UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 2013
or
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 1-10346
EMRISE CORPORATION
(Exact name of registrant as specified in its charter)
| Delaware | 77-0226211 | |
| (State
or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
2530
Meridian Parkway,
Durham, NC 27713
(Address of principal executive offices)
(919) 806-4722
(Registrant’s telephone number, including area code)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: Common Stock, par value $0. 0.0033 per share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
Indicate by check mark 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 the 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 checkmark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.:
| Large accelerated filer | [ ] | Non-accelerated filer | [ ] | |
| Accelerated filer | [ ] | Smaller reporting company | [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]
The aggregate market value of the voting common equity held by non-affiliates, computed by reference to the $0.50 closing sale price of such stock on June 28, 2013, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $4,995,000. The registrant has no non-voting common equity.
The number of shares outstanding of the Registrant’s common stock, par value $0.0033 per share, as of April 14, 2014, was 10,719,337.
Documents Incorporated By Reference: None.
EMRISE CORPORATION
ANNUAL REPORT ON
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2013
TABLE OF CONTENTS
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CAUTIONARY STATEMENT
All statements included or incorporated by reference in this Annual Report on Form 10-K (the “Report”), other than statements or characterizations of historical fact, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act, as amended. Examples of forward-looking statements include, but are not limited to, statements concerning projected net sales, costs, expenses and gross margins; our accounting estimates, assumptions and judgments; the demand for our products; the competitive nature of and anticipated growth in our industries; our ability to sell assets, pay down debt and increase our per share common stock price; our ability to identify and consummate (a) acquisitions and integrate their operations successfully and (b) dispositions, both on terms favorable to us; and our prospective needs for additional capital. These forward-looking statements are based on our current expectations, estimates, approximations and projections about our industries and business, management’s beliefs, and certain assumptions made by us, all of which are subject to change. Forward-looking statements can often be identified by words such as “anticipates,” “expects,” “intends,” “plans,” “predicts,” “believes,” “seeks,” “estimates,” “may,” “will,” “should,” “would,” “could,” “potential,” “continue,” “ongoing,” similar expressions, and variations or negatives of these words. These statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, our actual results could differ materially and adversely from those expressed in any forward-looking statements as a result of various factors, some of which are listed under “Risk Factors” in Item 1A of this Report. These forward-looking statements speak only as of the date of this Report. We undertake no obligation to revise or update any forward-looking statement for any reason.
Business and Industry Description
EMRISE Corporation (including our subsidiaries, referred to collectively in this Report as “EMRISE,” the “Company,” “we,” “us” or “our”) designs, manufactures and markets electronic devices, sub-systems and equipment for aerospace, defense, industrial and communications markets. Our products perform key functions such as power supply and power conversion; radio frequency (“RF”) and microwave signal conditioning; and network access and timing and synchronization of communications networks. We conduct our business through two operating segments: electronic devices and communications equipment. Our two electronic devices segment business units, XCEL Power Systems Ltd. (“XPS”) and Pascall Electronics Limited (“PEL”), are located in the UK (United Kingdom). Our two communications equipment business units, CXR Larus Corporation (“CXR Larus”) and CXR Anderson-Jacobson (“CXR AJ”), are located in the United States and France, respectively. During 2013, our electronic devices segment contributed approximately 68% of overall net sales, while the communications segment contributed approximately 32% of overall net sales. EMRISE serves the worldwide base of customers it has built, primarily in North America, Europe, North Africa and Asia.
