- I.7. Service Charge Con 11.1(b) 0.15% 0.15% - ------ ------------------------------ ------------------------ -------------------- -------------------- ------------- ------------- I.8. Minimum Annual Service Charge Con 11.1(c) 7,500 7,500 - ------ ------------------------------ ------------------------ -------------------- -------------------- ------------- ------------- I.9. Monitoring Fee Con 11.1(f) N/A N/A - ------ ------------------------------ ------------------------ -------------------- -------------------- ------------- ------------- I.10. Funding Limit (pound)300,000 Con 9.2 and 9.4 (pound)200,000 (pound)100,000 combined combined combined - ------ ------------------------------ ------------------------ -------------------- -------------------- ------------- ------------- I.11. Date on which an Approved Con 7.2(g) 4 calendar months 4 calendar months Debt will Automatically after the end of after the end of become a Disapproved Debt the month in which the month in which the relevant the relevant invoice is dated. invoice is dated. - ------ ------------------------------ ------------------------ -------------------- -------------------- ------------- ------------- THE FOLLOWING NOTES APPLY TO COLUMNS 1 TO 4 ABOVE WHERE SPECIFIED IN THE COLUMN HEADING. Note 1: Notice of assignment to us of your Debts and of your appointment as our agent to collect them will be given to your Customers. Note 2: No notice of assignment will be given.
-6- J. POWER OF ATTORNEY ----------------- You irrevocably appoint us and our directors, company secretary and officers from time to time jointly and each of them severally to be your attorneys for the purpose of: (a) perfecting our title to any Debts or Related Rights; and/or (b) securing the performance of any of your obligations, to us, or under a Contract of Sale and for these purposes your appointed attorneys may: (i) execute or sign deeds and documents; (ii) complete or endorse cheques and other instruments; (iii) institute or defend proceedings; (iv) complete and perform such other acts; (v) give notice of the Assignment of Debts to us; as we may in all cases reasonably consider necessary. K. DATA PROTECTION --------------- You are referred to Condition 19 of the Standard terms and Conditions incorporated in this Debt Purchase Agreement and, in particular to Conditions 19.1 and 19.2. L. CONDITIONS PRECEDENT -------------------- 1. Satisfactory reference from Venture on Xcel. 2. Satisfaction with Money Laundering requirements. 3. Assignment. of credit insurance policies on all exports, Pascall and Xcel. 4. Professional Valuation on Plant and Machinery total value to be (pound)300,000 and there is to be a landlords' waiver on rent or a reserve made for the amounts due. 5. Legal opinion on Section 151 Financial assistance. 6. Sight of audited accounts to 18th March 2005 on Pascall Electronics and to 31 December 2004 on Xcel Power Systems. 7. Insurance certificates on public and aircraft liability. 8. Suitable wording from LTSB confirming that we have priority over the last (pound)200k guaranteed by Emrise to LTSB Bank of (pound)700,000. 9. SCM to be satisfied with reserves for warranty repairs on both companies. 10. SCM to be satisfied with allocation of cash from Rockwell Collins on the Pascall sales ledger. -7- M. SPECIAL TERMS ------------- 1. You will send us a copy of the invoice and proof of delivery (pound)50,000 (where required) where the invoice total (including VAT) exceeds 2. You will send us a copy of the credit note where the credit note (pound)25,000 total (including VAT) exceeds 3. Where the CRF facility is not the only facility provided (either to this (pound)2,550,000 client or its group of companies), total aggregated and consolidated limits (to either its parent, subsidiary or related companies) total 4. This agreement will be operated as follows: 1. Reserve "staged design work invoices". 2. Warranty reserve to be ascertained and agreed with a monthly check on Free of Charge Repairs. 3. Exclude Belix Wound Components Ltd. 4. Monthly contra check with appropriate reserves. Chattel mortgages from both companies. 5. We, Lloyds TSB Commercial Finance Limited, are pleased to make available to the Company, on a separate line, an overadvance of (pound)300,000 to a maximum of 100% of the combined Approved Sales Ledger which will be payable at a rate of (pound)25,000 per month, the first payment falling due one calendar month after initial drawdown. I) This and future payments will be deducted from the Revolving Debtor facility on the same day every month. II) The discount charge on the overadvance account shall be 1.9% over Base Rate from time to time of Lloyds TSB Bank plc and will be applied monthly, in arrears to the Revolving Debtor facility. III) We shall have the option, exercisable at our sole discretion, to switch details on the overadvance account to the Revolving Debtor facility, if we consider in our sole opinion, that the Company have difficulty in meeting the specific reductions in the overadvance account. IV) The aggregate outstanding on the Revolving Debtor facility and the overadvance account shall not exceed 100% of the Company's approved Sales Ledger and both facilities are deemed to be co-terminus. -8- N. OTHER TERMS ----------- 1. Export cap at 60% of combined Gross Sales Ledgers. 2. Debt turn less than 65 days. 3. Overall cap on funding at 125% of combined Gross Sales Ledger. O. CLIENT PARTICULARS NAME: Xcel Power Systems Limited INCORPORATED IN: England & Wales WITH COMPANIES REGISTRY NO: 00575679 PRINCIPAL PLACE OF BUSINESS: Brunswick Road Cobbs Wood Ashford Kent TN23 1EB TRADING STYLE (IF ANY) USED: REGISTERED ADDRESS: Brunswick Road Cobbs Wood Ashford Kent TN23 lEB -9- P. OFFER OF DEBTS ON COMMENCEMENT (CONDITION 3.1) ---------------------------------------------- Client No: ______________________ C.C. ____________________________ To: Lloyds TSB Commercial Finance Limited Date: _______________ From: Xcel Power Systems Limited Schedule No: 1 ----------------------- Under the terms of the Agreement for the Purchase of Debts dated _________________, including in particular, Condition 3.1, we hereby offer to sell the debts shown in our Sales Ledger as set out below: This day Month to date --------------------- ---------------------- - ------------------------------------------------------------------------- --------------------- ---------------------- Sales ledger as at: Balance bfwd ------------------- --------------------- ---------------------- + Sales Invoices --------------------- ---------------------- - Sales Credit Notes ( ) --------------------- ---------------------- - Cash Received ( ) --------------------- ---------------------- - Discount Allowed +/- Adjustments : Contras : Inter co : Journals : B.D.W.O --------------------- ---------------------- --------------------- ---------------------- Total Net position per day/month --------------------- ---------------------- Balance agreed to aged debtors as at _____/_____/_____ --------------------- ---------------------- Total of Sales Ledger as at ........................(pound)_______________ Less Non Notifiable Debts..................(pound)_______________ Debts notified to LTSCBF as Agent: ____________________________________________ AUTHORISED SIGNATURE -10- This document has been executed as a deed by or on behalf of each of us to indicate our binding agreement to its terms. SIGNED and DELIVERED as a Deed on 28th day of June 2005 on behalf of LLOYDS TSB COMMERCIAL FINANCE LIMITED ) by: 1.** ) duly appointed attorney ) ) Attorney (s) for Lloyds TSB ) Commercial Finance Limited 2.** ) duly appointed attorney ) ) In the presence of: ) ) Signature: _______________________________________________________) ) Witness (only required if one Name:** _______________________________________________________) attorney signs) ) Occupation: _______________________________________________________) ) Address: _______________________________________________________) ) _______________________________________________________) SIGNED and DELIVERED as a Deed on 28th day of June 2005 on behalf of XCEL POWER SYSTEMS LIMITED acting by by you Signature of Director (a Director) and Signature of *Director/ a *Director / its Company Secretary Company Secretary KEY ** Insert Full Names * Delete as Applicable -11-
EX-10.10 11 emrise_10qex10-10.txt EXHIBIT 10.10 LOAN AGREEMENT BETWEEN LLOYDS TSB COMMERCIAL FINANCE LIMITED AND XCEL POWER SYSTEMS LIMITED LLOYDS TSB COMMERCIAL FINANCE LIMITED LOAN AGREEMENT A. DATE: ----- B. PARTIES: LENDER: LLOYDS TSB COMMERCIAL FINANCE LIMITED ------- ------ A company incorporated in England and Wales with number 733011 whose registered office is at Boston House, The Little Green, Richmond, Surrey TW9 1QF. Borrower: XCEL POWER. SYSTEMS LIMITED -------- a company incorporated in England and Wales with neither 00575679 whose registered office is at Brunswick Road, Cobbs Wood, Ashford, Kent TN23 1EB C. INTRODUCTION ------------ C.1 The Lender's Standard Terms and Conditions for revolving Loan Fealties (the "Conditions") are supplied with, and form an integral part of, this Loan Agreement (the "Agreement") and are signed (for identification) on behalf of the Lender and the Borrower. C.2 Except where the context otherwise requires: C.2 1 all references in this Agreement to: C.2.1.1 the expression "Agreement" includes the Conditions; C.2.1.1 a clause means a clause in this Agreement and to a condition means a condition contained in the Conditions, C.2.2 expressions defined in the Conditions bear the same meaning in this Agreement. C.3 Where there is any conflict between a clause and a condition, their such clause shall prevail. D. LOAN AGREEMENT -------------- D.1 Subject to the terms of this Agreement, at the request of the Borrower the Lender has agreed to make Advances to the Borrower relative to Valuations of the Secured Collateral up to the Loan Facility Limit. D.2 The Borrower has entered into this Agreement on the basis that it has read and understood all of its terms and also it has had the prior opportunity to take Independent legal advice as to its rights and obligations. E. PARTICULARS ----------- F.1 GENERAL ------- DATE OF DEBT PURCHASE AGREEMENT: -------------------------------- ADDITIONAL PRECONDITIONS: ------------------------- ADDITIONAL SECURITY DOCUMENT: ----------------------------- F.2 FINANCIAL --------- - ------------------------------------------------------- ------------------------------- ------------------------------ DRAWDOWN FREQUENCY Stock in Trade: Not Applicable Plant & Machinery: Monthly Property Not Applicable - ------------------------------------------------------- ------------------------------- ------------------------------ FIRST DRAWN DOWN DATE: When requested - ------------------------------------------------------- -------------------------------------------------------------- LENDER'S MAXIMUM AGGREGATE COMMITMENT: lesser of (pound)2,550,000 and 125% of the Notified Value of all Debts outstanding at the relevant time - ------------------------------------------------------- -------------------------------------------------------------- -2- - ------------------------------------------------------- --------------------------------------------------------- STOCK IN TRADE Not Applicable - ------------------------------------------------------- --------------------------------------------------------- STOCK IN TRADE ADVANCES LIMIT: FROM THE AMOUNT AVAILABLE FROM THE STOCK IN TRADE the lesser of (pound)0 or the sum equal to 0% of the VALUE WE WILL DEDUCT ALL PREFERENTIAL CLAIMS Stock in Trade Value AND OTHER RESERVES REQUIRED PRIOR TO ARRIVING AT AN AVAILABLE FUNDS FIGURE - ------------------------------------------------------- --------------------------------------------------------- STOCK IN TRADE INTEREST RATE 0% above Base Rate - ------------------------------------------------------- --------------------------------------------------------- STOCK IN TRADE REPAYMENT TERMS - ------------------------------------------------------- --------------------------------------------------------- VALUATIONS OF STOCK IN TRADE PREPARED BY BORROWER: Prior to the first advance and within 14 days of each calendar month. Prepared by Borrower a schedule of VAT and PAYE liability. - ------------------------------------------------------- --------------------------------------------------------- PLANT AND MACHINERY The plant and machinery set out or otherwise described in any schedules respectively to a document being an Additional Security Document and/o the General Security Document (and in this Agreement reference to Plant and Machinery shall be construed accordingly). - ------------------------------------------------------- --------------------------------------------------------- PLANT AND MACHINERY ADVANCES LIMIT the lesser of (pound)75,000 or the sum equal to 50% of plant and Machinery Value - ------------------------------------------------------- --------------------------------------------------------- PLANT AND MACHINERY INTEREST RATE 1.9% above Base Rate - ------------------------------------------------------- --------------------------------------------------------- PLANT AND MACHINERY REPAYMENT TERMS (pound)2,083.00 - ------------------------------------------------------- --------------------------------------------------------- VALUATIONS OR PLANT AND MACHINERY PREPARED BY INDEPENDENT VALUER. Prior to drawdown and annually on the anniversary of this Agreement - ------------------------------------------------------- --------------------------------------------------------- PROPERTY Not Applicable - ------------------------------------------------------- --------------------------------------------------------- PROPERTY ADVANCES LIMIT the lesser of (pound)0 or the sum equal to 0% of Property Value - ------------------------------------------------------- --------------------------------------------------------- PROPERTY ADVANCES INTEREST RATE 0% above Base Rate - ------------------------------------------------------- --------------------------------------------------------- PROPERTY ADVANCE REPAYMENT TERMS - ------------------------------------------------------- --------------------------------------------------------- PREPARED BE INDEPENDENT VALUER. Prior to drawdown and VALUATIONS OF PROPERTY annually on the anniversary of this Agreement - ------------------------------------------------------- --------------------------------------------------------- -3-
F. POWER OF ATTORNEY ----------------- For the purposes of enabling the Lender to exercise more readily and beneficially the powers conferred on the Lender in this Agreement the Borrower hereby irrevocably and by way of security appoints the Lender (and any successor or assignee and its (arid their respective) directors and officers from time to time jointly and each of them severally to be the Attorney of the Borrower for the purpose of executing all such deeds and documents and performing all such acts and things in the name of the Borrower as may be expedient for the exercise by the Lender (any such successor or assignee) of any of its said powers or to secure the performance of any of the Borrowers obligations in this Agreement. G. SPECIAL TERMS (IF ANY) ---------------------- -4- IN WITNESS whereof the Lender and the Borrower have each executed this Agreement as a deed on the above dare and in the manner appearing below: SIGNED and DELIVERED as a DEED on the 28th day of june 2005 on behalf of ) ) LLOYDS TSB COMMERCIAL FINANCE LIMITED ) ) by: 1.** ______________________________________) duly appointed attorney ) ) 2.** ______________________________________) duly appointed attorney ) SIGNED and DELIVERED as a Deed BY XCEL POWER SYSTEMS LIMITED acting by** Carmine T. Oliva ) /S/ Carmine T. Oliva ------------------------------ ) --------------------------- Director ) Director ) And** G.M.J. Jeffries ) /S/ G.M.J. Jeffries ------------------------------ ) --------------------------- *Director/Company Secretary ) *Director/Company Secretary -5- EX-10.11 12 emrise_10qex10-11.txt EXHIBIT 10.11 LLOYDS TSB BUSINESS LOAN AGREEMENT We LLOYDS TSB BANK PLC (the "Bank") of PO Box 18436, 39 Threadneedle Street, EC2R 8PT offer you XCEL CORPORATION LIMITED (company registered number (969006) of Brunswick Road, Cobbs Wood, Ashford, Kent TN23 1EB a loan on the following terms and conditions SPECIFIC TERMS AND CONDITIONS THE LOAN The maximum amount of the loan (excluding any amounts of interest that will be added to the loan) shall be (pound)500,000. This amount is to be used for working capital purposes. The loan shall be borrowed in one amount on or before 31st August 2005 or such later date as the Bank may agree. You will not be entitled to borrow any amount that has not been borrowed by the agreed date. The proceeds of the loan will be credited to your current account no. 00450767. Unless the Bank agrees otherwise, the loan may not be borrowed until all the PRECONDITIONS set out below have been satisfied PRECONDITIONS Unless received by the Bank prior to the date on which this agreement is signed by the Bank, the Bank is to receive in form and substance acceptable to the Bank the security and other documents (if any) listed in the Security Schedule lo this agreement and the documents, evidence or other requirements of the preconditions (if any) set out in the Preconditions Schedule to this agreement. Any security received should be accompanied by such evidence as the Bank may reasonably require to confirm the value of such security and to confirm that such security is fully effective. FEES AND COSTS You shall pay any costs and expenses incurred by the Bank in assessing the loan, in the preparation of this agreement and of any amendment, waiver or consent letter at any time entered into, in the preparation, valuation, taking or release of any guarantee or t security at any time given in connection with this agreement and in connection with the revaluation of any such security from time to time. In particular the following charges shall be paid by you on demand by the Bunk. These charges are to be paid even if the loan is not borrowed. Security Costs (pound)530 (estimated) Estimated charges have been calculated on the basis of the Bank's experience with similar transactions. The actual amount charged to you may be more or less than the estimated figure. An arrangement fee of (pound)10,000 is also payable. This fee shall be paid to the Bank by you on the date the loan is borrowed. -1- As mentioned in clauses 3 & 6 of the GENERAL TERMS AND CONDITIONS, other costs may arise in connection with the loan or in connection with the repayment of the loan. INTEREST The rate of interest payable on the loan will be Base Rate plus 2.5% per annum, currently 7.25% per annum in total. Interest shall be added to the loan 1 month after the date of borrowing, at monthly intervals thereafter and on the date of final repayment of the loan. Interest is calculated on a daily basis on the amount of the loan from time to time outstanding. Interest for any particular period is calculated on the number of days in that period and a year of 365 days. If you fail to pay any amount payable under this agreement when due the rate of interest may be increased in accordance with clause 6.3 of the GENERAL TERMS AND CONDITIONS. REPAYMENT The loan is repayable in 36 consecutive monthly installments representing principal and interest commencing on the date which is 1 month after the date the loan is borrowed. The amount of these instalments will vary with changes in the interest rate and the number of days in the charging period. EARLY REPAYMENT The loan may be repaid early in accordance with clause 2 of the GENERAL TERMS AND CONDITIONS. FINANCIAL COVENANTS For as long as any moneys are owing to the Bank under this agreement or the Bank is under any obligation under this agreement you shall comply with the financial covenants set out below. These covenants will be tested against each financial statement. Your consolidated profit before taxation and interest paid and payable is not at any time to be less than 500% of the consolidated interest paid and payable (whether to the Bank or to any other person) for the period covered by the accounts. Your consolidated profit before taxation, depreciation, amortisation of goodwill and of other intangibles and interest paid and payable (but after dividends paid and payable) is not at any time to be less than 300% of the aggregate of the consolidated principal repayments and the consolidated interest paid and payable (whether to the Bank or to any other person) for the period covered by the accounts. -2- PERIOD OF OFFER This agreement shall come into effect only if the Bank receives from you and finds in order a signed copy of this agreement on or before 31st July 2005. GENERAL TERMS CONDITIONS USEFUL LOAN PROCEEDS 1.1 Unless the loan is only for working capital or general business purposes, the amount borrowed shall be held in trust for the Bank until used for the purpose stated in the SPECIFIC TERMS AND CONDITIONS. REPAYMENT 2.1 You will repay the loan on the dates and in the manner set out in the REPAYMENT section of the SPECIFIC TERMS AND CONDITIONS. 