Electronic Devices
Within our electronic devices segment, we produce a range of power systems, RF and microwave devices, and sub-system assemblies. The following is a description of the major product categories within this segment:
| ● | Power Systems. Our power systems business is comprised of high and low voltage, high specification, high reliability custom and standard power conversion products designed for hostile environments. These products are used predominately in the defense, commercial aerospace, industrial, and communications markets. | |
| ● | RF and Microwave Devices. Our RF and microwave devices business is comprised of RF and microwave devices, including frequency control products, together with custom integrated assemblies and sub-systems. These products are used in applications that include communications, air traffic control, navigation and location equipment, radar and signal jamming devices, and weather radar, among others. | |
| ● | Sub-system Assemblies. Our sub-system assemblies business consists of the design and manufacture of assemblies that incorporate our own products from the other two categories combined with third-party equipment and devices into a completed unit. |
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The electronic devices segment is primarily “project” driven, with the majority of revenues being derived from custom products with long development cycles, long life cycles and high barriers to entry. Manufacturing and testing is performed in-house or through sub-contract manufacturers. Our electronic devices are used in a wide range of military airborne, seaborne and land-based systems, and Civil Aerospace systems such as in-flight entertainment and connectivity (“IFE&C”) systems - such as applications for mobile phone, Wi-Fi internet communications and on-board satellite and broadcast TV - which are being installed in new commercial aircraft as well as being retrofitted into existing commercial aircraft.
The electronic device market we serve is comprised predominantly of military and commercial aerospace applications. Large military programs, including land and seaborne military platforms, are high revenue generating opportunities, but are few in number and often more likely to be affected by budgetary constraints. As a result, we also focus on multiple smaller defensive aids and force protection projects in the 4C market (command, control, communication and computers) and commercial aerospace opportunities.
Communications Equipment
Within our communications equipment segment, we produce a range of network access products and network timing and synchronization products for public and private communications networks. The following is a description of the major product categories within this segment:
| ● | Network Access. Our network access product category is comprised of a wide range of LAN/WAN interconnection equipment and systems over copper, fiber or wireless networks, to industry standards as required by our customers. We provide a combination of proprietary products and third party products to meet customer requirements. Products are targeted to key markets such as the military, utilities and other private networks, government administration, point of sale and public communications service providers primarily in Europe, North Africa and, more recently, in the United States. | |
| ● | Timing and Synchronization. Our timing and synchronization product category is comprised of a range of timing products primarily for the outer edges of service provider networks, which we refer to as an “Edge Network.” Products are targeted to key markets such as telephone companies, cable carriers, government administration, utility companies, and other defense and homeland security related applications primarily in the United States, but also, to a lesser extent, in Europe. |
The communications equipment segment is “end user product” based with typically internally funded development and marketing prior to selling via direct and indirect sales channels. Manufacturing is primarily outsourced.
Strategy and Business Developments
During 2013 we renewed our focus on our existing operations and developed a plan for growth for those operations. These steps, coupled with the significant reduction in debt service requirements and rigorous control of overheads, helped us achieve an improvement in our results of operations during the year and placed the Company in a stronger position to exploit opportunities during 2014 and subsequent years. Early in 2013, we appointed a new general manager for our largest subsidiary, with the intention of expanding the electronic devices business, which could lead to enhanced levels of financial performance.
In March 2013, we purchased the building that is occupied by PEL. The cost was $2.9 million. We had previously leased this building and by making this purchase, we secured the future of PEL in this location while at the same time reducing our building rental costs. We negotiated a new 20 year loan in the amount of $2.1 million, secured by the building, at a rate of interest, fixed for 15 years, of 4.8% which together with cash from operations paid for the building.
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Customers
We sell our commercial and military electronic devices primarily to original equipment manufacturers (“OEMs”), including manufacturers of aerospace and defense systems and industrial equipment. During 2013, our top five electronics devices customers in terms of revenues were Rockwell Collins, Panasonic Avionics, Selex ES, EMS Technologies and GE Aviation Systems. Four of these companies were among our top five customers in 2012. We sell our communications equipment to public, private and corporate telecommunications service providers and end users, including telephone companies, cable service providers, utility companies and numerous other communications service providers. During 2013, our top five communications equipment customers, including distributors, in terms of revenues, were Cherry & White, Comores Telecom, BT Services, Thales Communications and Power & Telephone. Two of these customers were also among our top five customers in 2012.
We have a diversified customer base for both our electronic device products and our communications equipment products. During 2013, one customer accounted for 11.6% of our total net sales and the same customer was also the largest customer in 2012 accounting for 10.8% of our total net sales.