2.2 You may at any time after giving at least 5 business days' notice to the Bank make early repayment of all or any part of the loan together (in either case) with interest accrued to the date of payment. Each early repayment of part of the loan must be of at least (pound)5,000 (excluding accrued interest) and no amount repaid early may be borrowed again. If the loan is to be repaid in more than one amount, the Bank will decide how to apply the early repayment, either (a) by reducing subsequent repayments proportionately or (b) by applying the early repayment to then latest scheduled repayment instalments so as to reduce the terms of the loan. INCREASED COSTS AND CHANGES IN CIRCUMSTANCES 3.1 In running its business the Bank and any holding company of the Bank each has to comply with certain regulations and requirements laid down by regulatory and other official organisations or bodies as well as the law generally. The rate of interest quoted in the SPECIFIC TERMS AND CONDITIONS has been set in the light of how this affects the cost (to the Bank and any such holding company) of the Bank funding, agreeing to make and of making the loan available at the time the Bank signed this agreement. If, as a result of any new laws, regulations or requirements or any changes in existing ones, such cost is increased, the Bank may increase the rate of interest charged on the loan to compensate for that extra cost. 3.2 If at any tine the currency in which the loan is denominated is due to be or has been converted into the euro or any other currency as a result of a change in law or by agreement between the Bank and you, then: (a) the Bank may in its sole discretion determine and shall notify you in writing of the currency or currency unit in which amounts payable under this agreement shall be paid. After the expiry of 7 days -3- from the date of such notice all payments falling due under this agreement shall be made in such currency or currency unit, and (b) (i) the Bank may by giving you not less than 21 days' written notice change any of the terms applying to the loan but only to the extent that the Bank reasonably considers any such change necessary to take account of differences in market practice or to compensate for increases in costs to the Bank or to any holding company of the Bank arising from or related to such conversion or arising from or related to the introduction of or to the extension of monetary union within the European Union. Any such change shall amend the terms of this agreement upon expiry of such period of notice, and (ii) at any time within 21 days of receipt of the Bank's notice you may make early repayment of all (but not part) of the loan. Such repayment shall be in accordance with clauses 2 and 3.2(a) above. REPRESENTATIONS 4.1 You represent that: (a) all action required or necessary to authorise the execution of this agreement and the performance of your obligations under and in connection with this agreement has been taken and neither the execution of this agreement nor the performance of your obligations will constitute or result in any breach of any agreement, law, requirement or regulation, (b) no material litigation, administrative or judicial proceedings are presently pending or threatened against you or any of your subsidiaries, (c) there has been no material adverse change in your financial condition or that of any of your subsidiaries since the date of the financial statement received by the Bank prior to the date on which this agreement is signed by the Bank, and (d) no Event of Default (as described in clause (6.1 below) has occurred and is continuing and no circumstance has occurred which, with the giving of notice or the passing of time, could become or cause an Event of Default. 4.2 You shall be deemed to repeat the above representations on each day (with reference to the facts and circumstances then existing) prior to borrowing the loan and thereafter until all amounts payable to the Bank under this agreement have been paid. UNDERTAKINGS Prior to borrowing the loan and thereafter until all amounts payable to the Bank under this agreement have been paid: -4- 5.1 neither you nor any of your subsidiaries shall: (a) without the Bank's consent create or allow to be in place any mortgage, charge or other security interest or encumbrance over the whole or any part of your or their business or any of the property, income or other assets of your or their business or enter into any transaction which in the Bank's opinion has a similar effect, or factor or assign any debits, (b) part with, sell, transfer, lease or otherwise dispose of (or attempt or agree to do any such thing) the whole or any material part or your or any of your Subsidiary's undertaking, property, revenue or assets (either by a single transaction or a number of transactions whether related or not) other than for full value on an arm's length basis (save that no such parting with, sale, transfer, lease or other disposal may be made or entered into (i) if it would breach the terms of any security document given lo the Bank, or (ii) in respect of any undertaking, property, revenue or asset over which the Bank then has a fixed charge or fixed security interest), or (c) change the nature or your or their business as it is now conducted, 5.2 you shall promptly provide the Bank with copies of any financial information that the Bank may from time to time reasonably request, including but not limited to: (a) copies of your financial statement within 270 days of the end of each financial year, and (b) copies of your periodic management accounts at such intervals as the Bank may require in a form acceptable to the Bank within 45 days of the end of the period to which they relate. The Bank may at its option require such management accounts to incorporate an age-analysis of debtors, a schedule of all tenancies (if any) of any properly held by the Bank as security at the date of the accounts, and/or a breakdown of stock in trade, 5.3 you and each or your subsidiaries shall maintain with reputable underwriters or insurance companies adequate insurance on and over your respective business and assets, such insurance to be against such risks and to the extent usual for persons carrying on a business such as that carried on by you or, as the case may be, by the relevant subsidiary and, from time to time upon the request of the Bank, you shall furnish the Bank with evidence of such insurance, 5.4 in respect of any pension policy or life policy held by or charged to the Bunk, you agree to ensure that the premiums are paid when due and, upon request from the Bank at any time, promptly to provide the Bank with evidence that payment has been made. In the case of any such pension policy you also agree: (a) upon request by the Bank at any time, promptly to provide the Bank with evidence that the commutation proceeds will be paid to the Bank, -5- (b) except to the extent that you have and apply other funds in repayment of the loan, to take the maximum benefit of the pension policy by way of commutation and its apply that benefit in repayment of the loan when due, and (e) not to agree to any arrangement that would reduce the commutation amount of the pension policy nor arrange for any transfer to be made from the pension policy, 5.5 if the purpose of the loan (as stated in the SPECIFIC TERMS AND CONDITIONS) involves building works or works enabling building works affecting any properly, you agree that promptly upon request by the Blank at any time you shall: (a) provide the Bank with evidence in a form acceptable to the Bank that you have obtained all necessary permissions and approvals for the proposed works and have entered into (in a form of contract acceptable to the Bank) all contracts necessary for the due completion of the proposed works. You will at all times ensure that any other party to any such contract (whether or not such contract has been provided to the Bank) complies with the contract in accordance with its terms. You shall not, without the consent of the Bank, agree to any modification in the terms of any contract which has been provided to the Bank, or terminate any such contract or stop work on any proposed works prior to completion of the works, and (b) provide to the Bank confirmations (each in a form and from a party acceptable to the Bank) of all expenditure on the works. The Bank may refuse to permit the borrowing of the loan if the amount to be borrowed under this agreement in respect of the works exceeds the total expenditure detailed in the confirmations, and 5.6 you agree to reduce the loan (in accordance with clause 2 above) or to provide the Bank with additional security acceptable to the Bank if the ratio of the loan to the value of the security given to the Bank is at any time higher than that applicable on the date this agreement was signed by the Bank and agree to provide such evidence as the Bank may from time to time require to confirm the value of such security and to confirm that the security remains fully effective. If the loan is to be repaid in more than one amount, the Bank will decide how to apply any early repayment, either (a) by reducing subsequent repayments proportionately or (b) by applying the early repayment to the then latest scheduled repayment instalment(s) so as to reduce the term or the loan. DEFAULT AND TERMINATION 6.1 The events listed in (a) to (j) below are called "EVENTS OF DEFAULT". As soon as an Event of Default happens or at any time thereafter, by giving notice to you, the Bank may cancel any obligations it has to lend money to you and may also make -6- the loan become repayable on demand. When the loan is repayable on demand, you must repay the loan to the Bank together with all interest which has accrued on the loan and any other amounts owing under this agreement as soon as the Bank requests you to pay these amounts. The Bank may do this at the time the loan becomes repayable on demand or at any later time. EVENTS OF DEFAULT (a) you fail to pay when due any indebtedness owed by you to the Bank or fail to comply with any other obligation or undertaking to the Bank, (b) you fail to pay when due any indebtedness owed by you to another creditor or any of your creditors changes (or obtains the right to change) the original date on which that indebtedness is or was due to be paid to an earlier date us a result of your failure to comply with obligations in connection with that indebtedness, (c) any representation or statement made by you to the Bank, whether or not in connection with this agreement, proves in have been incorrect or inaccurate when made or deemed made, (d) any person with a legal claim takes possession or a receiver, administrator, custodian, trustee, liquidator or similar official is appointed of the whole or any part of your business or of any of the assets of your business or an administration application is presented or made for the making of an administration order or a notice of intention to appoint an administrator is issued by you or your directors or by the holder of a qualifying floating charge or notice of appointment of an administrator is filed by any person with the court or a judgment, decree or diligence is made or granted against you, (e) proceedings are commenced or a petition is presented or an order is made or a resolution is passed for your winding up or you are or become insolvent or you stop or threaten to stop payment of your debts generally or you are deemed by law unable to pay your debts or you or your directors convene or become obliged to convene a meeting of shareholders or creditors with a view to winding up or an application is made in connection with a moratorium or a proposal to creditors for a voluntary arrangement by you or you take any action (including entering negotiations) with a view to readjustment, rescheduling, forgiveness or deferral of any part of your indebtedness, (f) you cease or threaten to cease to carry on your business in the normal course or fail to maintain or breach any franchise, licence or right necessary to conduct your business or breach any legislation relating to your business, including but not limited to any applicable environmental protection laws, -7- (g) the persons who now control you cease to have such control, (h) any guarantee, other security or other document or arrangement relied upon by the Bank in connection with the loan ceases to be continuing or ceases to remain fully effective or notice of discontinuance is received by the Bank or if the Bank reasonably believes that the effectiveness of any such document or arrangement . is in doubt or if any provision of such document or arrangement is not complied with for any reason or any favourable tax treatment afforded to any pension policy or to any life policy held by or charged to the Bank ceases to be available, (i) any of the above events occur in relation to any parent or subsidiary or any guarantor of or other provider of security for the loan or, in the case of any individual that provides any guarantee or other security for the loan, a petition is presented for a bankruptcy or sequestration order against any such individual or any such individual dies or becomes incapable of managing his or her affairs by reason of mental disorder, or any action is taken in any jurisdiction which is similar or analogous to any of the above events in respect of you or any of the above mentioned panties, or (j) you fail or have failed to disclose to the Bank any important information that is relevant to the loan or the security required or you undertake or are subject to any action or occurrence which the Bank reasonably believes could place at risk the payment of any amount owing to the Bank. 6.2 If any Event of Default happens or anything happens that might lead to an Event of Default, you shall inform the Bank immediately. 6.3 If any amount payable in respect of this agreement is not paid when due (including any amount payable under this clause 6, you shall pay interest on that amount at the default rate from the date on which the amount was due until it is paid to the Bank. Interest, if unpaid, shall be added to the amount in default at monthly intervals. The default rate shall be the rate determined by the Bank to be 3% per annum higher than the rate of interest specified in the SPECIFIC TERMS AND CONDITIONS that would normally apply. 6.4 You shall indemnify the Bank against any costs incurred or losses reasonably sustained by the Bank as the result of any Event of Default. 6.5 You shall also pay any costs and expenses reasonably incurred by the Bank in enforcing or perfecting any security for the loan and in enforcing or preserving its rights under this agreement. OTHER 7.1 This agreement shall be construed mind have effect in accordance with English law and is subject to the jurisdiction of the English Courts. The Bank may take action against you in any other jurisdiction where proceedings may be lawfully commenced. -8- 7.2 No delay or omission by the Bank in exercising any of its rights hereunder shall operate or be construed as a waiver, nor shall any single or partial exercise of any such right prevent any other or further exercise thereof or the exercise of any other right. 7.3 If the loan is to be borrowed, or if any payment becomes due from you, on a day which is not a business day then the amount concerned will be borrowed or, as the case may be, will become payable on the next business day. 7.4 The Bank may use any credit balance there may be on any of your accounts towards payment or any amounts owed by you to the Bank under this agreement without notifying you beforehand, whether such credit balances are in sterling or any other currency or are deposited for fixed or determinable periods. 7.5 Unless otherwise agreed by the Bank you shall at all times during the term of this agreement keep a current account (or other account for the purposes of meeting all payments due to the Bank under and in connection with this agreement) with the Bank and all amounts from time to time due lo the Bank under this agreement may be debited to that account. You shall keep enough money in the account (or ensure that there are sufficient funds available within any agreed overdraft.) to meet all such payments as they become due. 7.6 Any security given to the Bank (whether given before the date on which this agreement is signed by the Bank or at any time in the future and whether or not. specified in this agreement) shall, unless otherwise agreed by the Bank. be security not only for the loan but also for all other moneys and liabilities whether certain or contingent at any time due, owing or incurred by you to the Bunk. 7.7 Members of the Lloyds TSB group from time to time may transfer information regarding you among themselves, to their auditors for the time being and to any potential assignee or transferee of the loan. Information may not be transferred further or otherwise (including for marketing purposes) without prior written consent unless such information is in the public domain or unless the Bunk is required by law so to do. 7.8 This agreement and all communications from you to the Bank in connection with this agreement and the loan (all of which are to be sent in writing to the Bank at the address given at the heading of this agreement or to such other address as the Bank may from time to time advise) shall be signed on your behalf either in accordance with the mandate given by you to the Bank, or if requested by the Bank, in accordance with a specific resolution of your Board of Directors. All communications (whether given by you or by the Bank) relating to loan and any change to this agreement shall he in English. -9- 7.9 This agreement is for the benefit of the contracting parties only and shall not confer any benefit on or be enforceable by a third party. 7.10 Any change to this agreement that is not permitted in this agreement must be made in writing and be signed by the contracting parties. 7.12 The SPECIFIC TERMS AND CONDITIONS and GENERAL TERMS AND CONDITIONS shall be read and construed as one agreement. 7.12 References in this agreement to: THE BANK includes its successors and assigns. BANK RATE means the Bank's Base Rate from time to time. This rate will be displayed in branches of the Bank and may be varied (either up or down) by the Bunk at any time. a BUSINESS DAY means a day other than a Saturday or a Sunday on which banks are open for normal business in England and Wales. CONTROL shall have the meaning given to it in Section 840 of the Income and Corporation Taxes Act 1988 or any amendment to or restatement of that Act for the time being in force. FINANCIAL STATEMENT means any particular time the latest consolidated balance sheet and profit and loss account (being audited or signed by an independent accountant if so required by law or by the Bank at any time and being prepared on the some basis, containing a similar level of detail and in accordance with the same accounting principles as, and for an accounting reference period consistent with, the latest such balance sheet and profit and loss account received by the Bank prior to the date on which this agreement is signed by the Bank) of you and your subsidiaries together with the notes to both. LOAN means, at any particular time, the total amount which may he borrowed by you under this agreement or, it appropriate, the total amount which has been debited to the loan account and remains outstanding at such time. The loan may, at any time, include any interest, costs and charges added to the loon account in accordance with this agreement. MONTH means a calendar month. PARENT and SUBSIDIARY shall have respectively the meaning given to parent undertaking and subsidiary undertaking in Section 258 of the Companies Act l985 or any amendment to or restatement of that Act for the time being in force. During any period in which you do not have a SUBSIDIARY, all references to your subsidiaries shall be ignored and the relevant text read and construed accordingly. -10- 7.13 For the purposes of the financial covenants: PROFIT BEFORE TAXATION shall include items of an exceptional nature and shall exclude items of an extraordinary nature unless taken into account at the Bank's discretion for the purpose of any relevant calculation. PRECONDITIONS SCHEDULE No preconditions required. SECURITY SCHEDULE (1) an all moneys guarantee from Emrise Corporation for a principal amount of (pound)5000,000 plus interest and other costs as detailed in the guarantee and in respect of your debts and liabilities to the Bank, (2) admission of Pascall Electronics Limited to the omnibus guarantee and letter of set off, (3) an unlimited debenture from Pascall Electronics Limited, (4) an assignment of the proceeds a life insurance policy of not less than (pound)500,000 which is to be taken out in respect of Graham Jefferies with assurers acceptable to the Bank, (5) a deed of postponement from Emrise Corporation in respect of a loan of US$5,000,000 to you, (6) an unlimited debenture dated 7th August 1986 from Xcel Corporation Limited, (7) an omnibus guarantee and set off agreement dated 4th April 2000 among the Bank, Xcel Corporation Limited, Xcel Power Systems Limited, Belix Wound Components Limited, (8) an unlimited all moneys guarantee dated 18th March 1998 from Xcel Power Systems Limited in respect of your debt, and liabilities to the Bank, and (9) a letter of comfort dated 14th December 1987 from XCEL Corporation Limited. -11- You acknowledge having received, read and understood a copy of this agreement and, in consideration of the Bank agreeing to grant the loan, agree to the SPECIFIC TERMS AND CONDITIONS and to the GENERAL TERMS AND CONDITIONS set out above (together the "agreement"). You also acknowledge that this agreement comprises all the terms currently applicable to the loan and that no representation, warranty or undertaking has been made by the Bank in connection with the loan which is not set out in this agreement and, in deciding to enter into this agreement and to proceed with any transaction or project for which the loan has been sought, you recognise that the Bank has no duty to give you advice and you have not received or relied upon any advice given by the Bank. Signed for and on behalf of Xcel Corporation by /S/ G.M.J. Jeffries (signature) /S/ Carmine T. Oliva (signature) - ------------------------------------ ---------------------------------------- *Director/Authorised Signatory/ *Director/Authorised Signatory/Secretary G.M.J. Jeffries (signature) Carmine T. Oliva (signature) - ------------------------------------ ---------------------------------------- Pursuant to a Resolution of the Board dated # -------------------------------------------- Date June 30, 2005 ---------------------- Signed for and on behalf of the Bank by # This will be either the date of the account - -------------------------------------------- mandate if an appropriate resolution is Manager/Authorised Signatory/ contained herein, or the date of a specific resolution passed in respect of this loan Date June 30, 2005 --------------------------------------- * Delete as appropriate IMPORTANT NOTE: - --------------- THIS AGREEMENT CREATES LEGAL OBLIGATIONS. BEFORE SIGNING YOU MAY WISH TO TAKE INDEPENDENT ADVICE. - -------------------------------------------------------------------------------------------------- Lloyds TSB Bank plc Registered Office 25 Graham Street, London EC2V 7HN. Registered in England Number 2065 Authorized and regulated by the Financial Services Authority and a signatory to the Banking Codes. -12-