Sales, Marketing and Customer Support
We market and sell our products through our operating subsidiaries within both of our operating segments. Our sales force and marketing staff consists primarily of engineers and technical professionals including a direct sales force and, in some cases, a network of independent sales representatives or distributors. Our sales professionals in each country within which we operate are experienced and highly knowledgeable about their respective markets, customer operations and strategies and regulatory environments. We believe this extensive experience and knowledge significantly enhances the ability of our sales and marketing staff to build long-standing customer relationships, as such relationships are more consultative in nature and, as a result, our sales and marketing staff can communicate back to us valuable input on systems and features that our customers desire in future products.
Our electronic devices products are sold through a combination of direct sales and independent representatives. We sell our electronic devices primarily to OEMs and system integrators in the military and commercial aerospace and industrial electronics industries. We typically have long-term relationships with our customers within our electronic devices segment and projects and programs in this segment often span multiple years, with military programs sometimes in excess of five years. We obtain revenues through long-term purchase orders and repeat business from our existing customers, by marketing subsystem assemblies that incorporate our own and third party equipment and devices to our existing customers, and by entering new product markets, such as Civil Aerospace Cabin Electronics market and new geographic markets.
Military and defense customers generally require our products to be formally qualified for their application. The total system will then typically undergo flight qualification or the equivalent on a land or sea based system. A further development or prototyping phase may follow to meet additional requirements. This can lead to lengthy development and approval cycles and very long prototype phases, sometimes spanning several years, prior to the product entering production. As a result of these long development and approval cycles, the overall program is subject to external political and economic constraints over which we have little control and which makes sales forecasting difficult. Further, delays associated with customer internal approval processes, contracting procedures and/or procurement practices may cause potential sales of our electronic device products to be delayed. After a customer has approved our product for purchase, any new prospective supplier will have considerable barriers to entry due to the need to re-qualify the application. As a result, once qualified, our products typically enjoy a long production life.
Our communications equipment is sold primarily through a combination of our local in-house sales force, independent representatives, and third-party distributors. We sell our communications equipment primarily to private network operators and to large communication service providers as well as resellers and value added resellers and, in Europe, to military customers. Communications service providers generally commit significant resources to an evaluation of our products and our competitors’ products and require each vendor to expend substantial time, effort and money educating them about the value of our solutions and, in many cases, to qualify products for their networks. Consequently, sales to this type of customer generally require an extensive sales effort throughout the prospective customer’s organization and final approval by an executive officer or other senior level employee. The result is lengthy sales and approval cycles, which make sales forecasting difficult. In addition, even after a customer has approved our product for purchase, future purchases are uncertain because while we generally enter into long-term supply agreements with our customers, these agreements do not require specific levels of purchases.
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Delays associated with potential customers’ internal approval and contracting procedures, procurement practices, testing and acceptance processes are common and may cause potential sales of our communications products to be delayed or foregone. As a result of these and related factors, the sales cycle of new products for large customers typically ranges from six to 12 months or more. In addition, we have some distribution channels that generally are box-stocking distributors with significant independent sales forces selling our products to final customers, integrators and other resellers on a regional and nationwide basis. We perform periodic product applications training for our distributor and reseller workforce and we funnel many of the leads we generate to the distribution channels for their follow-up and closure.
Competition
We believe that our competitive advantage is founded on the application of leading edge technology, the quality of our products, our ability to quickly address and adapt to individual customer requirements and to the overall marketplace, the strength of our distribution channels, and our compliance with government and industry standards.
The electronic devices market is highly fragmented and competitive and is comprised of a diverse group of OEMs. Nonetheless, we believe that our many years serving this market and significant experience in the industry and the customized nature of our products have acted and will continue to act as barriers to entry for potential competitors. This is particularly true in the military and defense markets that have high barriers to entry after a product has been qualified. Competition for development programs includes multinational and local engineering and manufacturing companies containing customer in-house capabilities. Competitors in this segment include Astronics, Crane, Vicor, ITT and Martek, among others. Our RF devices and power supplies are similarly positioned in the IFE&C markets. Significant competitors in this market include the in-house manufacturing capability of Panasonic, Rockwell Collins and Thales, all of which are also our customers.
The communications equipment market is intensely competitive and subject to rapid technological change, evolving industry standards and regulatory developments. Our principal competitors within this segment include Micro Semi, Frequency Electronics Inc. and ADVA for timing and synchronization products and RAD, Zhone/Paradyne, Adtran, Patton Electronics Corporation for network access products. The design of many of our network access products enables us to offer numerous product combinations to our customers and to serve both central site data communications needs and remote access sites on both the enterprise-wide and single location level. We believe that this design flexibility gives us a competitive advantage by enabling us to offer quality products that meet and are adaptable to evolving customer requirements, technologies and government and industry standards.
Most of our competitors have greater sales, marketing, technological, research and financial resources than we do. Our competitors’ advantage with regard to these resources may reduce our ability to obtain or maintain market share for our products in cases where our competitors are better able than we are to satisfy customer needs.
Backlog
For a significant portion of our business, customers issue binding purchase orders or enter into other binding purchase arrangements for the products to be produced and shipped over time in the future. Our “backlog” represents these orders and provides a partial view into potential shipments and revenues. 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 work is currently in progress. At December 31, 2013, our backlog from continuing operations of firm, unshipped orders was approximately $25.9 million compared to $22.6 million a year ago (an increase of 14.6%). Our electronic devices business represented approximately 90% of the backlog. The electronic devices business has long lead-times for our manufacturing processes due to the custom nature of the products. Approximately 10% of the backlog is represented by our communications equipment business. We believe that the majority of our current backlog will be shipped within the next 12 months. However, we cannot provide assurance that we will be successful in fulfilling these orders in a timely manner or that we will ultimately recognize as revenue the amounts reflected as backlog. At March 31, 2014, our backlog from continuing operations was approximately $26.8 million, compared to $24.5 million at March 31, 2013.
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Warranties
Generally, our products carry a standard one-year, limited parts and labor warranty. In certain circumstances, and by specific negotiation with a customer, we provide an extended limited parts and labor warranty. We offer this extended parts and labor warranties beyond the standard one or two year warranty, as may be applicable, for an additional cost to our customers. Products returned under warranty typically are tested and repaired or replaced at our option. Historically, we have not experienced significant warranty costs or returns. However, it is possible that disputes over specifications, materials or workmanship could arise in the future.
Product Development and Engineering
We are making investments in product development and engineering which are designed to increase our range of product offerings to our customers, stay current with the technological and regulatory changes in our industry and anticipate and satisfy our customers’ preferences and requirements on existing and/or future anticipated orders. Our product development and engineering activities focused on product development for network access, timing and synchronization products, RF frequency control products and power conversion devices. We continually review and evaluate technological and regulatory changes that may affect our products and we seek to offer products and capabilities that solve our customers’ operational challenges and improve their efficiency. Development costs are charged to expense as incurred. The cost of development charged against income in 2013 was $1,132,000 and in 2012 the comparable cost was $1,267,000.
Manufacturing, Assembly and Quality Assurance
Our communications equipment, including network access products and communication timing and synchronization products, generally are assembled from outsourced sub-assemblies, with final assembly, configuration and quality testing typically performed in house. We believe that outsourcing certain aspects of manufacturing, especially full assemblies, lowers our manufacturing costs, in particular our components and labor costs, provides us with more flexibility to scale our operations to meet changing demand, and allows us to focus our engineering resources on new product development and product enhancements.
We manufacture our electronic devices through a combination of in-house and external outsource manufacturing processes depending on the product, application and volume. We maintain broad mechanical and electronic assembly capabilities such as machining, surface mount technology, through-hole assembly, cable harness assembly and general assembly, all of which are primarily utilized to maintain our flexibility to produce small volume batch products and quick turnaround prototypes. Many of the remaining portions of manufacturing, including assembly of our more standardized and/or large volume production orders are outsourced. Although many of our electronic devices incorporate our standard techniques and intellectual property, most of our products are nevertheless built to meet customer specifications. This approach of incorporating proprietary standard modular designs into custom products allows us to reduce lead time to delivery and minimize material inventory. Our electronic devices segment produces products in one-piece to several hundred-piece batches, with a typical lead time between 12 and 50 weeks. The lead-time is predominantly to source electronic component piece parts. Typical build time is six to eight weeks from receipt of external components, but can, at times, extend to 26 weeks or more.