EX-10.12 13 emrise_10qex10-12.txt EXHIBIT 10.12 GUARANTEE & INDEMNITY BETWEEN XCEL POWER SYSTEMS LIMITED PASCALL ELECTRONICS LIMITED PASCALL ELECTRONIC (HOLDINGS) LIMITED BELIX WOUND COMPONENTS LIMITED AND LLOYDS TSB COMMERCIAL FINANCE LIMITED GUARANTEE AND INDEMNITY ----------------------- To LLOYDS TSB Commercial Finance Limited Boston House The Little Green Richmond Surrey TW9 1QE 1. We, the Guarantors and Indemnifiers, whose names appear in the schedule hereto have agreed to give you as contained in the succeeding clauses hereof, as many separate and independent guarantees and indemnities as there are parties hereto (other than you) whereby the liabilities to you of each and every one of us are guaranteed by the others of us and whereby each one of us indemnifies you against any losses (as defined herein) arising from transactions between you and any other of us. 2. Accordingly in this deed except where the context otherwise requires: (1) words implying the singular shall include the plural and words implying any of the three genders shall include either of the other two; (2) the expression "Principal" shall mean and apply to any one of us for whose liabilities any such guarantee is given and in respect of whose transactions with you any such indemnity is given; (3) the following expressions shall have the meanings assigned to them below: "Agreement" any agreement between the Principal and you for the factoring, discounting and/or financing of book debts and/or receivables, "Indulgence" any indulgence, agreement not to sue or release of any charge lien or other security or any part thereof, "Losses" losses, costs, damages, claims, interest and expenses and (4) any other expression used in the Agreement shall have the meaning attributed to it therein. 3. We hereby guarantee: (i) the due performance of all the obligations of the Principal under the Agreement and any other agreement and (ii) upon your demand in writing the due payment of all amounts payable or which may at any time hereafter become payable to you by the Principal whether arising under the Agreement or otherwise. 4. Without prejudice to the provisions of paragraph 3 hereof, we hereby agree to indemnify you and hold you harmless against all losses you may suffer or incur by reason of any failure of the Principal to comply with any term of the Agreement or of any other agreement between the Principal and you. 5. The guarantee given herein shall be a continuing guarantee, shall apply to the ultimate amount payable by the Principal and shall not be discharged by any intermediate payment or satisfaction by the Principal. 6. Our liability under this guarantee and indemnity shall not be affected by: (i) any time or indulgence granted by you to the Principal or any other person, (ii) any compromise made by you with the Principal or any other person, (iii) any variation in the Agreement or in any other agreement between the Principal and you (whether or not our liability to you may be increased thereby) or by any defect therein or in its execution, or (iv) any change in the constitution of the Principal. and we shall be liable hereunder in every respect as principal debtors. 7. For the purpose of determining our liability under this guarantee and indemnity, which shall be additional to and not in substitution for any other security taken or to be taken by you in respect of the Principal's obligations to you, we shall be bound by any acknowledgement or admission by the Principal and by any judgment in your favour against the Principal. For the purpose of determining the amount of any losses we shall accept and be bound by a certificate signed by your company secretary in arriving at the amount payable by the Principal to you you shall be entitled to take into account all liabilities (whether actual or contingent) and to make a reasonable estimate of any contingent liability. 8. Any notice or demand on any of us shall be validly given if handed to any one of its officials or if delivered to or sent by post to its address stated herein or its registered office or its address last known to you and if sent by post shall be deemed to be received within seventy-two hours of posting. 9. We shall be liable to pay you interest calculated from day to day and compounded monthly at a rate equivalent to the discount charge for which provision is made in the Agreement on all sums demanded by you hereunder from the date of your demand to the date when payment is received by you both before and after any judgment. -2- 10. Each one of us assigns to you, as security for the due performance of our obligations hereunder any right of proof, in consequence of any winding up of the Principal, in respect of any indebtedness of the Principal to that one of us; and each one of us irrevocably appoints you and your directors and secretary for the time being jointly and each one of you and them severally to be his attorney to execute in his name such documents and to do such other things as you may consider requisite to effect collection of any dividend or to vote at any meeting in respect of such right of proof. 11. Our liability hereunder shall be joint and several and you may release, grant indulgence to or compromise with any one of us without affecting the obligations of the other or others. The liability of any one of us hereunder shall not be affected by: (i) any defect in the execution of this deed by any other of us, (ii) any defect in any other guarantee or indemnity or other security held by you in respect of the Principal's obligations to you or in the execution thereof or (iii) any notice of termination hereof by any other of us. You may at your discretion (but shall not be obliged to) treat any notice by any one of us as notice by all of us. 12. Any monies received by you by virtue of or in connection with this guarantee and indemnity may be placed by you to the credit of a suspense account with a view to your preserving your right to prove for the whole of your claim against the Principal in the event of its winding up. 13. This guarantee and indemnity shall remain in full force and effect until the termination of the Agreement and the discharge in full of all the Principal's obligations thereunder and after such full discharge until the expiry of not less than three months notice of termination delivered by any one of us to your registered office but such termination shall not affect our liability as regards any liability of the Principal existing or known to be contingent before the expiry of the period of the said notice with effect from the date of the receipt of' it by you. 14. This guarantee and indemnity shall be construed and take effect according to English law and we accept the non-exclusive jurisdiction of the English Courts. If any provision hereof shall he held invalid or unenforceable no other provisions hereof shall be affected and all such other provisions shall remain in full force and effect. -3- THE SCHEDULE Guarantors and Indemnifiers: (1) Xcel Power Systems Limited (name) Brunswick Road, Cobbs Wood, Ashford, Kent (address) TN23 1EB England & Wales (country or registration) 00575679 (number) (2) Pascall Electronics Limited (name) Brunswick Road, Cobbs Wood, Ashford, Kent (address) TN23 1EH England & Wales (country of registration) 01316674 (number) (3) Pascall Electronic (Holdings) Limited (name) Brunswick Road, Cobbs Wood, Ashford, Kent (address) TN23 1EH England & Wales (country of registration) 01756274 (number) (4) Belix Wound Components Limited (name) Brunswick Road, Cobbs Wood, Ashford, Kent (address) TN23 1EH England & Wales (country of registration) 01537636 (number) This document has been executed as a deed by or on behalf of each of us to indicate our binding agreement to its terms. SIGNED and DELIVERED as a deed on ) 21st day of June 2005 by you ) XCEL POWER SYSTEMS LIMITED acting by ) ) (a Director ) and Signature of Director ) (a Director / its Company Secretary ) Signature of Director/ ) Company Secretary -4- SIGNED and DELIVERED as a deed on ) day of by you ) PASCALL ELECTRONICS LIMITED acting by ) (a Director) and Signature of Director ) (a Director / its Company Secretary ) Signature of Director/ ) Company Secretary SIGNED and DELIVERED as a deed on ) 21st day of June 2005 by you ) PASCALL ELECTRONIC (HOLDINGS) LIMITED acting by ) (a Director) and Signature of Director ) (a Director / its Company Secretary ) Signature of Director/ ) Company Secretary SIGNED and DELIVERED us it deed on ) 21st day of June 2005 by you ) BELIX WOUND COMPONENTS LIMITED acting by ) (a Director) and Signature of Director ) (a Director /its Company Secretary ) Signature of Director/ ) Company Secretary -5- EX-10.13 14 emrise_10qex10-13.txt EXHIBIT 10.13 DEED OF GUARANTEE AND INDEMNITY BETWEEN XCEL CORPORATION LIMITED AND LLOYDS TSB COMMERCIAL FINANCE LIMITED THIS DEED OF GUARANTEE; AND INDEMNITY is made on the date specified in the Schedule to this Deed BETWEEN: (1) "LTSBCF" Lloyds TSB Commercial Finance Limited, Boston House, The Little Green, Richmond, Surrey TW9 1QE AND (2) "THE GUARANTOR" The Corporation executing this Deed W I T N E S S that in consideration of LTSBCF at the request of the Guarantor entering into or continuing with an agreement with the Supplier named in the Schedule to this Deed for the Purchase of Debts ("the Agreement") and/or approving any Debt thereunder THE GUARANTOR jointly and severally with any other person who enters into a Guarantee and Indemnity with LTSBCF in respect of the Supplier's obligations hereby: 1. AGREES to pay LTSBCF on demand all sums now or at any future date due to LTSBCF from the Supplier. 2. GUARANTEES the due performance of all other obligations of the Supplier to LTSBCF however arising. 3. INDEMNIFIES LTSBCF against all actions claims demands liabilities losses costs interest and damages which LTSBCF may sustain or incur as a result of the insolvency of the Supplier or of any breach or non observance or non performance by the Supplier of any of its obligations to LTSBCF. 4. AGREES THAT: (i) Variations may from time to time be made to the Agreement without the consent of or notice to the Guarantor even though the Guarantor's liability to LTSBCF may be increased. (ii) The giving or time or the failure by LTSBCF to enforce any remedies against the Supplier or any customer or any other guarantor shall in no way affect the Guarantor's liability to LTSBCF. (iii) The terms of this guarantee and indemnity shall constitute a continuing security notwithstanding the fulfilment from time to time of any of the obligations of the Supplier to LTSBCF and shall remain in force despite any disability on the Guarantor's part until 12 months after payment is made by the Supplier of all sums from time to time due to LTSBCF however arising. (iv) Any acknowledgement or admission by or any Judgement obtained by LTSBCF against the Supplier shall be binding on the Guarantor. (v) The Guarantor's obligations shall continue even though LTSBCF may at any time relinquish in whole or in part any charge lien or security taken from the Supplier or any customer or any other guarantor. (vi) Until all sums due hereunder have been paid to LTSBCF the Guarantor shall not be entitled to the benefit of nor claim to be subrogated to any charge lien or security held by LTSBCF for the due performance of the Supplier's obligations nor shall LTSBCF be under any obligation to enforce them for the Guarantor's benefit. (vii) Any sums due hereunder to LTSBCF shall from the due date for payment bear interest at the same rate as the Discount Charge referred to in the Agreement. (viii) In arriving at the amount due to LTSBCF by the Supplier LTSBCF shall be entitled to take into account all liabilities whether actual or contingent and to make a reasonable estimate thereof. 5. DECLARES THAT this Guarantee and Indemnity: (i) Shall be governed by English Law. (ii) Shall be binding upon the Guarantor's Executors or Administrators or upon any Committee Receiver or other person acting on the Guarantor's behalf. (iii) May be assigned by LTSBCF. (iv) Shall be in addition to and not in substitution for any other security taken by LTSBCF for the Supplier's obligation. (v) Shall not be discharged by any defect in the Agreement or any other guarantee or indemnity or in their respective executions. (vi) Shall remain binding notwithstanding any change in the constitution of the Supplier or the death or legal disability or any other guarantor to LTSBCF of the Suppliers' obligations. 6. ACCEPTS THAT any notice or demand by LTSBCF shall be deemed to be validly served or made if sent or delivered to the Guarantor's address stated below or to the registered office of the Guarantor (if applicable) or to any other address at which the Guarantor may carry out business and if sent by post shall be conclusively deemed to have been delivered to the Guarantor within 72 hours of the time of posting. 7. AGREES THAT monies received by LTSBCF by virtue of or in connection with the guarantee and indemnity may be placed to the credit of a suspense account with a view to preserving the right of LTSBCF to prove for the whole of its claim against the Supplier in any proceedings in or analogous to bankruptcy liquidation receivership composition or arrangement. -2- 8. CONFIRMS THAT if any provision hereof shall be held invalid or unenforceable it is hereby declared and confirmed that such event shall not effect any other provisions all of which shall remain in full force and effect. Where this Deed is executed by more than one Guarantor and such execution shall be defective this shall in no way affect the liability of the remaining parties. 9. AGREES THAT definitions used in the Agreement shall bear the same meaning in this Deed. 10. AGREES THAT this Guarantee and Indemnity shall be construed according to English Law and the Guarantor accepts the non exclusive jurisdiction of the English Court. IN WITNESS thereof the Guarantor has caused this Deed to be sealed on the date specified in the Schedule hereto. -3- THE SCHEDULE Date of Execution of this Deed Name of Supplier Xcel Power Systems Limited Name of Guarantor Xcel Corporation Limited Registered Offices Brunswick Road of Guarantor Cobbs Wood Ashford Kent TN23 1EH Company Registration Number 01969006 in England & Wales of Guarantor SIGNED and DELIVERED as a deed on 21 ) ( day of June 2005 by you ) ) Signature of Director XCEL CORPORATION LIMITED acting by ** ) (a Director) and ** ) ) (a *Director / its Company Secretary ) Signature of *Director/ ) Company Secretary -4- EX-10.14 15 emrise_10qex10-14.txt EXHIBIT 10.14 DEED OF GUARANTEE AND INDEMNITY BETWEEN PASCALL ELECTRONICS LIMITED AND LLOYDS TSB COMMERCIAL FINANCE LIMITED THIS DEED OF GUARANTEE AND INDEMNITY is made on the date specified in the Schedule to this Deed BETWEEN: (1) "LTSBCF" Lloyds TSB Commercial Finance Limited, Boston House, The Little Green, Richmond, Surrey TW9 1QE AND (2) "THE GUARANTOR" The Corporation executing this Deed W I T N E S S that in consideration of LTSBCF at the request of the Guarantor entering into or continuing with an agreement with the Supplier named in the Schedule to this Deed for the Purchase of Debts ("the Agreement") and/or approving any Debt thereunder THE GUARANTOR jointly and severally with any other person who enters into a Guarantee and Indemnity with LTSBCF in respect of the Supplier's obligations hereby: 1. AGREES to pay LTSBCF on demand all sums now or at any future date due to LTSBCF from the Supplier. 2. GUARANTEES the due performance of all other obligations of the Supplier to LTSBCF however arising. 3. INDEMNIFIES LTSBCF against all actions claims demands liabilities losses costs interest and damages which LTSBCF may sustain or incur as a result of the insolvency of the Supplier or of any breach or non observance or non performance by the Supplier of any of its obligations to LTSBCF. 4. AGREES THAT: (i) Variations may from time to time be made to the Agreement without the consent of or notice to the Guarantor even though the Guarantor's liability to LTSBCF may be increased. (ii) The giving of time or the failure by LTSBCF to enforce any remedies against the Supplier or any customer or any other guarantor shall in no way affect the Guarantor's liability to LTSBCF. (iii) The terms of guarantee and indemnity shall constitute a continuing security notwithstanding the fulfilment from time to time of any of the obligations of the Supplier to LTSBCF and shall remain in force despite any disability on the Guarantor's part until 12 months after payment is made by the Supplier of all sums from time to time due to LTSBCF however arising. (iv) Any acknowledgment or admission by or any Judgment obtained by LTSBCF against the Supplier shall be binding on the Guarantor. (v) The Guarantor's obligations shall continue even though LTSBCF may at any time relinquish in whole or in part any charge lien or security taken from the Supplier or any customer or any other guarantor. (vi) Until all sums due hereunder have been paid to LTSBCF the Guarantor shall not be entitled to the benefit of nor claim to be subrogated to any charge lien or security held by LTSBCF for the due performance of the Supplier's obligations nor shall LTSBCF be under any obligation to enforce them for the Guarantor's benefit. (vii) Any sums due hereunder to LTSBCF shall from the due date for payment bear interest at the same rate as the Discount Charge referred to in the Agreement. (viii) In arriving at the amount due to LTSBCF by the Supplier LTSBCF shall be entitled to take into account all liabilities whether actual or contingent and to make a reasonable estimate thereof. 5. DECLARES THAT this Guarantee and Indemnity: (i) Shall be governed by English Law. (ii) Shall be binding upon the Guarantor's Executors or Administrators or upon any Committee Receiver or other person acting on the Guarantor's behalf. (iii) May be assigned by LTSBCF. (iv) Shall not be discharged by any defect in the Agreement or any other guarantee or indemnity or in their respective executions. (vi) Shall remain binding notwithstanding any change in the constitution of the Supplier or the death or legal disability of any other guarantor to LTSBCF of the Supplier's obligations. 6. ACCEPTS THAT any notice or demand by LTSBCF shall be deemed to be validly served or made if sent or delivered to the Guarantor's address stated below or to the registered office of the Guarantor (if applicable) or to any other address at which the Guarantor may carry on business and if sent by post shall be conclusively deemed to have been delivered to the Guarantor within 72 hours of the time of posting. 7. AGREES THAT monies received by LTSBCF by virtue of or in connection with the guarantee and indemnity may be placed to the credit of a suspense account with a view to preserving the right of LTSBCF to provide for the whole or its claim against the Supplier on any proceedings in or analogous to bankruptcy liquidation receivership composition or arrangement. -2- 8. CONFIRMS THAT if any provision hereof shall be held invalid or unenforceable it is hereby declared and confirmed that such event shall not effect any other provisions all of which shall remain in full force and effect. Where this Deed is executed by more than one Guarantor and such execution shall be defective this shall in no way affect the liability of the remaining parties. 9. AGREES THAT definitions used in the Agreement shall bear the same meaning in this Deed. 10. AGREES THAT this Guarantee and Indemnity shall be construed according to English Law and the Guarantor accepts the non exclusive jurisdiction of the English Court. IN WITNESS thereof the Guarantor has caused this Deed to be sealed on the date specified in the Schedule hereto. -3- THE SCHEDULE Date of Execution of this Deed 21, June 2005 Name of Supplier Xcel Power Systems Limited Name of Guarantor Pascall Electronics Limited Registered Offices Brunswick Road of Guarantor Cobbs Wood Ashford Kent TN23 1EH Company Registration Number 01316674 in England & Wales of Guarantor SIGNED and DELIVERED as a deed on ) /S/ L.E. Down 21 day of June 2005 by you ) ) Signature of Director Pascall Electronics Limited acting by ** (a Director) and ** ) /S/ G.M.J. Jefferies (a *Director / its Company Secretary ) Signature of Director/ ) Company Secretary Key * Delete as Applicable ** Insert Full Names -4- EX-10.15 16 emrise_10qex10-15.txt EXHIBIT 10.15 DEED OF GUARANTEE AND INDEMNITY BETWEEN XCEL CORPORATION LIMITED AND LLOYDS TSB COMMERCIAL FINANCE LIMITED THIS DEED OF GUARANTEE; AND INDEMNITY is made on the date specified in the Schedule to this Deed BETWEEN: (1) "LTSBCF" Lloyds TSB Commercial Finance Limited, Boston House, The Little Green, Richmond, Surrey TW9 1QE AND (2) "THE GUARANTOR" The Corporation executing this Deed W I T N E S S that in consideration of LTSBCF at the request of the Guarantor entering into or continuing with an agreement with the Supplier named in the Schedule to this Deed for the Purchase of Debts ("the Agreement") and/or approving any Debt thereunder THE GUARANTOR jointly and severally with any other person who enters into a Guarantee and Indemnity with LTSBCF in respect of the Supplier's obligations hereby: 1. AGREES to pay LTSBCF on demand all sums now or at any future date due to LTSBCF from the Supplier. 2. GUARANTEES the due performance of all other obligations of the Supplier to LTSBCF however arising. 3. INDEMNIFIES LTSBCF against all actions claims demands liabilities losses costs interest and damages which LTSBCF may sustain or incur as a result of the insolvency of the Supplier or of any breach or non observance or non performance by the Supplier of any of its obligations to LTSBCF. 