We operate four manufacturing and assembly facilities worldwide. The European subsidiaries are certified to ISO 9001 and ISO 14000 while our electronics devices companies are also ISO 9100.
The purchased components we use to build our products are generally available from a number of suppliers. As a result of the global economic situation, many suppliers have reduced their inventory levels, requiring longer lead times to obtain raw materials and complete existing orders. We rely on a few limited or sole source suppliers for certain specific components and parts. We do not have long-term supply agreements with these vendors. In general, we make advance purchases of some critical components to ensure an adequate supply, particularly for components that have long lead-times, sometimes of up to 50 weeks. If we were required to locate new suppliers or additional sources of supply, we could experience a disruption in our operations or incur additional costs in procuring required materials.
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Intellectual Property
We regard certain of our own software, hardware and manufacturing processes as proprietary and we rely primarily on trade secrets, confidentiality agreements and contractual provisions to protect our proprietary rights. Where applicable, we seek to protect our software, documentation and other written materials under trade secret and copyright laws, although due to the standardized nature of the underlying technology of our products, this protection is often not applicable. Our product development and manufacturing process typically involves the use and development of a variety of forms of intellectual property and proprietary technology. In addition, in some cases, we incorporate technology and software that we obtain from third party sources. Sometimes we obtain this technology by means of a license. These licenses generally involve a one-time fee and no time limit, but in some cases may involve on-going licensing fees or royalties based on future sales. If these third party sources were to cease doing business, or to cease doing business with us, we would need to obtain the technology and software from another source. We recognize the importance of having alternative sources and believe that alternatives to these third party technologies are available both domestically and internationally and we intend to expand these alternative technological opportunities in the future.
We may receive, in the future, notices from holders of patents that raise issues as to possible infringement by our products. Questions of infringement and the validity of patents in the fields of electronic devices, communications and information technology involve highly technical and subjective analyses. These types of proceedings are time consuming and expensive to defend or resolve, result in substantial diversion of management resources, cause product shipment delays or could force us to enter into royalty or license agreements rather than dispute the merits of the proceeding initiated against us. At this time, we are not aware of any infringement notices.
Government Regulation and Industry Standards and Protocols
We design our products to comply with a significant number of industry standards and regulations, some of which are evolving as new technologies are deployed. In the United States, our products must comply with various regulations defined by the U.S. Federal Communications Commission, (“FCC”) and Underwriters Laboratories, as well as industry standards such as the Network Electronic Build Standards, (“NEBs”) established by Telcordia Technologies, Inc., formerly Bellcore, and those developed by the American National Standards Institute. Internationally, our products must comply with standards established by the European Committee for Electrotechnical Standardization, the European Committee for Standardization, the European Telecommunications Standards Institute and telecommunications authorities in various countries, as well as with recommendations of the International Telecommunications Union. Any failure of our products to comply, or delays in compliance, with the various existing and evolving standards could negatively affect our ability to sell our products. Our products for the military markets are typically type tested and require the production of a first article and other prototypes, which are subject to testing to meet specific customer and government regulations governing operating environment, performance and operational capability.
Our facilities and product lines are subject to statutes governing safety and environmental protection. We believe that we are in compliance with these statutes and are not aware of any proposed or pending safety or environmental rule or regulation that, if adopted, would have a material effect on our business or financial condition.
Many of our military related products are subject to national or international trade import and/or export restrictions. We are subject to the International Traffic in Arms Regulations (“ITAR”) and similar protocols in Europe. In many cases, we are also required to obtain export and/or “end-use” permits when we are asked by our customers to ship certain products outside our native countries where the products are manufactured. We maintain and operate the appropriate controls and security as required for the commercial and military work that we undertake. For example, we must certify certain facilities to specific defense requirements which are subject to regular audit and includes access control and restrictions to personnel. We believe that we are in compliance with all of these statutes and regulations.
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Seasonality
There are no significant seasonal aspects to our business, except that purchases of our communications equipment by public communications carriers tend to be higher than average at the end of the year and lower than average during the first quarter of each year because their capital equipment budgets typically are not approved until late in the first quarter. Furthermore, shipments within our electronic devices segment can vary significantly quarter to quarter due to variances in the nature and timing of customer orders, especially as they relate to high-volume, long term production contracts. The timing of such contracts can dramatically affect the volume of shipments and our profitability from one quarter to the next or even from year to year.
Employees
As of March 31, 2014, we employed 203 individuals, of which 192 were full time, in our various divisions and subsidiaries. At March 21, 2013, we employed 213 individuals, of which 201 were full time. None of our employees are represented by labor unions, and there have not been any work stoppages at any of our facilities. We believe that our relationship with our employees is good.
Corporate Information and Securities Filings
EMRISE is a Delaware corporation that was formed in 1989. Our principal executive offices are located at 2530 Meridian Parkway, Durham, NC 27713. Our website address is www.emrise.com. We do not intend our website address to be an active link or to otherwise incorporate by reference the contents of the website into this Report. The public may read and copy any materials that we file with the United States Securities and Exchange Commission (the “SEC”) at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549, on official business days during the hours of 10:00 am to 3:00 pm, or electronically through the SEC website (www.sec.gov). The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Within the Corporate Governance section of our website, we provide information concerning corporate governance, including our Board of Directors committee charters, Codes of Conduct and other information.
The following summarizes material risks that investors should carefully consider before deciding to buy or maintain an investment in our common stock. Any of the following risks, if they actually occur, would likely harm our business, financial condition and results of operations. As a result, the trading price of our common stock could decline, and investors could lose the money they paid to buy our common stock or not profit from their investment.
Risks Related to Our Business
Our profits in 2013 were small and it is several years since the Company generated significant profits. We need to invest in our business to generate and increase future profits and we need to meet loan repayments that fall due later in 2014. We need to raise new business loans and manage our business effectively to meet the cash demands but this will not necessarily lead to an overall positive cash flow during 2014. If we incur losses, we are likely to experience negative cash flow, which may hamper our operations, may prevent us from expanding our business and may cause our stock price to decline.
We generated modest profits of $249,000 from operations in 2013 after sustaining a very small loss in 2012, $2 million loss from continuing operations for 2011 and a $6 million loss in 2010. We expect to rely on cash on hand, cash generated from our operations, existing financing arrangements and a new loan facility to fund the cash requirements of our business and the repayment of the promissory notes. If our profits do not continue grow, we are likely to experience negative cash flow, which may hamper current operations and may prevent us from investing in and expanding our business. We may be unable to attain, sustain or increase profitability on a quarterly or annual basis in the future. The Company needs cash to grow and this investment and consequent cash outflow may not result in an immediate or indeed, any increases in profit. If we do not achieve, sustain or increase profitability, our stock price may decline.
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We owe debt, including promissory notes which fall due for redemption within the next 12 months.
At the year-end we had a significant amount of the debt in the form of promissory notes which were originally issued to former shareholders of Advanced Control Components (the “Former Shareholders of ACC”). The principal amount of $2.3 million was due to be paid in 2014. We paid $0.3 million in March 2014 with the final tranches of this principal sum, being $0.3 million due in September 2014 and $1.7 million due for payment in December 2014. Using a combination of existing cash generated from within the business and an additional loan from our principal lender, we redeemed the promissory notes in April 2014. The new borrowings generated net new cash of $1.2 million at a lower rate of interest than we were paying for the promissory notes. During 2013, we were also making annual re-payments of principal of approximately $240,000 to our lead banker in the United Kingdom. As a result of the new loan, the repayments which will be made from operational cash flows have risen to approximately $600,000 per year. We have credit facilities available to us under separate financing arrangements for our UK and French operations. The cost of carrying and servicing this debt affects our profitability. If we are unable to grow the Company and generate additional cash, we will need to seek new finance to ensure we can meet scheduled loan repayments as they come due. If we are unable to do this we may have to consider the future sale of assets or sell equity to raise the capital needed to pay these debts.