4. AGREES THAT: (i) Variations may from time to time be made to the Agreement without the consent of or notice to the Guarantor even though the Guarantor's liability to LTSBCF may be increased. (ii) The giving of time or the failure by LTSBCF to enforce any remedies against the Supplier or any customer or any other guarantor shall in no way affect the Guarantor's liability to LTSBCF. (iii) The terms of this guarantee and indemnity shall constitute a continuing security notwithstanding the fulfilment from time to time of any of the obligations of the Supplier to LTSBCF and shall remain in force despite any disability on the Guarantor's part until 12 months after payment is made by the Supplier of all sums from time to time due to LTSBCF however arising. (iv) Any acknowledgement or admission by or any Judgement obtained by LTSBCF against the Supplier shall be binding on the Guarantor. (v) The Guarantor's obligations shall continue even though LTSBCF may at any time relinquish in whole or in part any charge lien or security taken from the Supplier or any customer or any other guarantor. (vi) Until all sums due hereunder have been paid to LTSBCF the Guarantor shall not be entitled to the benefit of nor claim to be subrogated to any charge lien or security held by LTSBCF for the due performance of the Supplier's obligations nor shall LTSBCF be under any obligation to enforce them for the Guarantor's benefit. (vii) Any sums due hereunder to LTSBCF shall from the due date for payment bear interest at the same rate as the Discount Charge referred to in the Agreement. (viii) In arriving at the amount due to LTSBCF by the Supplier LTSBCF shall be entitled to take into account all liabilities whether actual or contingent and to make a reasonable estimate thereof. 5. DECLARES THAT this Guarantee and Indemnity: (i) Shall be governed by English Law. (ii) Shall be binding upon the Guarantor's Executors or Administrators or upon any Committee Receiver or other person acting on the Guarantor's behalf. (iii) May be assigned by LTSBCF. (iv) Shall be in addition to and not in substitution for any other security taken by LTSBCF for the Supplier's obligation. (v) Shall not be discharged by any defect in the Agreement or any other guarantee or indemnity or in their respective executions. (vi) Shall remain binding notwithstanding any change in the constitution of the Supplier or the death or legal disability of any other guarantor to LTSBCF of the Suppliers' obligations. -2- 6. ACCEPTS THAT any notice or demand by LTSBCF shall be deemed to be validly served or made if sent or delivered to the Guarantor's address stated below or to the registered office of the Guarantor (if applicable) or to any other address at which the Guarantor may carry out business and if sent by post shall be conclusively deemed to have been delivered to the Guarantor within 72 hours of the time of posting. 7. AGREES THAT monies received by LTSBCF by virtue of or in connection with the guarantee and indemnity may be placed to the credit of a suspense account with a view to preserving the right of LTSBCF to prove for the whole of its claim against the Supplier in any proceedings in or analogous to bankruptcy liquidation receivership composition or arrangement. 8. CONFIRMS THAT if any provision hereof shall be held invalid or unenforceable it is hereby declared and confirmed that such event shall not effect any other provisions all of which shall remain in full force and effect. Where this Deed is executed by more than one Guarantor and such execution shall be defective this shall in no way affect the liability of the remaining parties. 9. AGREES THAT definitions used in the Agreement shall bear the same meaning in this Deed. 10. AGREES THAT this Guarantee and Indemnity shall be construed according to English Law and the Guarantor accepts the non exclusive jurisdiction of the English Court. -3- IN WITNESS thereof the Guarantor has caused this Deed to be sealed on the date specified in the Schedule hereto. THE SCHEDULE Date of Execution 21 June 2005 of this Deed Name of Supplier Xcel Power Systems Limited Name of Guarantor Xcel Corporation Limited Registered Offices Brunswick Road of Guarantor Cobbs Wood Ashford Kent TN23 1EH Company Registration Number 01969006 in England & Wales of Guarantor SIGNED and DELIVERED as a deed on ) /S/ Carmine T. Oliva (day of by you ) ) Signature of Director XCEL CORPORATION LIMITED acting by ** (a Director) and ** ) /S/ G. M. J. Jefferies (a *Director / its Company Secretary ) Signature of *Director/ ) Company Secretary -4- EX-10.16 17 emrise_10qex10-16.txt EXIBIT 10.16 DEED OF PRIORITIES BETWEEN LLOYDS TSB COMMERCIAL FINANCE LIMITED AND LLOYDS TSB BANK PLC AND PASCALL ELECTRONICS LIMITED THIS DEED is made the 28th day of June 2005 BETWEEN (1) LLOYDS TSB COMMERCIAL FINANCE LIMITED whose registered office is situate on Boston House, The Little Green, Richmond, Surry TW9 1QE ("LTSBCF") (2) LLOYDS TSB BANK PLC whose address for the purposes of this Deed is at 39 Threadneedle Street, London EC24 8PT (the "Bank") and (3) PASCALL ELECTRONICS LIMITED whose registered office is at Brunswick Road, Cobbs Wood, Ashford, Kent TN23 1EB (the "Company") AND WITNESSES as follows: 1. Definitions and Interpretation ------------------------------ 1.1 In this Deed, except where the contest otherwise requires, each of the expressions set out below shall have the following meanings: "Administrator" has the same meaning as in Schedule B1 to the Insolvency Act 1986 as introduced by the Enterprise Act 2002; "Bank's Security" means a debenture dated 28 June 2005 made between the Company and the Bank; "Debts" has the meaning ascribed to it by a Debt Purchase/Agreement (the "Financing Agreement") (as substituted, amended, varied or replaced) dated 28th June 2005 made between LTSBCF and the Company; "Financiers" means the Bank and LTSBCF and "Financer" shall mean either of them; "LTSBCF's Security" means a debenture dated 28th June 2005 made between the Company and LTSBCF; "Non Vesting Debts" means all or any Debts of the Company purchased or to be purchased by LTSBCF pursuant to the Financing Agreement which fail to vest absolutely in LTSBCF for any reason together with the Related Rights (as defined in the Financing Agreement) to such Debts; "Receiver" includes a liquidator, an Administrator, an administrative receiver and a receiver and manager; "Securities" means the Bank's Security and LTSBCF's Security and "Security" means either of them. 1.2 In this Deed, unless the context otherwise requires: (a) references to the parties shall be construed so as to include their respective successors and permitted assigns; -2- (b) references to a "business day" shall be construed as a reference to a day (other than a Saturday or a Sunday) on which banks are generally open for the transaction of business in Pounds Sterling in London; (c) references to clauses are references to clauses of this Deed; (d) references to this Deed shall be to this Deed as amended, varied, supplemental or novated from time to time; (e) headings are inserted for ease of reference only and shall be ignored in the construction of this Deed; (f) references to any statute or law shall be to such statute or law as re-enacted, amended, extended or replaced from time to time; and (g) the singular includes the plural and vice versa and any gender includes the other. 1.3 If there is any conflict or inconsistency between any provision of this Deed and any provision contained within a Security, the provisions of this Deed shall prevail. 2. Consents and Agreements ----------------------- 2.1 Insofar as consent is required under the terms of either of the Securities or otherwise the Bank hereby confirms to consent to the creation and continuance of LTSBCF's Security and LTSBCF hereby confirms its consent to the creation and continuance of the Bank's Security. 2.2 Notwithstanding anything to the contrary in the Financing Agreement or LTSBCF's Security, no Debt arising in respect of the sale of a capital asset or otherwise than in the ordinary course of trading shall vest in LTSBCF or constitute a Non Vesting Debt or be the subject of a sale and purchase under the Financing Agreement. 2.3 For the avoidance of doubt, the monies held by the Company with any bank shall be included within the definition of Debts and Non Vesting Debts. 3. Priorities ---------- 3.1 All receipts, recoveries and realisations ("realisations") pursuant to the enforcement of the Securities shall be applied in satisfying the monies, obligations and liabilities thereby secured as follows: (a) realisations of the Non-Vesting Debts shall be applied: FIRST to LTSBCF without limit SECOND to the Bank -3- (b) realisations of all other assets of the Company shall be applied: FIRST to LTSBCF without limit SECOND to the Bank 3.2 The amount of any Receiver's remuneration and all outgoings, costs, charges, expenses, liabilities and payments ranking by statute for payment in priority to the amount secured by the Securities shall be deducted from all receipts and recoveries under the Security under which he is appointed prior to their application towards the discharge or satisfaction of the amount secured by the Securities. 3.3 Without prejudice to clause 3.1, for the purposes of the Insolvency Act 1986 (as amended by the Enterprise Act 2002) LTSBCF hereby confirms for the benefit of the Bank that any qualifying floating charge within the meaning of paragraph 14 of Schedule B1 to the Insolvency Act 1986 contained in the Bank's Security is to be treated as having priority over any qualifying floating charge continued in LTSBCF's Security notwithstanding the date of creation of such floating charges. 3.4 Without prejudice to the priority accorded to the Bank's Floating Charge by clause 3.3 of this Deed and insofar as LTSBCF's Floating Charge is a prior charge within the meaning of paragraph 15 of Schedule B1 to the Insolvency Act 1986 (such that the Bank is thereby obliged to notify LTSBCF of its intention to appoint an Administrator before so appointing) LTSBCF hereby irrevocably waives its right to receive such notice. In addition, and within the meaning of paragraph 15(1)(b) of Schedule B1 to the Insolvency Act 1986 LTSBCF irrevocably consents to the appointment of an Administrator by the Bank notwithstanding that no notice of intention to appoint an Administrator shall have been given to it. 3.5 For the avoidance of doubt, nothing contained within this Deed is intended to rank any floating charge contained within the Securities before any fixed charge contained within the Securities. 4. Continuing Security The Securities shall be continuing securities for repayment to the Finances of the money and liabilities thereby secured and the priority arrangements herein contained shall not be affected by any fluctuations in the amount from time to time due owing or incurred by the Company to either of the Financiers or by the existence at any tome of a credit or nil balance on any relevant account of the Company with either Financier. 5. Enforcement of Security ----------------------- 5.1 The Financiers shall consult and co-operate with each other to the extent (without any requirement) that: (a) the Securities shall so far as practicable be enforced by the same method and at the same time; -4- (b) in the case of an appointment of a Receiver or Receivers by a Financier under its Security the same person(s) shall be appointed Receiver(s) by the other Financier (if that other Financier shall also make such an appointment). 5.2 The provisions of clause 5.1 shall not prevent either Financier from appointing a Receiver under its Security or from the exercise or enforcement of its Security without any consultation if it considers it expedient to do so, subject to the giving of any notices that may be required pursuant to the Insolvency Act 1986 (as amended by the Enterprise Act 2002). 5.3 If either Financier shall appoint a Receiver under its Security or shall otherwise enforce or exercise its Security it shall promptly give written notice thereof on the other Financier. 6. Information ----------- 6.1 Whilst this Deed subsists each Financier shall be at liberty from time to time to disclose to the other information concerning the Company and its affairs in such manner and to such extent as such Financier shall from time to time think fit. 6.2 Each Financier acknowledges the right of the other Financier to the production and delivery of copies of the documents comprising or referred to in its Security. 7. Compliance with Covenants ------------------------- 7.1 Provided that the Company shall observe and perform all the covenants in LTSBCF's Security and the Financing Agreement relating to its Debts and Non Vesting Debts and the proceeds of the same then the Company shall be deemed to have complied with all or any of the covenants in the Bank's Security relating to such debts and the proceeds of the same. 7.2 In the event of any monies being received under any insurance covering any of the property or assets charged under the Securities (excluding, for the avoidance of doubt, any credit insurance relating to any Debts) such monies shall (subject to the rights of prior encumbrances, if any) be applied in replacing, restoring or reinstating the property or assets destroyed, damaged or lost unless the Bank otherwise directs in writing. 8. Operation of Accounts --------------------- 8.1 Noting in this Deed shall prevent the Bank operating the bank accounts of the Company in the ordinary course of banking business including, without limitation, collecting cheques and other payment orders and accepting monies for credit of the Company's bank accounts and allowing the Company to draw cheques and other payments and generally to withdraw funds form its bank accounts. 8.2 LTSBCF shall make no claim against the Bank in connection with any Debt the proceeds of which are credit to any account of the Company with the Bank (other than any account in the name of the Company designated as in trust for LTSBCF) unless: -5- (a) prior to the Bank's receipt of such money the Bank has received notice in writing from LTSBCF that a specified sum of money belongs or will belong to LTSBCF. Such notice shall contain such information as the Bank may reasonably require to enable the Bank to indemnify such credit in the day to day operation of the relevant account of the Company in accordance with the Bank's normal practice; or (b) the Bank has procured the payment to the Bank of a sum which to the actual knowledge of the Bank should have been paid to LTSBCF. In the circumstances set out in (a) and (b) above, such monies following payment into such account shall be held to the order of LTSBCF and paid to LTSBCF on demand subject to any law, regulation or court order but provided always that if the Bank requires an indemnity from LTSBCF before any such payment to LTSBCF, then LTSBCF shall provide such an indemnity in a form acceptable to the Bank. 9. Termination. ------------ This Deed shall cease to have effect when either of the Securities shall have been fully discharged. 10. The Company's Acknowledgment ---------------------------- 10.1 The Company acknowledges the priorities herein recorded and consents to the remaining terms hereof. 10.2 The Company acknowledges that this Deed does not create any rights in its favour and that it shall not be entitled to rely upon or enforce any of the terms of this Deed against either Financier. 11. Entire Agreement ---------------- This Deed forms the entire agreement between the parties relating to the priority of their respective Securities and the application of the proceeds thereof and supersedes all earlier meanings, discussions, correspondence, e-mails, facsimile transmissions, telexes, letters and communications, understandings and arrangements of any kind so relating. 12. Waivers ------- 12.1 No forbearance or failure by any party to exercise or assert or claim any right or entitlement hereunder shall be construed (in the absence of a written agreement to waive or a written confirmation of a past waiver) as a waiver of that right or entitlement. 12.2 No waiver of any breach of any term of this Deed shall (unless expressly agreed in writing by the waiving party) be construed as a waiver of a future breach of the same term or as authorising a continuation of the particular breach. -6- 12.3 None of the terms of this Deed is enforceable by any person other than LTSBCF and the Bank and their respective successors in title pursuant to the Contracts (Rights of Third Parties) Act 1999. No purchaser dealing with either of the Financiers or any Administrator or Receiver shall be concerned in any way with the provisions of this Deed and shall assume that the Financiers or any such Administrator or Receiver is acting in accordance with the provisions of this Deed. 13. Variations ---------- 13.1 Any variation of this Deed shall be binding only if it is recorded in a document signed by or on behalf of each Financier. 13.2 If any substitution, amendment, variation or replacement of the Financing Agreement or any other Agreement alters the definition of `Debts' after the date of execution of the Finance Agreement referred to in the definition of `Debt' in clause 1.1, LTSBCF will, as soon as reasonably practicable, inform the Bank in writing of any such alteration. 14. Severability ------------ The provisions of this Deed shall be severable and distinct from each other and if at any time any one or more of such provision is or becomes invalid, illegal or unenforceable, the validity, legality and enforceability of each of the remaining provisions of this Deed shall not in any way be affected, prejudiced or impaired thereby. 15. Facilities ---------- Nothing contained in this Deed shall bind either the Bank or LTSBCF to make any advance or repayment or to grant any credit or other facilities the Company. 16. Time and Indulgence ------------------- Each Financier shall be entitled to grant time or indulgence or to release or compound with the Company or otherwise deal with its Security without reference to the other except to the extent regulated by this Deed. 17. Counterparts ------------ This Deed may be executed in any number of documents or counterparts each in the like form, all of which taken together shall constitute one and the same documents. 18. Notices ------- 18.1 Any notice or other communication given or made under or in connection with the matters contemplated by this Deed shall be in writing. 18.2 Any such notice or other communication shall, subject to clause 18.3 be addressed to the relevant party at its address stated at the beginning of this Deed and, if so addressed, shall be deemed to have been duly given or made as follows: -7- (a) if sent by personal delivery, upon delivery at the address of the relevant party; (b) if sent by first class pre-paid letter post, two client business days after the date of posting; (c) if sent by facsimile transmission: (i) to the following number: for LTSBCF 0208 332 7761/2 or the Bank: (ii) to such other number (if any) as shall previously have been notified by the addressee to the sender for the purpose of the service of notices by facsimile transmission. Any notice sent by facsimile in accordance with clause 18.2(c) shall be deemed to have been received by the addressee as soon as sent, save that if it is sent outside the address's normal business hours on a day which is not a working day in the place of receipt it shall be deemed to have been received at 10am on the next following working day. 18.3 A party may notify the other parties to this Deed of a change to its name or address for the purpose of clause 18.2 provided that such notification shall only be effective on: (a) the date specified in the notification as the date on which the change is to take place; or (b) if no date is specified or the date specified is less than five clear business days after the date on which notice is given, the date falling five clear business days after notice of any such change has been given. 18.4 For the avoidance of doubt, the parties agree that the provisions of this clause shall not apply in relation to the service or any document by which any legal proceedings are commenced or continued or forming any part of such proceedings. 19. Waiver ------ For the avoidance of doubt it is hereby confirmed that the provisions of this Deed are additional to and not in substitution for any waiver given by the Bank in favour of LTSBCF in respect of Debts purchased by and vesting in LTSBCF. 20. Law and Jurisdiction -------------------- 20.1 This Deed is governed by, and shall be construed in accordance with, English law. 20.2 The parties to this Deed irrevocably submit to the exclusive jurisdiction of the English courts to settle any disputes which may arise out of or in connection with this Deed. -8- IN WITNESS whereof the parties hereto have executed this Deed and have delivered it on the day and year first above written. SIGNED and DELIVERED as a Deed on 28th day of June 2005 on behalf of LLOYDS TSB COMMERCIAL FINANCE LIMITED by 1.** /S/ Kevin John Sullivan ) ----------------------------------- ) duly appointed attorney ) ) ) Attorney (s) for ) Lloyds TSB 2.