We rely on our foreign subsidiaries to generate cash to meet Company liabilities.
We rely on our foreign subsidiaries to generate profits and cash with which to finance our US operations and repay corporate debt. EMRISE does not have any facility in the United States to generate cash to pay its liabilities beyond dividends and loans from its subsidiaries and management charges imposed on those same companies. In the event that the overseas trading entities were unable to support EMRISE, either through a lack of cash or limitations on cash transfers imposed through bank covenants, loan conditions or tax factors then EMRISE would need to seek funds elsewhere. There is no guarantee that this would be possible.
We have limited cash resources which limits investment in new products, people or working capital.
We have bank borrowing facilities for each of our subsidiaries which are sufficient to meet our normal levels of activity within those subsidiaries. Our plans anticipate moderate growth but we cannot guarantee that this growth will be self-financing in the short term. New products and new orders require additional working capital and delays in design, production, delivery or payment from customers will put a strain on this working capital which could result in the Company running out of cash. We monitor our cash resources and cash availability against existing bank facilities very carefully but as a small company we do not have the resources to cover the eventuality of a lengthy delay in the working capital cycle. Some of our borrowing facilities are specific to individual subsidiaries and there are limitations, imposed by banking covenants, on the ability to transfer cash between these subsidiaries. In the event that one or more subsidiary requires cash in excess of its borrowing facility to meet its obligations we may be unable to transfer cash to that subsidiary even if the Company as a whole has adequate borrowing facilities
Our strategy includes organic growth, which may not result in increased revenues or profitability and may deplete our limited cash reserves without return on investment.
We intend to grow our business organically, focusing on sales to further increase our revenues and backlog, and ramping up manufacturing to meet the increased demand. We may encounter difficulties caused by a number of factors, some of which are out of our control, including operational or personnel issues; delays in obtaining (or failure to obtain) required parts, supplies, or third-party technology; global recession concerns; access to credit by our customers, our suppliers, or ourselves; and our competitors may be more successful than we are technologically or in terms of sales generation. We are using cash reserves to make up-front investments in engineering and inventory. We may invest in the wrong technologies or products or the investment may not yield improved products and sales as anticipated. Our competition may make similar investments with greater success. If we fail to develop significant sales of products, it will negatively impact our business, our ability to become profitable, and results of operations. We would also expect such failure to cause fluctuations or decreases in our common stock price.
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If we are unable to fulfill backlog orders due to circumstances involving us or one or more of our suppliers or customers, our anticipated results of operations will suffer.
As of December 31, 2013, we had $25.9 million in backlog orders for our products. This represents approximately 81% of our 2013 annual revenues. Backlog orders represent 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. Our backlog orders are due, in large part, to the long lead-times associated with our electronic device products, which products generally are custom built to order. We may encounter difficulties in fulfilling these orders and commitments, which could lead to failing to deliver them in a timely manner. We may not ultimately recognize as revenue the amounts reflected as backlog. Factors that could affect our ability to fulfill backlog orders include difficulty we may experience in obtaining raw materials or sub-assemblies from suppliers, whether due to obsolescence, production difficulties on the part of suppliers, including the longer lead times we have recently seen with many suppliers, or customer-induced delays and product holds. If we were required to locate new suppliers or additional sources of supply, we could experience a disruption in our operations or incur additional costs in procuring required materials. Our anticipated results of operations and cash flows will suffer to the extent we are unable to fulfill backlog orders within established timeframes, particularly if delays in fulfilling backlog orders cause our customers to reduce or cancel their orders. Analysts and investors are likely to view us negatively if we fail to recognize as revenue the amounts reflected as backlog, which could lead to a decrease in our common stock price.
We may not sustain these backlog amounts in the future, particularly if we are not successful in continuing to grow our sales or if our investment in technologies and products or acquisitions fails to translate into increased sales.
The sales cycles of many of our products are lengthy, exposing us to the risks of delays, foregone orders and fluctuations in operating results.