** ) Commercial -------------------------------- ) Finance Limited duly appointed attorney ) ) In the presence of: ) ) Signature /S/Loraine Smith ) ---------------------------------- ) ) Name** Loraine Smith ) Witness (only ----------------------------------- ) required if one ) attorney signs) Occupation: Secretary ) ----------------------------------- ) Lloyds TSB Commercial Finance Ltd ) Address: Boston House ) --------------------------------------- ) The Little Green ) Richmond ) ----------------------------------- ) Surrey ) TW9 1QE ) Signed and Delivered as a Deed by Lloyds TSB Bank PLC by /S/Paul Geoffrey Goodwin ) --------------------------------------- ) duly appointed attorney ) Attorney for ) Lloyds TSB Bank ) PLC In the presence of Signature /S/ David Morgan ----------------------------------- Name of Witness David Morgan ----------------------------------- Address of Witness ----------------------------------- ----------------------------------- ----------------------------------- -9- Signed as a Deed by PASCALL ELECTRONICS LIMITED acting by** L.E. Down ) /S/ L.E. Down ------------------------------------ a director and *** ) G.M.J. Jefferies ) /S/ G.M.J. Jefferies *director/the secretary ------------------------------------ Key ** Insert full Names * Delete as applicable -10- EX-10.17 18 emrise_10qex10-17.txt EXHIBIT 10.17 DEED OF PRIORITIES BETWEEN LLOYDS TSB COMMERCIAL FINANCE LIMITED AND LLOYDS TSB BANK PLC AND XCEL POWER SYSTEMS LIMITED THIS DEED is made the _____ day of _______________________ BETWEEN (1) LLOYDS TSB COMMERCIAL FINANCE LIMITED whose registered office is situate at Boston House, The Little Green, Richmond, Surrey TW9 1QE ("LTSBCF") (2) LLOYDS TSB BANK PLC whose address for the purposes of this Deed is at 39 Threadneedle Street, London EC2R 8PT (the "Bank") and (3) XCEL POWER SYSTEMS LIMITED whose registered office is at Brunswick Road, Cobbs Wood, Ashford, Kent TN23 1EB (the "Company") AND WITNESSES as follows: 1. DEFINITIONS AND INTERPRETATION ------------------------------ 1.1 In this Deed, except where the context otherwise requires, each of the expressions set out below shall have the following meanings; "Administrator" has the same meaning as in Schedule B1 to the Insolvency Act 1986 as introduced by the Enterprise Act 2002; "Bank's Security" means a debenture dated [________________] made between the Company and the Bank; "Debts" has the meaning ascribed to it by a Debt Purchase/Factoring Agreement (the "Financing Agreement:") (as substituted, amended, varied or replaced) dated made between LTSBCF and the Company; "Financiers" means the Bank and LTSBCF and "Financier" shall mean either of them; "LTSBCF's Security" means a debenture dated [________________] made between the Company and LTSBCF; "Non Vesting Debts" means all or any Debts of the Company purchased or to be purchased by LTSBCF pursuant to the Financing Agreement which fail to vest absolutely in LTSBCF for any reason together with the Related Rights (as defined in the Financing Agreement) to such Debts; "Receiver" includes liquidator, an Administrator, an administrative receiver and a receiver and manager; "Securities" means the Bank's Security send LTSBCF's Security and "Security" means either of them. 1.2 In this Deed, unless the context otherwise requires: (a) references to the parties shall be construed so as to include their respective successors and permitted assigns; (b) references to a "business day" shall be construed as a. reference to a day (other than a Saturday or a Sunday) on which banks are generally open for the transaction of business in Pounds Sterling in London; (c) references to clauses are references to clauses of this Deed; (d) references to this Deed shall be to this Deed as amended, varied, supplemented or novated from time to time; (e) headings are inserted for ease of reference only and shall be ignored in the construction of this Deed; (f) references to any statute or law shall be to such statute or law as re-enacted, amended, extended or replaced from time to time; and (g) the singular includes the plural and vice versa and any gender includes the other. 1.3 If there is any conflict or inconsistency between any provision of this Deed and any provision contained within a Security, the provisions of this Deed shall prevail. 2. CONSENTS AND AGREEMENTS ----------------------- 2.1 Insofar as consent is required under the terms of either of the Securities or otherwise the Bank hereby confirms its consent to the creation and continuance of LTSBCF's Security and LTSBCF hereby confirm its consent to the creation and continuance of the Bank's Security. 2.2 Notwithstanding anything to the contrary in the Financing Agreement or LTSBCF's Security, no Debt arising in respect of the sale of all capital asset or otherwise than in the ordinary course of trading shall vest in LTSBCF or constitute a Non Vesting Debt or be the subject of a sale and purchase under the Financing Agreement. 2.3 For the avoidance of doubt, no monies held by the Company with any bank shall he included within the definition of Debts and Non Vesting Debra. 3. PRIORITIES ---------- 3.1 All receipts, recoveries and realisations ("realisations") pursuant to the enforcement of the Securities shall be applied in satisfying the monies, obligations and liabilities thereby secured as follows: (a) realisations of the Nun Vesting Debts shall be applied; FIRST - to LTSBCF without limit, SECOND - to the Bank -2- (b) realisations of all other assets of the Company shall be applied: FIRST - to the Bank without limit; SECOND - to LTSBCF 3.2 The amount of any Receiver's remuneration and all outgoings, costs, charges, expenses, liabilities and payments ranking by statute for payment in priority to the amount secured by the Securities shall be deducted from all receipts and recoveries under the Security under which he is appointed prior to their application towards the discharge or satisfaction of the amount secured by the Securities. 3.3 Without prejudice to clause 3.1, for the purposes of the Insolvency Act 1986 (as amended by the Enterprise Act 2002) LTSBCF hereby confirms for the benefit of the Bank that any qualifying floating charge within the meaning of paragraph 14 of Schedule 1B to the Insolvency Act 1986 contained in the :Bank's Security is to be treated as having priority over any qualifying floating charge contained in LTSBCF's Security notwithstanding the date of creation of such floating charges. 3.4 Without prejudice to the priority accorded to the Bank's Floating Charge by clause 3.3 of this Deed and insofar as LTSBCF's Floating Charge is a prior charge within the meaning of paragraph 15 of Schedule B1 to the Insolvency Act 1986 (such that the Bank is thereby obliged to notify LTSBCF of its intention to appoint an Administrator before so appointing) LTSBCF hereby irrevocably waives its right to receive such notice in addition, and within the meaning of paragraph 15(1)(b) of Schedule B1 to the Insolvency Act 1986 LTSBCF irrevocably consents to the appointment of an Administrator by the Bank notwithstanding that no notice of intention to appoint an Administrator shall have been given to it. 3.5 For the avoidance of doubt, nothing contained within this Deed is intended to rank any floating charge contained within the Securities before any fixed charge contained within the Securities. 4. CONTINUING SECURITY ------------------- The Securities shall be continuing securities for repayment to the Financiers of the money and liabilities thereby secured and the priority arrangements herein contained shall nor be affected by any fluctuations in the amount from time to time due owing of incurred by the Company to either of the Financiers or by the existence at any time of a credit or bill balance on any relevant account of the Company with either Financier. 5. ENFORCEMENT OF SECURITY ----------------------- 5.1 The Financiers shall consult and co-operate with each other to the extent (without hour any requirement) that (a) the Securities shall so far as practicable be enforced the same method and at the same time; -3- (b) in the case of an appointment of a Receiver or Receivers by a Financier under its Security the same person(s) shall be appointed Receiver(s) by the other Financier (if that other Financier shall also make such an appointment). 5.2 The provisions of clause 5.1 shall not prevent either Financier from appointing a Receiver under its Security or from the exercise or enforcement of its Security without any consultation if it considers it expedient to do so, subject to the giving of any notices that may be required pursuant to the Insolvency Act 1986 (as amended by the Enterprise Act: 2002). 5.3 If either Financier shall appoint a Receiver under its Security or shall otherwise enforce or exercise its Security it shall promptly give written notice thereof to the other Financier. 6. INFORMATION ----------- 6.1 Whilst this Deed subsists each Financier shall be at liberty from time to time to disclose to the other information concerning the Company and its affairs in such manner and to such extent as such Financier shall from time to time think fit. 6.2 Each Financier acknowledges the right of the other Financier to the production and delivery of copies of the documents comprising or referred to in its Security. 7. COMPLIANCE WITH COVENANTS ------------------------- 7.1 Provided that the Company shall observe and perform all the covenants in LTSBCF's Security and the Financing Agreement relating to its Debts and Non Vesting Debts and the proceeds of the same then the Company shall be deemed to have complied with all or any of the covenants in the Bank's Security relating to such debts and die proceeds of the same. 7.2 In the event of any monies being received under any insurance covering any of the property or assets charged under the Securities (excluding, for the avoidance of doubt, any credit insurance relating to any Debts) such monies shall (subject to the rights of prior encumbrances, if any) be applied in replacing, restoring or reinstalling the property or assets destroyed, damaged or lost unless the .Bank otherwise directs in writing. 8. OPERATION OF ACCOUNTS --------------------- 8.1 Nothing in this Deed shall prevent the Brink operating the bank accounts of the Company in the ordinary course of banking business including, without limitation, collecting cheques and other payment orders and accepting money for credit of the Company's bank accounts and allowing the Company to draw cheques and other payments and generally to withdraw funds from its bank accounts. 8.2 LTSBCF shall make no claim against the Bank in connection with any Debt the proceeds of which are credited to any account of the Company with the Bank (other than any account in the name of the Company designated as in trust for LTSBCF) unless: -4- (a) prior to the Bank's receipt of such money the :Bank has received nonce in writing from LTSBCF that a specified sum of money belongs at will belong to LTSBCF. Such notice shall contain such information as the Bank may reasonably require to enable the Bank to identify such credit in the day to day operation of the relevant account of the Company in accordance with the Bank's normal practice; or (b) the Bank has procured the payment to the Bank of a sum which to the actual knowledge of the Bank should have been paid to LTSBCF. In the circumstances set out in (a) and (b) above, such monies following payment into such account shall be held to the order of LTSBCF and paid to LTSBCF on demand subject to any law, regulation or court order but provided always that if the Bank requires an indemnity from LTSBCF before any such payment to LTSBCF, then LTSBCF shall provide such an indemnity in a form acceptable to the Bank. 9. TERMINATION ----------- This Deed shall cease to have effect when either of the Securities shall have been fully discharged. 10. THE COMPANY'S ACKNOWLEDGEMENT ----------------------------- 10.1 The Company acknowledges the priorities herein recorded and consents to the remaining terms hereof: 10.2 The Company acknowledges that this Deed does not create any rights in its favour and that it shall not be entitled to rely upon or enforce any of the terms of this Deed against either Financier. 11. ENTIRE AGREEMENT ---------------- This Deed forms the entire agreement between the parties relating to the priority of their respective Securities and the application of the proceeds thereof and supersedes all earlier meetings, discussions, correspondence, e-mails, facsimile transmissions, telexes, letters and communications, understandings and arrangements of any kind so relating. 12. WAIVERS ------- 12.1 No forbearance or failure by any party to exercise or assert or claim any right of entitlement hereunder shall be construed (in the absence of a written agreement o waive or a written confirmation of a past waiver) as a waiver of that right or entitlement:. 12.2 No waiver of any breach of any term of this Deed shall (unless expressly agreed in writing by the waiving party) be construed as a waiver of a future breach of the same term or as authorising a continuation of the particular breach. -5- 12.3 None of the terms of this Deed is enforceable by any person other than LTSBCF and the Bank and their respective successors in title pursuant to tine. Contracts (Rights of Third Parties) Act 1999. No purchaser dealing with either of the financiers or any Administrator or Receiver shall be concerned any way with the provisions of this Deed and shall assume that the Financiers or any such Administrator or Receiver is acting in accordance with the provisions of this Deed. 13. VARIATIONS ---------- 13.1 Any variation of this Deed shall be binding only if it is recorded in a document signed by or on behalf of each Financier. 13.2 If any substitution, amendment, variation or replacement of the Financing Agreement or any other Agreement alters the definition of `Debts' after the date of execution of the Finance Agreement referred to in the definition of "Debt' in clause 1.1, LTSBCF will, as soon as reasonably practicable, inform the Bank in writing of any such alteration. 14. SEVERABILITY ------------ The provisions of this Deed shall be severable and distinct from each other and if at any time any one or more of such provisions is or becomes invalid, illegal or unenforceable, the validity, legality and enforceability of each of the remaining provisions of this Deed shall not in any way be affected, prejudiced or impaired thereby. 15. FACILITIES ---------- Nothing curtained in this deed shall bind either the Bank or LTSBCF to make any advance or prepayment or to grant any credit or other facilities to the Company. 16. TIME AND INDULGENCE ------------------- Each Financier shall be entitled to grant time or indulgence or to release or compound with the Company or otherwise deal with its Security without reference to the other except to the extent regulated by this Deed. 17. COUNTERPARTS ------------ This Deed may be executed in any number of documents or counterparts each in the like form, all of which taken together shall constitute one and the same document. 18. NOTICES ------- 18.1 Any notice or other communication given or made under or in connection with the matters contemplated by this Deed shall be in writing. 18.2 Any such notice or other communication shall, subject to clause 18.3. be addressed to the relevant party at its address stated at the beginning of this Deed and, if so addressed, shall be deemed to have been duly given or made as follows: -6- (a) if sent by personal delivery, upon delivery at the address of the relevant party; (b) if sent by first class pre-paid letter post, two clear business days after the date of posting; (c) if sent by facsimile transmission: (i) to the following number: for LTSBCF: 0208 332 7761/2 for the Bank: _______________________________; or (ii) to such other number. (if any) as shall previously have been notified by the addressee to the sender for the purpose of the service of notices by facsimile transmission. Any notice sent by facsimile in accordance with clause 18.2(c) shall be deemed to have been received by the addressee as soon as sent, save that if it is sent outside the addressee's normal business hours on a day which is not a working day in the place of receipt it shall be deemed to have been received at 10am on the next following working day. 18.3 A party may notify the other parties to this Deed of a change to its name or address for the purposes of clause 18.2 provided that such notification shall only be effective on: (a) the date specified to the notification as the date on which the change is to take place; or (b) if no date is specified or the date specified is less than five clear business days after the date on which notice is given, the date falling five clear business days after notice of any such change has been given. 18.4 For the avoidance of doubt, the parties agree that the provisions of this clause shall not apply to relation to the service of any document by which any legal proceedings are commenced or continued or forming any part of such proceedings. 19. WAIVER For the avoidance of doubt it is hereby confirmed that the provisions of this Deed are additional to and not in substitution for any waiver given by the bank to favour of LTSBCF in respect of Debts purchased by and vesting in LTSBCF. 20. LAW AND JURISDICTION -------------------- 20.1 This Deed is governed by, and shall be construed in accordance with, English law. 20.2 The parties to this Deed irrevocably submit to the exclusive jurisdiction or the English courts to settle any disputes which may arise out of or in connection with this Deed. -7- IN WITNESS whereof the parties hereto have executed this Deed and have delivered it on the day and year first above written. SIGNED and DELIVERED as a Deed on 28 day of June 2005 on behalf of LLOYDS TSB COMMERCIAL FINANCE LIMITED ) by: 1.** ______________________________________) duly appointed attorney ) Attorney (s) for ) Lloyds TSB Commerical ) Finance Limited 2.** ______________________________________) duly appointed attorney ) ) In the presence of: ) ) Signature: _______________________________________________________) ) Witness (only Name:** _______________________________________________________) required if one ) attorney signs) Occupation: _______________________________________________________) ) Address: _______________________________________________________) ) _______________________________________________________) SIGNED and DELIVERED as a Deed By LLOYDS TSB BANK PLC by: ______________________________________) duly appointed attorney ) Attorney for ) Lloyds TSB Bank PLC In the presence of: Signature: _______________________________________________________) Name of Witness _____________________________________________________) Address of Witness: _________________________________________________) _________________________________________________) _________________________________________________) Signed as a Deed by ) XCEL POWER SYSTEMS LIMITED ) acting by ** ) a director and** ) ) *director/the secretary ) Key ** Insert full Names * Delete as applicable -8-
EX-10.18 19 emrise_10qex10-18.txt EXHIBIT 10.18 ALL ASSETS DEBENTURE GIVEN BY XCEL POWER SYSTEMS LIMITED REG. NO. 00575679 IN FAVOUR OF LLOYDS TSB COMMERCIAL FINANCE LIMITED ORDER OF CLAUSES 1. Covenant to Pay 2. Charging Provisions 3. Company's Obligations 4. Additional Obligations of the Company 5. Further Assurance and Power of Attorney 6. Acts of Default 7. Power of Possession and Sale 8. Appointment of Receiver and his Powers 9. Additional Powers 10. Application of Monies 11. Protection of Third Parties 12. H M Land Registry 13. Continuing and Additional Security 14. Currency Indemnity 15. Discharge 16. Service of Notices and Process 17. Jurisdiction 18. Representations, Warranties and Undertakings by Company 19. Transfers and Disclosures 20. Miscellaneous 21. Definitions and Interpretation THIS DEBENTURE IS MADE on the date referred to immediately after the Fifth Schedule hereto BY THE PARTY DESCRIBED IN THE FIRST SCHEDULE HERETO ("Company") of the one part in favour of LLOYDS TSB COMMERCIAL FINANCE LIMITED of Boston House, The Little Green, Richmond, Surrey, TW9 1QE registered in England and Wales with number 733011 ("Security Holder") of the other part. 1. COVENANT TO PAY 1.1 The Company agrees with the Security Holder: 1.1.1 to pay the Secured Monies, which are now or shall be due, owing and payable to the Security Holder, in accordance with the terms of the transaction, security, instrument or other obligation giving rise to the Company's indebtedness to the Security Holder, including those under the Financing Agreement; and 1.1.2 to discharge all obligations and liabilities, whether actual, accruing or contingent, now or in future due, owing or incurred to the Security Holder by the Company, in whatever currency denominated and on whatever account and howsoever arising, whether alone or jointly and in whatever style, name or form and whether as principal or surety. 2. CHARGING PROVISIONS 2.1 As security for the payment of the Secured Monies, the Company with full title guarantee now gives the following mortgages and charges in favour of the Security Holder namely: 2.1.1 a FIXED CHARGE by way of legal mortgage on all freehold and leasehold property owned by the Company, including but not limited to land of which the Company is registered as proprietor at H. M. Land Registry (details of which are set out in the Third Schedule to this deed) 2.1.2 a FIXED CHARGE on all of the following assets, whether now or in future belonging to the Company: (i) the freehold and leasehold properties of the Company not effectively mortgaged under clause 2.1.1 including such as may hereafter be acquired; (ii) all fixtures and fittings (including trade fixtures and fittings) and fixed plant and machinery in, on or attached to the property subject to the legal mortgage under clause 2.1.1 and all spare parts, replacements, modifications and additions for or to the same; (iii) any other freehold and leasehold property which the Company shall own together with all fixtures and fittings (including trade fixtures and fittings) and fixed plant and machinery in, on or attached to such property and all spare parts, replacements, modifications and additions for or to the same; -2- (iv) all plant and machinery and other equipment listed in the Fifth Schedule and all spare parts, replacements, modifications and additions for or to the same; (v) all fixed plant and machinery, including all spare parts, replacements, modifications and additions for or to the same, not listed in the Fifth Schedule; (vi) all goodwill, unpaid and/or uncalled capital of the Company; (vii) all the Company's Intellectual Property; (viii) all the Company's Securities; (ix) all loan capital, indebtedness or liabilities on any account or in any manner owing to the Company from any Subsidiary of the Company or a member of the Company's Group; (x) all amounts realised by an administrator or liquidator of the Company, upon enforcement or execution of any order of the Court under Part IV of the Insolvency Act 1986; 2.1.3 A FIXED CHARGE upon all or any of the following assets, whether now in existence or coming into existence in future: (i) all documents of title to any item of property which at any time and for any purpose has been or may be deposited with the Security Holder; (ii) the assets mentioned in the title documents referred to in the immediately preceding sub-paragraph; (iii) all monies in the bank account specified in clauses 3.1.6(i) and 3.1.7 including Remittances in respect of which instructions to the Company's bankers have been given under clause 3.1.6(iii); (iv) all Remittances in respect of the Company's Other Debts and Non-Vesting Debts which in accordance with clause 3.1.6(ii) shall be received by the person or at the address or post office box specified in that sub-clause; (v) all other Remittances in respect of Other Debts and Non-Vesting Debts received by the Company pending their being dealt with in accordance with the terms of this deed or any instructions given in accordance with it; (vi) any account in the name of the Company under the control of or operated in accordance with the directions of the Security Holder. 2.1.4 A FIXED CHARGE on all the Company's Other Debts and Non-Vesting .Debts, present and future; 2.1.5 A FLOATING CHARGE on such of the moneys present and future which the Company may receive in respect of the Company's Other Debts and Non-Vesting Debts and which, until any direction from the Security Holder to the contrary, are paid into the bank account of the Company referred to in clause 3.1.8 and which upon such payment will he released from the fixed charge thereon; 2.1.6 A FLOATING CHARGE on the remainder of the undertaking, property rights and assets of the Company whatsoever and wheresoever, both present and future, not subject to the above charges. -3- 2.2 if the Security Holder shall enforce any of the above charges then the floating charges created by this deed shall immediately and without further formality become fixed charges. However, the Security Holder may also at any time give written notice to the Company immediately converting all or any of the floating charges into fixed charges in respect of the whole or any part of the Mortgaged Property subject to such floating charges. 2.3 Until the Security Holder shall: 2.3.1 enforce any of the above charges; or 2.3.2 serve any notice under clause 2.2 on the Company, converting any of the floating charges into fixed charges; or 2.3.3 give the directions referred to in any of clauses 3.1.4 and 3.1.6 to 3.1.9 inclusive; any Remittance which is paid into the Company's bank account under clause 3.1.8 shall, be released from the fixed charge created by clause 2.1.4 and shall immediately become subject to the floating charge created by clause 2.1.5. Such release shall not in any way affect the continuation of the fixed charge created by clause 2.1.4 on the remainder of the Company's Other Debts, outstanding from time to time. 2.4 This deed shall take effect subject to the provisions of the prior Encumbrances over the Company's assets detailed in the Fourth Schedule, except as otherwise varied by any separate deed. 2.5 The floating charges created by this deed shall, unless otherwise agreed by the Security Holder in writing, automatically and without notice be converted into fixed charges: 2.5.1 immediately preceding the coming into existence of any Encumbrance (except: as detailed in the Fourth Schedule) or any disposition or dealing prohibited by his deed; or 2.5.2 after an Act of Default. 3. COMPANY'S OBLIGATIONS 3.1 The Company agrees with the Security Holder that, whilst this security exists, it: 3.1.1 will deal with the Non-Vesting Debts and their Related Rights as if they were Debts and their Related Rights purchased by the Security Holder under the Financing Agreement and in particular will not bank or deal with Remittances in respect of them except by dealing with them in accordance with the Financing Agreement; 3.1.2 will not sell, transfer, lease, licence or dispose of the Mortgaged .Property subject to the floating charges herein, except by way of sale at full value in the ordinary course of its business now being carried on; 3.1.3 will not sell, transfer, lease, license or dispose of the Mortgaged Property subject to the fixed charges herein without the prior written consent of the Security Holder but such restriction shall not prohibit the disposal of an asset (other than freehold or leasehold property) for the purpose of its immediate replacement, modification, repair and/or maintenance; -4- 3.1.4 will deal with the Company's Other Debts outstanding and Remittances in accordance with the Security Holder's written directions; until such directions are given will only deal with the Company's Other Debts by way of getting in and realising the same in the ordinary course of its business; 3.1.5 will execute an assignment of the Company's Other Debts in favour of the Security Holder in such form as the Security Holder requires, whenever the Security Holder so demands; 3.1.6 give instructions in accordance with the directions of the Security Holder at any time (i) to debtors to pay Remittances in respect of the Company's Other Debts direct into such bank account under the control of the Security Holder (and whether in the name of the Company or the Security Holder) as the Security Holder may specify and whether or not this is an account opened under the terms hereof; and/or (ii) to debtors to pay Remittances in respect of the Company's Other Debts to such address, or post office box under the control of the Security Holder or to such person employed by or only accepting instructions from the Security Holder as the Security Holder may specify; and/or (iii) to the Company's bankers that all Remittances in respect of Other Debts, received by means of electronic funds transfers direct into a bank account of the Company, shall forthwith be transferred to such bank account as the Security Holder may specify (whether the specified bank account is in the name of the Company or the Security Holder and whether or not it is an account opened under the terms hereof) but in each case without affecting the right of the Security Holder under clause 3.1.4 to give other directions; 3.1.7 will, as directed by the Security Holder, open such bank accounts in the name of the Company with such mandates as the Security Holder may specify; such bank accounts can include separate designated accounts or trust accounts or accounts where the officers of the Security Holder are irrevocably appointed as the only persons able to operate the accounts; will thereafter pay into such bank accounts all Remittances which the Company may receive in respect of its Other Debts; will only deal with the monies in such account in accordance with the written directions of the Security Holder (subject only to such rights as the bank at which the account is held may have in respect thereof); 3.1.8 until any contrary direction, demand or requirement by the Security Holder under this deed, will only pay Remittances, which the Company may receive in respect of the Company's Other Debts, into a bank account under the Company's control; 3.1.9 will only pay or otherwise deal with the monies in any of the Company's bank account referred to in clause 3.1.5 in accordance with the written directions from time to time given by the Security Holder (subject to any rights which the bank at which the account is held has in respect thereof); -5- 3.1.10 will not, charge, sell, discount, factor, dispose of or, except in accordance with this deed, otherwise deal with its Other Debts or the relative Remittances unless it has the prior written consent of the Security Holder; 3.1.11 after conversion of the floating charges created by clause 2.1.5 and/or 2.1.6 into fixed charges, will not, except as permitted by the Security Holder, withdraw any credit balance representing Remittances from any of the Company's bank accounts under control of the Company; 3.1.12 will authorise its bankers from time to time to provide copy statements and full particulars of all the Company's accounts and Facilities with them whenever requested by the Security Holder; 3.1.13 will provide such other information, as the Security Holder may reasonably request regarding the Company's affairs; 3.1.14 will, immediately it becomes aware, provide the Security Holder with details of any present or future litigation, arbitration or administrative proceedings in progress, pending or, to the knowledge of the Company, threatened against it which might have a material adverse effect on the Company's ability to perform its obligations under this deed; 3.1.15 will permit the Security Holder free access at all reasonable times to inspect and take copies or and extracts from the hooks, accounts and records of the Company and such other documents as the Security Holder may require and will provide the Security Holder with all information and facilities which it may require; 3.1.16 will grant the Security Holder or its solicitors on request all reasonable facilities to enable it or them to carry out, at the Company's expense, such investigation of title to the Mortgaged Property and enquiries about it as would be carried out by a prudent mortgagee; 3.1.17 will use its best endeavours to detect any infringement of its rights to the Intellectual Property; if aware of such infringement, will immediately give the Security Holder all information available to it about such infringement and will commence and diligently prosecute (or permit the Security Holder in the name but at the expense of the Company to commence and prosecute) all proceedings necessary to prevent such infringement or to recover damages; 3.1.18 will do everything needed to ensure that the Intellectual Property, to which the Company is or may become entitled, is valid and subsisting and remains owned by the Company and will take all such actions and proceedings as are necessary to protect such Intellectual Property; if any such intellectual Property shall at any time lapse or become void, will do everything necessary to restore such Intellectual Property to the Company; 3.1.19 will comply in all material respects with all laws concerning the Mortgaged Property and every notice, order, direction, licence, consent, permission lawfully made or given in respect of it and likewise with the requirements of any competent authority; 3.1.20 will duly and promptly pay all monies which may become due in respect of any of the Securities; (it being acknowledged by the Company that the Security Holder shall not incur any liability whatsoever for such monies); -6- 3.1.21 forthwith upon the execution of this deed will deposit with the Security Holder all certificates or documents of title in respect of the Securities, together as appropriate with duly executed instruments of transfer or assignments thereof in blank; (it being acknowledged that the Security Holder shall at any time be entitled to have any of the Securities registered either in the name of the Security Holder or nominees selected by the Security Holder); 3.1.22 will ensure the delivery or payment to the Security Holder of all stocks, shares, securities, rights, monies or other property accruing, offered or issued at any time by way of bonus, redemption, exchange, purchase, substitution, conversion, preference, option or otherwise in respect of any Securities or the certificates or other documents of title to or representing the same, together with executed instruments of transfer or assignments in blank; (it being acknowledged that the Security Holder may arrange for any of them to be registered either in the name of the Security Holder or nominees selected by the Security Holder). 4. ADDITIONAL OBLIGATIONS OF THE COMPANY 4.1 The Company agrees that, at all times during the continuance of this security, it: 4.1.1 will carry on the Company's business in a proper and efficient manner and will not make any material alteration to the Company's business, constituting as change from that carried on at the date hereof; 4.1.2 will maintain proper and up to date books of account of its business; will keep such books of account and all other documents relating to the affairs of the Company at the Company's registered office or at such other place where the same ought to be kept and will promptly provide copies thereof to the Security Holder upon request; 4.1.3 will deliver to the Security Holder the copies of its audited financial statements and any reports and notes accompanying them within 6 months of each year end; 4.1.4 will punctually pay all its debts and liabilities becoming due and payable and which would, on the winding up of the Company, have priority over the charges created by this deed; 4.1.5 will punctually pay all outgoings payable in respect of the Mortgaged Property and will promptly produce the receipts for them to the Security Holder upon request; 4.1.6 will keep all the Company's freehold and leasehold property in good and substantial repair and will allow the Security Holder free access, at all reasonable times, to view the state and condition of any such property, but without the Security Holder becoming liable to account as a mortgagee possession; 4.1.7 will observe and perform all the lessee's covenants in any lease under which any of the Mortgaged Property may be held and will take no action which might lead to such lease being surrendered or forfeited; 4.1.8 will allow the Security Holder, at the expense of the Company, to carry out repairs or take any action which the Security Holder shall reasonably consider necessary should the Company fail to observe or perform its obligations as a lessee; -7- 4.1.9 will not exercise the powers of leasing or accepting, surrenders of leases, conferred on a mortgagee in possession by Sections 99 and 100 of the Law & Property Act 1925, or any other powers of leasing or accepting surrenders of leases, without the prior written consent of the Security Holder; 4.1.10 will make sure that an order of the Court is obtained, under Section 38(4) of the Landlord and Tenant Act 1954, excluding the security of tenure provisions of that Act, before granting any lease; 4.1.11 will insure and keep insured those parts of' the Mortgaged Property as are of an insurable nature against loss or damage by fire and other risks usually insured against and such other risks that the Security Holder shall reasonably require to their full insurable value with insurers approved by the Security Holder; 4.1.12 will make sure that all the Company's insurance policies will be endorsed with notice of the interest of the Security Holder in them and will produce to the Security Holder the receipts for each current premium within fifteen days of its becoming due; failing such production the Security Holder may effect or renew any such insurance as the Security Holder shall think fit at the Company's expense; 4.1.13 will observe and perform all restrictive and other covenants and stipulations for the time being affecting the Mortgaged Property or its use or enjoyment; 4.1.14 will not do or allow anything to be done on the Company's freehold or leasehold property which shall be treated as a development or a change of use within the meaning of the Town and Country Planning Acts unless the prior written consent of the Security Holder has been obtained; 4.1.15 will not infringe the Town and Country Planning Acts in any way which prejudices the Security Holder's security over the Mortgaged Property; 4.1.16 will deposit with the Security Holder all deeds and documents of title; relating to the Company's freehold and leasehold property and the insurance policies relating to the same, (subject only to the requirements of any prior Encumbrance or of the Company's landlord); 4.1.17 will not permit any person to become entitled to any proprietary right or interest which might affect the value of the assets subject to the fixed charges herein. 4.2 If the Company holds property as a tenant or lessee and shall be required by the landlord either to insure or to reimburse the Company's landlord for any insurance premium paid by him then the Company shall be treated as having complied with its insuring obligation under this deed if it duly and promptly complies with such requirements. However this shall not affect the right of the Security Holder to require the Company to produce satisfactory evidence that the Company has complied with the landlord's requirements. 5. FURTHER ASSURANCE AND POWER OF ATTORNEY 5.1 At the Security Holder's request, the Company will immediately sign, seal, execute, deliver and perfect all deeds and instruments and do all such other acts and things as the Security Holder or any Receiver appointed hereunder may require in order to perfect or enforce this security or to use the powers given to each of them in this deed or to enforce the obligations of the Company and/or the rights of the Security Holder under this deed. -8- 5.2 The Company will, if called upon by the Security Holder, execute a legal or equitable assignment of any part of the Mortgaged Property, in such terms as the Security Holder may require. The Company will then give notice of such assignment to such persons as the Security Holder may specify and take such other steps as the Security Holder may require to perfect such assignment. 5.3 The Company irrevocably appoints the Security Holder, any directors, officers or managers for the time being of the Security Holder and any other person authorised by the directors of the Security Holder and any Receiver appointed hereunder, jointly and each of them severally, to be the lawful attorneys of the Company. Such appointment gives each attorney the power in the Company's name and on its behalf and as its act and deed to carry out all acts for the purposes set out in clauses 5.1 and 5.2. Each attorney so appointed may appoint substitute attorneys to carry out all or any of such purposes. The Company agrees to ratify and confirm any instrument, act or thing which any such attorney or substitute attorney may lawfully execute or do. 6. ACTS OF DEFAULT 6.1 The Secured Monies shall become payable and the charges in favour of the Security Holder shall immediately become enforceable, without notice or demand, by the Security Holder at any time after any of the following events occur: 6.1.1 if the Company shall breach any of its obligations under this deed or in the Financing Agreement or any other agreement with the Security Holder; 6.1.2 if the Company shall default in paying any of the Secured Monies as and when they become due; 6.1.3 if the Company shall fail to give the Security Holder such information as may reasonably be requested as to the business, affairs or assets of the Company; 6.1.4 if any representation, warranty or undertaking at any time made by the Company to the Security Holder is or was, in the reasonable opinion of the Security Holder, incorrect or misleading in any respect or, being on an undertaking, shall not be complied with by the Company; 6.1.5 if the Company shall dispose or attempt to dispose of its principal undertaking or a substantial part of it, without the prior written approval of the Security Holder; 6.1.6 if the Company shall be insolvent; 6.1.7 if the Company suspends or threatens to suspend a substantial part of' its business or if the Security Holder receives information, from the Company or any responsible third party, whether orally or in writing, that the Company is contemplating or is likely to suspend a substantial part of its business; 6.1.8 if the Company shall commence negotiations with any of its creditors with a view to the general readjustment or rescheduling of the Company's indebtedness; 6.1.9 if the Company shall default under any of the following with any party: -9- (i) a trust deed; (ii) a loan agreement; (iii) an Encumbrance; (iv) any other agreement or obligation relating to borrowing or financing (including all liabilities in respect of accepting, endorsing or discounting any notes or bills and all liabilities under debt purchase, factoring, discounting and similar agreements); (v) any guarantee or indemnity; 6.1.10 if any borrowing or any ether money payable by the Company: (i) becomes payable or is capable of being declared payable prior to its stated date of maturity; or (ii) is not paid when due; 6.1.11 if any Encumbrance created by the Company in favour of another party becomes enforceable; 6.1.12 if any guarantee, indemnity or other security for any of the Secured Liabilities fails or ceases in any respect to have full force and effect or to be continuing or is terminated or disputed or is the opinion of the Security Holder in jeopardy, invalid or unenforceable; 6.1.13 if any governmental authority permits, or procures, or threatens any reorganisation, transfer or appropriation (whether with or without compensation) of a substantial part of the business or assets of. the Company; 6.1.14 if the Company shall, without the prior written consent of the Security Holder, change the nature of its business or trading in any way which the Security Holder considers prejudicial to this security; 6.1.15 if it is unlawful for the Company to perform or comply with any of its obligations under this deed or under any other agreement between the Company and the Security Holder or such obligations or the Company are not or cease to be legally valid, binding and enforceable; 6.1.16 if, after the date of this deed, control (as defined in Section 435 of the insolvency Act 1986) or the power to take control of the Company changes, without prior written consent of the Security Holder; or 6.1.17 if, in the opinion of the Security Holder, a material adverse change occurs in the financial condition, results of operations or business of the Company. 6.2 At any time after any Act of Default: 6.2.1 the Security Holder shall cease to be under any further commitment to the Company and may at any time thereafter declare the Secured Monies (or such of them as the Security Holder may specify) either to be immediately due and payable or to be payable at any time thereafter immediately on demand, even if this conflicts with the terms of any other agreement or arrangement; and/or 6.2.2 the Company shall immediately on demand provide cash cover for all of its contingent liabilities to the Security Holder (including under the Financing Agreement) and for all notes or bills accepted, endorsed or discounted and all guarantees or other instruments entered into by the Security Holder; and/or 6.2.3 the Security Holder may retain: (i) any monies in any account referred to in clause 3.1.6; and/or -10- (ii) any monies in any account operated by the officers of the Security Holder under clause 3.1 .7; and/or (iii) any Remittance received in accordance with clause 3.1.6(ii) for such period as the Security Holder reasonably considers necessary to ensure the Company's compliance with the terms of this deed; and/or 6.2.4 the Security Holder may exercise in the name or the Company any voting rights attached to the Securities and all powers given to trustees by Sections 10(3) and (4) of the Trustee Act 1925 (as amended by Section 9 of the Trustee Investments Act 1961) in respect of securities, property subject to a trust and any powers or rights exercisable by the registered holder of any of the Securities or by the bearer thereto. The Security Holder will not then need any consent or authority from the Company. 7. POWER OF POSSESSION AND SALE 7.1 At any time alter this security shall become enforceable, the Security Holder and/ or any Receiver appointed under this deed may, in their discretion, enter upon and take possession of the Mortgaged .Property or any part of it. They may also at their discretion, when exercising their powers given in this deed, sell, call in, collect and convert into monies the Mortgaged .Property or any part of it. By way of extension of these powers such sale, calling in and conversion may be done for such consideration as the Security Holder or any Receiver shall consider sufficient. It is irrelevant whether the consideration shall consist of cash, shares or debentures in some other company or any other property or partly of one and partly of some other type of consideration. Such consideration may be immediately payable or payable by instalments or deferred. Instalment or deferred payments may be with or without security and on such other terms as the Security Holder or the Receiver shall think fit. 8. APPOINTMENT OF RECEIVER AND HIS POWERS 8.1 Section 109 of the Law of Property Act 1925 (restricting the power to appoint a receiver) shall not apply to this deed. At any time after an Act of Default or after any other event, as a result of which this security shall become enforceable or, if the Company at any time so requests in writing, the Security Holder may without further notice to the Company appoint any person to be a Receiver. Their appointment shall extend to the whole or any part of the Mortgaged Property. The Security Holder may remove any Receiver (except an administrative receiver). In case of such removal or the retirement or death of any Receiver, the Security Holder may appoint another in his place. At the time of his appointment (or at any time afterwards) the Security Holder may fix the remuneration of the Receiver on such basis as the Security Holder shall determine. This may include a fixed fee or an hourly rate or a commission. 8.2 The Security folder may appoint more than one person to act as the Receiver. Where more than one person shall be appointed to act as Receiver, those so appointed shall carry out their duties, exercise their rights, and be subject to their obligations jointly as well as severally. References in this deed to the Receiver shall be to each and all of them as appropriate. -11- 8.3 Any appointment, or fixing of the remuneration of the Receiver or any such removal shall be made in writing and be signed by any director or authorised officer of the Security Holder. 8.4 Any Receiver appointed under this deed shall be the agent of the Company. He shall be in the same position as a Receiver appointed under the Law of Property Act 1925. The Company shall be solely responsible for his acts, omissions, losses, misconduct, defaults and remuneration. The Security Holder shall not in any way be liable or responsible either to the Company or to any other person for any of them. 8.5 The Receiver shall, without the need for any consent on the part of the Company, have all of the following powers, unless any shell specifically he excluded by the terms of his appointment. He may exercise these powers in such way, at such time and on such terms as he shall think necessary or expedient and whether in his name or the name of the Company. Any Receiver, whether appointed solely or jointly, shall have the powers granted to a receiver by the Law of Property Act 1925 and the Insolvency Act 1986. He shall also have all of the following powers: 8.5.1 to enter upon, take possession of, collect and get in the Mortgaged Property and for that purpose to have possession of all records, correspondence and other documents relating to the Mortgaged Property; 8.5.2 to lease the Mortgaged Property, in the name of the Company or otherwise (whether or not the Receiver shall have taken possession thereof); 8.5.3 to carry on or permit the carrying on or all or any part of the business of the Company and to manage, develop, reconstruct, amalgamate or diversify the Company's business, including purchasing supplies and materials; 8.5.4 to do all acts which the Company might do for the protection or improvement of the Mortgaged Property or for obtaining income or returns from it; 8.5.5 to raise or borrow any money, which may be needed from time to time for any of the purposes of the Receiver's appointment, whether in the name of the Company or otherwise; for such purpose the Receiver shall have power to secure any monies so borrowed by mortgage or charge over the Mortgaged Property, whether ranking in priority to or pari passu with or after any or all of the charges created by this deed. 8.5.6 to sell or concur in selling the Mortgaged Property including by public or private treaty, by tender, for cash or on credit, in one lot or in parcels, with or without special conditions or stipulations as to title, time or mode of payment of purchase money or otherwise and whether forthwith upon his appointment or later; 8.5.7 to allow the whole or any part of the sale monies of the Mortgaged Property to remain outstanding on mortgage of the property sold or on any other security or even without any security and without being responsible for any loss caused and with full power to buy in and rescind or vary any contract for sale and to resell without being responsible for loss; -12- 8.5.8 to let or let on hire, lease or surrender and accept surrenders of the Mortgaged Property; 8.5.9 to execute assurances of the Mortgaged Property in the name and on behalf of the Company or otherwise and to do all other acts and things for completing the sale of the Mortgaged Property; 8.5.10 to sever fixtures belonging to the Company and sell them separately from any other part of the Mortgaged Property; 8.5.11 to make any arrangement or compromise with any person in respect of the Mortgaged Property; 8.5.12 to repair, decorate, furnish, maintain, alter, improve, renew or add to any of the Mortgaged Property as he shall think fit and effect maintain, renew or increase indemnity insurance and other insurances and obtain bonds; 8.5.13 to settle, arrange, compromise, and submit to arbitration any accounts, claims, questions or disputes whatsoever which may arise in connection with the business of the Company or any part of the Mortgaged Property or in any way relating to the security constituted by this deed and to bring, prosecute, defend, enforce, compromise, submit to and discontinue any actions, suits, arbitrations or proceedings whatsoever, whether civil or criminal; 8.5.14 to enter into, complete, disclaim, abandon or disregard, determine or rectify any of the outstanding contracts or arrangements of the Company and allow time for payment of any debts, either with or without security; 8.5.15 to exercise or permit the Company or any nominee of the Company to exercise any powers or rights incidental to the ownership of the Mortgaged Property, in such manner as he may think fit; 8.5.16 to form a subsidiary of the Company and transfer, lease or licence to such subsidiary or any other person all or any part of the Mortgaged Property on such terms and conditions as he may think fit; 8.5.17 to give complete discharges in respect of all monies and other assets which may come into the hands of the Receiver in the exercise of his powers; 8.5.18 to carry out and enforce specific performance of or obtain the benefit of all the Company's contracts or those entered into in exercise of the powers or authorities conferred by this deed; 8.5.19 to make, or require the directors of the Company to make, calls upon the shareholders of the Company in respect of any capital of the Company; 8.5.20 to enforce payment, of any call so made by action (in the name of the Company or the Receiver) or in any other way; 8.5.21 to exercise all or any of the powers and authorities conferred on the Receiver under the provisions of the Law of Property Act 1925 without any further consent by or notice to the Company; 8.5.22 to demand and get in all rents and other income, whether accrued before or after the date or his appointment; 8.5.23 to exercise the powers conferred on a landlord or a tenant under the Landlord and Tenant Acts 1927 and 1954 but without liability for powers so exercised; 8.5.24 to do all things necessary to make sure that the Company performs or observes all of its obligations to the Security Holder; -13- 8.5.25 to delegate to any person, for such time as the Security Holder shall approve, any of the powers conferred upon the Receiver; 8.5.26 to take legal proceedings for all or any of the purposes set out above; 8.5.27 to employ and dismiss managers, solicitors, officers, agents, auctioneers, workmen and employees for the purpose of carrying out any of the powers and duties of the Receiver or the obligations of the Company at such salaries or remuneration and on such other terms of service as the Receiver in his discretion may think fit; 8.5.28 to have access to and make use of the premises, plant, equipment and accounting and other records of the Company and the services of its staff in order to exercise his powers and duties; 8.5.29 to do all such other acts and things without limitation, as the Receiver may consider to be incidental or conducive to the lawful exercise of his powers and duties. 8.6 The Security Holder may at any time give up possession of any part of the Mortgaged Property and/or withdraw from the receivership. 8.7 Whether or not a Receiver shall be appointed under this deed, the Security Holder may at any time after this security shall have become enforceable and without giving notice, exercise all or any of the powers, authorities and discretions conferral on a Receiver as set out above. 9 ADDITIONAL, POWERS 9.1 In addition to the powers of leasing or accepting surrenders of' leases conferred on mortgagees by Sections 99 and 100 of the Law of Property Act 1925, it shall he lawful for the Security Holder or any Receiver without the restrictions contained in those Sections: 9.1.1 to grant any lease of the Mortgaged Property upon such terms as the Security Holder or the Receiver shall in its absolute and unfettered discretion think fit; and 9.1.2 to accept a surrender of any lease of the Mortgaged Property on such terms as the Security Holder or the Receiver in its or his discretion shall think fit. 9.2 Section 103 of the Law of Property Act 1925 (restricting the power of sale) shall not apply. However the power or sale and the other powers conferred on mortgagees by that Act shall apply to this security but without the Act's restrictions as to giving notice or otherwise. Accordingly for the purposes of a sale or other exercise of any such powers the whole of the Secured Monies shall be treated as due and payable immediately upon the execution and delivery of this document. 9.3 The restrictions on the right of consolidating mortgage securities, which are contained in Section 93 of the Law of Property Act, shall not apply to this security. 9.4 The Security Holder may, at any time without discharging or in any other way affecting this security or any remedy that the Security Holder may have, grant to the Company (or to any other person) time or -14- indulgence or abstain from perfecting or enforcing any remedies, securities, guarantees or rights which the Security Holder may now or afterwards have from or against the Company or any other person. 9.5 If the Security Holder receives or is treated as having received notice of any subsequent mortgage or charge affecting any of the Mortgaged Property then the Security Holder may open a new account with the Company. If it does not open a new account, it shall nevertheless be treated as it had done so at the time when it received or was treated as having received such notice. From that time all payments made by the Company to the Security Holder shall be credited or be treated as having been credited to the new account. Such payments shall not operate to reduce the amount secured by this deed when the Security Holder received or was treated as having received such notice. 10. APPLICATION OF MONIES 10.1 All monies received by the Security Holder or by the Receiver under or by virtue of this deed shall be applied in the following order; 10.1.1 in the discharge of' all Liabilities having priority to the mortgages and charges hereby created or the matters referred to hereafter in this clause 10.1; 10.1.2 in payment of all costs, charges and expenses incurred in or incidental to the exercise or performance (or attempted exercise or performance) of any of the powers or authorities conferred by or in any other way connected with this deed; AND THEN 10.1.3 in payment to the Receiver of his remuneration fixed in accordance with clause 8.1 of this deed; AND THEN 10.1.4 in payment to the Security Holder of the Secured Monies due to the Security Holder in such order as the Security Holder in its absolute discretion thinks lit; AND THEN 10.1.5 in payment to the Company of any surplus. 10.2 Any surplus shall not carry interest. The Receiver or the Security Holder may pay any surplus into any of the Company's bank accounts including an account opened specifically for such purpose. The Security Holder shall then have no further liability for such surplus. 10.3 Following the enforcement of this security, any monies received by the Security Holder may be appropriated by the Security Holder in its discretion in or towards the payment and discharge of any part of the Secured Monies. 10.4 The Security Holder or the Receiver may credit any monies to a suspense account for so long and in such manner as the Security Holder may from time to time determine. The Receiver may retain the same for such period as the Receiver and the Security Holder consider expedient. 10.5 All monies received by the Company under any insurance policy on the Mortgaged Property shall be treated as part of the Mortgaged Property subject only to any rights of third parties having priority and to the requirements of any lease of the Mortgaged Property. They shall be -15- applied at the discretion of the Security Holder either in reducing the Secured Monies or towards making good the loss or damage for which the monies became payable. Any monies received by the Company under any insurance on the Mortgaged Property shall be held on trust for payment to the Security Holder pending such application. 11. PROTECTION OF THIRD PARTIES 11.1 No person paying or handing over monies to the Receiver and obtaining a discharge shall have any responsibility or liability to see to their correct application. 11.2 No person dealing with the Security Holder or the Receiver need enquire : 11.2.1 whether any event has happened giving either the Security Holder or the Receiver the right to exercise any of his powers; 11.2.2 as to the propriety or regularity of any act purporting or intending to be an exercise of such powers; 11.2.3 as to the validity or regularity of the appointment of any Receiver purporting to act or to have been appointed us such; or 11.2.4 whether any money remains owing upon this security. 11.3 All the protection to purchasers contained in Sections 104 and 107 of the Law of Property Act 1925 shall apply to any person purchasing from or dealing with the Receiver or the Security Holder as if the Secured Monies had become due and the statutory power of sale and appointing a receiver in relation to the Mortgaged Property had arisen on the date of this deed. 11.4 No person dealing with the Security Holder or the Receiver shall be affected by express notice that any act is unnecessary or improper. 12. H.M. LAND REGISTRY 12.1 The Company will notify the Security Holder of any freehold or leasehold property which it now owns or which it may own alter the date or this deed. The Company will, upon request and at its cost , join with the Security Holder in registering this security as a fixed charge against any of the freehold or leasehold property of which the Company is now registered or may in future apply to be registered as the proprietor at H.M. Land Registry. 12.2 The Company hereby applies to the Chief Land Registrar for a restriction to be entered on the Company's title to any land in the following terms: "Except under an order of the .Registrar no disposition or dealing by the proprietor of the land is to be registered or noted without the consent of the proprietor for the time being of Charge No....................." -16- 13. CONTINUING AND ADDITIONAL SECURITY 13.1 This security is a continuing security. It shall apply to all the Secured Monies despite any interim settlement of account until a final discharge of this security shall be given by the Security Holder to the Company. 13.2 This security is in addition to and shall not merge or otherwise prejudice or affect any other right or remedy of the Security Holder or any assignment, bill, note, guarantee, mortgage or other security now or in future in favour of the Security Holder or held by or available to the Security Holder, whether created by the Company or any third party. 13.3 This security shall not in any way be prejudiced or affected by: 13.3.1 any guarantee, mortgage or other security now or in future held by or available to the Security Holder or by the invalidity of any of them or by the Security Holder now or afterwards dealing with, exchanging, releasing, modifying or abstaining from perfecting or enforcing any of then or any rights which it may now or afterwards have; or 13.3.2 by the Security Holder giving time, the payment or indulgence or compounding with the Company or any other persons. 14. CURRENCY INDEMNITY 14.1 For the purpose of or pending the discharge of any of the Secured Liabilities secured by this deed the Security Holder or any Receiver appointed hereunder may convert any monies received, recovered or realised under this deed (including the proceeds of any previous conversion) from their existing currency into such other currency as the Security Holder or such Receiver may think fit. Any such conversion shall be effected at the then prevailing spot selling rate of exchange, of the Security Holder's bankers, for such other currency against the existing currency. 14.2 The Company will indemnify the Security Holder against any shortfall between: 14.2.1 any amount received or recovered by the Security Holder in respect of any of the Secured Liabilities which is converted in accordance with clause 14.1 into the currency in which such liability was payable; and 14.2.2 the amount payable to the Security Holder under this deed in the currency of such liability. 15. DISCHARGE 15.1 Upon payment and complete discharge and performance of all the Secured Liabilities and of all costs, charges and expenses incurred by the Security Holder under or in relation to this deed, the Security Holder shall, at the request and cost or the Company, duly discharge this security and any further security given in accordance with its terms. The Security Holder will also transfer to the Company any of' the Mortgaged Property which has been assigned or transferred to the Security Holder. -17- 15.2 The right of the Security Holder to recover the Secured Monies or to enforce the terms of this deed shall not be affected by any payment or any act or thing which may be avoided or adjusted under the laws relating to bankruptcy or insolvency or under Part VI of the Insolvency Act 1986. Any release or discharge given or settlement made by the Security Holder relying on any such payment, act or thing shall be void and of no effect. 16. SERVICE OF NOTICES AND PROCESS 16.1 Except as stated to the contrary herein, any written notice from the Security Holder to the Company and any proceedings issued by the Security Holder requiring service on the Company may be given or served: 16.1.1 by delivering it at or posting it to the Company's registered office or to such other address of the Company advised to and acknowledged by the Security Holder as being effective for the purposes of this clause; or 16.1.2 by delivering it at or posting it to any address last known to the Security Holder at which the Company carried on business; 16.1.3 by handing it Company's officers; 16.1.4 by a fax or e-mail to the Company's number or address advised to and acknowledged by the Security Holder as suitable for communication between the parties. 16.2 Any such notice or process shall be considered served: 16.2.1 if delivered - at the time of delivery; or 16.2.2 if sent by post - 48 hours from the time of posting; or 16.2.3 if sent by fax or e-mail - at the time of transmission; or 16.2.4 if handed over - at the time of handing over. 16.3 Any notice in writing by the Company to the Security Holder required hereunder shall take effect at the time it is received by the Security Holder at its registered office or at such other address the Security Holder may advise in writing to the Company for this purpose. 17. JURISDICTION 17.1 This deed shall be interpreted and shall be governed by the laws of England. The Company will accept the non-exclusive jurisdiction of the English Courts in connection with any matter arising under this deed. 18. REPRESENTATIONS, WARRANTIES AND UNDERTAKINGS BY COMPANY 18.1 The Company certifies that the execution of this deed has been duly authorised by a resolution of the Company's Board of Directors and that it does not break any of the provisions of the Company's Memorandum and Articles of Association or of any other Encumbrance, security or agreement entered into prior to the date of this deed or the laws of any jurisdiction applying to the Company. -18- 18.2 The Company represents and warrants to the Security Holder that: 18.2.1 it is and will at all times be the sole beneficial owner with full title guarantee of all the Mortgaged Property and that no Encumbrances affect it except the Encumbrances (if any) set out in the Fourth Schedule and general liens in the ordinary course of business; 18.2.2 it has and will at all times have the necessary power to enter into and perform its obligations under this deed; 18.2.3 this deed constitutes its legal, valid, binding and enforceable obligations and is an effective security over all and every part of the Mortgaged Property in accordance with its terms; 18.2.4 all necessary authorisations and consents to enable or entitle it to enter into this deed have been obtained and these will remain in full force and effect during the existence or this security; 18.2.5 the Company has acquired, maintained and complied with all Environmental Licences (if any) needed for its use or occupation of the Mortgaged Property or for the conduct of its current business; 18.2.6 the Company has complied with all other applicable Environmental Laws and has not done or permitted any act or omission whereby its Environmental Licences (if any) could be varied or revoked; 18.2.7 so far as the Company is aware there has been no discharge, spillage, release or emission of any prescribed, dangerous, noxious or offensive substance or any controlled waste on, into or from any of the Mortgaged Property or any premises adjoining any part of it; and no such substances or any controlled waste have been stored or disposed of on or in any part of the Mortgaged Property or, so far as the Company is aware, in any adjoining premises except in accordance with the requirements of the applicable Environmental Laws; 18.2.8 the Company is not in breach of and has not incurred or become subject to any civil or criminal liability under any Environmental Laws or the terms of any Environmental Licence; 18.2.9 the Company has obtained and maintained all such insurance policies as would be maintained by prudent companies carrying on business of the type carried on by the Company at all relevant times and has complied in all material respects with the terms and conditions or such policies. 18.3 The Company undertakes that no Encumbrances (other than a general lien in the ordinary course of business) ranking in priority to or pari passu with the charges created by this deed will arise after the date of this deed over the Mortgaged Property. 19. TRANSFERS AND DISCLOSURES 19.1 This deed is freely transferable by the Security Holder. References in this deed to the Security Holder's shall include its successors, assignees and transferees. 19.2 The Company may not assign or transfer any of its obligations under this deed. Nor may the Company enter into any transaction which would result in any such obligations passing to another person. -19- 19.3 The Security Holder may disclose any information about the Company and any member of the Company's Group and any other person connected or associated with it to any member of the Security Holder's Group and/or to any person to whom it: is proposing to transfer or assign or has transferred or assigned this deed. The Company represents and warrants that it has and (so far as permitted by law) will maintain any necessary authority by or on behalf or any such persons to agree to the provisions of this clause. 20. MISCELLANEOUS 20.1 No delay or omission on the part of the Security Holder in exercising any right or remedy under this deed shall impair that right or remedy or operate as or be taken to be a waiver of it. Any single, partial or defective exercise of any such right or remedy shall not prevent the further exercise of that or any other right or remedy. 20.2 The Security Holder's rights under this deed are cumulative. They are not exclusive of any rights provided by law. They may be exercised from time to time and as often as the Security Holder sees fit. 20.3 Any waiver by the Security Holder of any terms of this deed or any consent or approval given by the Security Holder under it shall only be effective if given in writing. Such consent and approval shall then only apply for the purpose stated and be subject to any written terms and conditions imposed by the Security Holder. 20.4 If at any time any one or more of the provisions of this deed is or becomes illegal, invalid or enforceable in any respect under the laws of any jurisdiction then neither the legality, validity or enforceability of the remaining provisions of this deed nor the legality, validity or enforceability of such provision under the law of any other jurisdiction shall be in any way affected or impaired as a result. 20.5 Any certificate signed by a director or authorised officer of the Security Holder us to the amount of the Secured Monies at the date of such certificate shall, in the absence of manifest error, be conclusive evidence of such amount and be binding on the Company. 20.6 This deed may be executed in any number of counterparts. It will then be as effective as if all signatures on the counterparts were on a single copy or this deed. 20.7 The paper on which this deed is written is, and will remain at all times, the property of the Security Holder, even after the discharge of this security. 21. DEFINITIONS AND INTERPRETATION 21.1 In this deed any words whose meaning is defined in the Financing Agreement shall have the same meaning. 21.2 In this deed the following words shall have the meaning set out after each of them: "ACT OF DEFAULT" - in relation to the Company - any event set out in clause 6.1; -20- "DEBTS"; has the same meaning as in the Financing Agreement; "ENCUMBRANCE" - any mortgage, charge, pledge, lien, assignment, hypothecation, security interest, title retention, flawed asset agreement, preferential right, trust arrangement or other security arrangement, whether by law or agreement. "ENVIRONMENTAL LAW"; - all laws, directions and regulations and all codes of practice, circulars and guidance notes issued by any competent authority or agency (whether in the United Kingdom or elsewhere and whether or not having the force of law) concerning the protection of the environment or human health, including without limitation the conservation of natural resources, the production, storage, transportation, treatment, recycling or disposal of any waste or any noxious, offensive or dangerous substance or the liability of any person, whether civil or criminal, for any damage to or pollution of the environment or the rectification thereof or any related mutters. "ENVIRONMENTAL LICENCE"; - any permit, licence, authorisation, consent or other approval required by any Environmental Law. "FINANCING AGREEMENT"; - the agreement (if any) for the sale and purchase or Debts and/or a conditional sale agreement and/or any other type of agreement between the Company and the Security Holder, details of which are set out in the Second Schedule and any amendments or alterations to it or them and any replacement of it which may he agreed between the parties. "GROUP"; - IN RELATION TO ANY COMPANY, that company, the company and its Subsidiaries, its holding company (as defined in Section 736 of the Companies Act 1985) and the Subsidiaries of that holding company. "INSOLVENT"; - the happening of any of the following events in relation to the Company: 1. a distress or execution being levied on or issued against any of the Mortgaged Property; 2. entering or seeking to enter into any formal scheme of arrangement of its affairs or composition in satisfaction of its debts with its creditors in accordance with the insolvency Act 1986; 3. taking any corporate action by the Company for its winding up, dissolution or re-organisation (otherwise than for the purposes of an amalgamation or reconstruction while solvent on terms previously approved in writing by the Security Holder) or for the appointment of a Receiver, administrator, trustee or similar officer to in respect of it all or any part of its revenue or assets; 4. a petition being presented or an order being made for the winding up of the Company; 5. an administration order being made or applied for; 6. a meeting of creditors being called for winding up the Company or for any other purpose referred to in the insolvency Act 1986; 7. a statutory demand under the Insolvency Act 1986 being served; -21- 8. an encumbrancer taking possession of any part of the undertaking or properly of the Company or a Receiver or being appointed over it; 9. entering into any informal arrangement or composition with or for the benefit of the Company's general body of creditors; 10. being unable to pay its debts as they become due; 11. being deemed insolvent under the insolvency Act 1986; 12. the appointment of an administrator by the holder all qualifying floating charge under Schedule B1 to Insolvency Act 1986 (introduced by the Enterprise Act 2002); and 13. taking any steps towards a moratorium under the Insolvency Act 2000. "INTELLECTUAL PROPERTY" - all patents (including applications, improvements, prolongations, extensions and right to apply therefor) designs (whether registered or unregistered) copyrights, design rights, trade marks and service marks (whether registered or unregistered) utility models, trade and business names, know-how, formulae, inventions, confidential information, trade secrets and computer software programs and systems (including the benefit of any licences or consents relating to any of the above) and all fees, royalties or other rights derived therefrom or incidental thereto in any part or the world. "MORTGAGED PROPERTY"; - the subject matter of the mortgages and charges (or any or any part of them, if the context so allows) created by this deed and set out at clause 2. "NON VESTING DEBTS"; - all or any Debts of the Company to be purchased by the Security Holder pursuant to the Financing Agreement but which fail to vest absolutely and effectively in the Security Holder for any reason, together with the Related Rights to such Debts. "OTHER DEBTS"; - all sums due and owing or accruing due and owing to the Company whether or not on account of its trading both present and future except: 1. Non-Vesting Debts; and 2. any Debts whilst they remain absolutely and effectively vested in or held on trust for the Security Holder under the `Financing Agreement and whether such vesting results from a legal or equitable assignment. "RECEIVER"; - includes a receiver or a manager or a receiver and manager or an administrative receiver as defined in Section 29(2) of the Insolvency Act 1986 or a receiver of part only of the property of the Company or a receiver only of the income arising from such property or from part of it. - includes an administrator appointed or to be appointed by the Security Holder under Schedule B1 to the Insolvency Act 1986 (introduced by the Enterprise Act 2002) (where this deed constitutes a qualifying floating charge under that Act); "RELATED RIGHTS"; - has the same meaning as in the Financing Agreement. -22- "REMITTANCES"; - cash, cheques, bills of exchange, negotiable and non-negotiable instruments, letters of credit, orders, drafts, promissory notes, electronic payments and any other instruments, methods or forms of payment or engagement. "SECURED LIABILITIES"; - both the Secured Monies and the obligations and liabilities in clause 1.1.2. "SECURED MONIES"; - all the monies which now or at any time to future may be owing due and/or payable (but remaining unpaid) by the Company to the Security Holder in any manner and for any reason on any account; Secured Monies include all such monies due by the Company, either alone or jointly with any other person or on any partnership account (even though the whole or any part of such monies is represented or secured by any mortgages, guarantees, trust receipts, bills of exchange, leasing, hire or conditional sale agreements, assignments, agreements for discounting or factoring of Debts or any other agreements or securities) and whether or not any or them have or has fallen due or become payable and whether or not default shall have been made in respect thereof, Secured Monies also means any or the following items, whether now or in the future: 1. all monies due or payable under the Financing Agreement (if any) or by virtue of any guarantee or indemnity given by the Company to the Security Holder; 2. all advances which the Security Holder has made or shall make to the Company; 3. any indebtedness now or hereafter to be incurred by the Security Holder for or at the request of the Company, including all monies which the Security Holder shall pay or become liable to pay for or on account of the Company or any other person at the request or order of the Company or under its authority, either alone or jointly with any other person and whether or not by any of the following: 3.1 the Security Holder making direct advances; or 3.2 the Security Holder drawing, accepting, endorsing, paying or discounting any Remittance; or 3.3 the Security Holder entering into any bond, guarantee, indemnity or letter of credit; or 3.4 the Security Holder confirming orders; or 3.5 the Security Holder otherwise accepting any other liability for or on behalf of the Company; 4. all monies which the Security Holder can charge to the Company and all costs charges and expenses incurred by the Security Holder following default in payment of any such monies or of breach by the Company of any of the provisions of this deed. 5. the charges of surveyors and/or solicitors instructed by the Security Holder in connection with any part or the Mortgaged Property. 6. all costs and charges and expenses which the Security Holder may from time to time incur in: 6.1 stamping, perfecting, registering or enforcing this security; or -23- 6.2 the negotiations for the preparation and execution of this deed, and the Financing Agreement or any guarantee, indemnity, priority arrangement, waiver or consent in respect or them; or 6.3 obtaining payment or discharge of Secured Monies; or 6.4 paying any rent, rates, taxes or outgoings for the Mortgaged Property; or 6.5 insuring, repairing, maintaining, managing or realising any part of the Mortgaged Property; or 6.6 the preservation or exercise of any rights under or in connection with this deed or any attempt to do so; or 6.7 giving a discharge or release of this security; or 6.8 dealing with or obtaining advice about any other matter or question arising out of or in connection with this deed with the intention that the Security Holder shall be afforded a full complete and unlimited indemnity against all costs, charges and expenses paid or incurred by it and whether arising directly or indirectly in respect of this security or of any other security held by the Security Holder for the Secured Monies; 7. all monies expended by any attorney appointed under clause 5.3 in exercising his powers; 8. interest on all monies due and owing to the Security Holder at such rate as may from time to time be payable pursuant to any agreement or arrangement relating thereto. "SECURITIES"; - all stocks, shares, bonds and securities of any kind whatsoever and whether marketable or otherwise and all other interests (including but not limited to loan capital) both present and future held by the Company in any person and includes all allotments, rights, benefits and advantages whatsoever at any time accruing, offered or arising in respect of or incidental to the same and all money or property offered at any time by way of dividend, conversion, redemption, bonus, preference, option or otherwise in respect thereof. "SECURITY HOLDER"; - where the context permits includes its officers, agents and representatives. "SUBSIDIARY"; - 1. a subsidiary within the meaning of Section 736 of the Companies Act 1985; and 2. unless the context otherwise requires, a subsidiary undertaking within the meaning of Sections 258-260 of the Companies Act 1985 its substituted by Section 21 of the Companies Act 1989. 21.3 In the construction and interpretation of this deed: 21.3.1 the singular shall include the plural and vice versa; reference to one gender shall include a reference to any other genders; -24- 21.3.2 references to persons shall be treated as including individuals, firms, partnerships, corporations, organs of government, whether local, national or supra national and any other entity recognised by law; 21.3.3 references to any Act of Parliament shall be treated as including each Act as amended, modified or re-enacted from time to time and all rules, regulations, orders and subordinate legislation made in accordance with it; 21.3.4 references to clauses and to schedules are to those in this deed; 21.3.5 where the Company has an obligation to carry out an act then it shall be fully responsible for the costs and expenses or doing so; 21.3.6 where the Security Holder acts in accordance with this deed the Company will indemnify the Security Holder against all costs and expenses incurred; 21.3.7 where any discretion is vested in a Receiver or the Security Holder it shall be treated as an absolute discretion; 21.3.8 each of the provisions of this deed shall be severable and distinct from one another; 21.3.9 references to this deed and other documents referred to in it includes any supplemental or collateral document to each of them or which is entered into pursuant to each of them and any document varying, supplementing, novating or replacing the same from time to time; 21.3.10 references to charges shall be treated as references to mortgages and charges created by this deed; 21.3.11 references to this security shall be treated as reference to the security created by this deed; 2.1.3.12 any powers given in this deed to an administrator shall apply to the littlest extent permitted by the insolvency Act 1986; 21.3.13 headings to clauses are for reference only and shall not affect the interpretation of this deed; 21.3.14 the meaning of general words introduced by the word other or the word otherwise shall not be limited by reference to any preceding word or enumeration indicating a particular class of acts, matters or things. -25- FIRST SCHEDULE (Page 3 - The Parties) The Company Xcel Power Systems Limited, a Company registered in England and Wales with Companies Registry number 00575679 and whose registered office is at: Brunswick Road, Cobbs Wood, Ashford, Kent TN23 1EB SECOND SCHEDULE (Clause 21 (Definition of "Financing Agreement"), Clauses 1.11 and 6.1.1) The Agreement for the purchase of Debts entered into between the Company and the Security Holder dated THIRD SCHEDULE (Clause 2.1.1) Land Registered at H.M. Land Registry None London Borough/County and District Title Numbers and Description FOURTH SCHEDULE (Clauses 2.4 and 18.2.l) Encumbrances to which this security is subject. FIFTH SCHEDULE (Clause 2.1.2(iv)) (Plant and machinery subject to chattel mortgage hereunder) To be Advised -26- IN WITNESS whereof the parties have executed this deed on the 28 day of June 2005 which is the date on which this deed becomes effective. THE COMPANY EXECUTED AND DELIVERED AS A DEED ) ) BY XCEL POWER SYSTEMS LIMITED ) ) ) and by ........................ ) (Director)** ) Signature of Director ) ) and** ......................... ) (* Director/Company Secretary ) Signature of *Director/Company ) Secretary THE SECURITY HOLDER SIGNED and :DELIVERED as a Deed on day of on behalf of LLOYDS TSB COMMERCIAL FINANCE LIMITED ) by 1.** ) duly appointed attorney ) ) Attorney (s) for Lloyds 2.** ) TSB Commercial Finance duly appointed attorney ) imited ) In the presence of: ) Signature: .................................. ) ) Name:** .................................. ) Witness (only required ) if one attorney signs) Occupation: .................................. ) ) Address: .................................. ) ) .................................. ) Key ** insert full names * delete as applicable -27- EX-31 20 emrise_10qex-31.txt EXHIBIT 31 CERTIFICATIONS I, Carmine T. Oliva, certify that: 1. I have reviewed this Form 10-Q of Emrise Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) [language omitted pursuant to SEC Release 34-47986] for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) [Omitted pursuant to SEC Release 34-47986]; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 14, 2005 /s/ CARMINE T. OLIVA - ----------------------------------------------------- Carmine T. Oliva Chief Executive Officer (principal executive officer) I, Randolph D. Foote, certify that: 1. I have reviewed this Form 10-Q of Emrise Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) [language omitted pursuant to SEC Release 34-47986] for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) [Omitted pursuant to SEC Release 34-47986]; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 14, 2005 /s/ RANDOLPH D. FOOTE - ----------------------------------------------------- Randolph D. Foote Chief Financial Officer (principal financial officer) EX-32 21 emrise_10qex-32.txt EXHIBIT 32 CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND ACTING CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the quarterly report on Form 10-Q of Emrise Corporation (the "Company") for the period ended September 30, 2005 (the "Report"), the undersigned hereby certify in their capacities as Chief Executive Officer and Chief Financial Officer of the Company, respectively, pursuant to 18 U.S.C. section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and 2. the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: November 14, 2005 By: /s/ CARMINE T. OLIVA ----------------------------- Carmine T. Oliva Chief Executive Officer (principal executive officer) Dated: November 14, 2005 By: /s/ RANDOLPH D. FOOTE ----------------------------- Randolph D. Foote Chief Financial Officer (principal financial officer) A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signatures that appear in typed form within the electronic version of this written statement required by Section 906, has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----