Sales of many of our products depend upon potential customers’ internal approval and contracting procedures, procurement practices, and testing and acceptance processes, all of which require a significant amount of time. As a result of these and related factors, the sales cycle of many of our products, especially for large customers, typically ranges from six to 12 months. Lengthy sales cycles subject us to risks of delays, foregone orders and fluctuations in operating results. Coupled with the lack of long-term purchase orders or commitments described above, our sales revenues can fluctuate from period to period and such unpredictability could negatively affect our stock price.
The high costs of being a U.S. public registrant places pressure on our cash facilities
The Company adopts rigorous procedures in connection with corporate governance, embracing measures that go beyond the minimum standards required by the OTCQB, Delaware State law or our own by-laws. We observe such procedures because we consider this to be in the best interest of our stakeholders, including employees, customers, suppliers, financiers and shareholders. These measures carry a cost and these costs plus those of maintaining the quotation for our stock relative to the size of our business are high. The Company relies on its subsidiaries to generate sufficient cash to meet their own operating costs in addition to collectively meeting the costs of maintaining a public entity. A shortfall in cash generation by the subsidiaries would restrict the ability of EMRISE to meet its liabilities as they fall due.
We rely heavily on our management, and the loss of their services could adversely affect our business.
Our success is highly dependent upon the continued services of key members of our management, including Carmine T. Oliva, our Chairman of the Board of Directors (the “Board”) and Chief Executive Officer, and Graham Jefferies, our President and Chief Operating Officer. Mr. Oliva co-founded Emrise Electronics Corporation (“EEC”) and has developed personal contacts and other skills that we rely upon in connection with our financing, acquisition and general business strategies. Mr. Jefferies is a long-time employee of EMRISE whom we have relied upon in connection with our acquisitions and operations in England and France and who fulfills significant operational responsibilities in connection with our foreign and domestic operations. The loss of Mr. Oliva, Mr. Jefferies or one or more other key members of management could adversely affect us. Although we have entered into employment or severance agreements with each of our executive officers, those agreements do not guarantee continued employment of these individuals. We maintain key-man life insurance on Messrs. Oliva and Jefferies. However, this insurance covers termination due to death and not due to any other potential reasons for their employment termination. Even if this insurance can be continued in full effect and a claim paid, the coverage may not be sufficient to compensate us for the loss of the services of Messrs. Oliva or Jefferies.
| 11 |
Many of our competitors have greater resources than we do. If we are unable to keep pace with our competitors in anticipating and responding to the rapid changes involving the electronic devices and communications equipment industries, we may not be able to compete successfully with them and thereby possibly causing our stock price to decline.
Our future success depends, in part, upon our ability to enhance our current products and services and to develop and introduce new products and services that keep pace with technological developments, respond to the growth in the electronic devices and communications equipment markets in which we compete, encompass evolving customer requirements, and provide a broad range of products and achieve market acceptance of our products. Most of our existing and potential competitors have larger technical staffs, more established and larger marketing and sales organizations and significantly greater financial resources than we do. Our lack of resources relative to our competitors may cause us to fail to anticipate or respond adequately to technological developments and customer requirements or to experience significant delays in developing or introducing new products and services. These failures or delays could reduce our competitiveness, revenues, profit margins or market share, cash flow and stock price.
The global financial crisis and fragile global economy:
| ● | has had and may continue to have significant negative effects on our customers and our suppliers; | |
| ● | has had and may continue to have significant negative effects on our access to credit and our ability to raise capital; | |
| ● | may prevent us from accurately forecasting demand for our product; | |
| ● | may increase the risk that we could suffer unrecoverable losses on our customers’ accounts receivable; or | |
| ● | may increase the risk that we cannot sell inventory that is on hand, resulting in excess inventory levels; |
and may therefore negatively affect our business, market share, results of operations, and financial condition.
The uncertainty and lack of confidence in the global economy since global financial crisis - which has included, among other things, significant reductions in available capital and liquidity from banks and other providers of credit, substantial reductions and/or fluctuations in equity and currency values worldwide, and concerns that the worldwide economic recession may be prolonged - has had and may continue to have a significant negative effect on our business and operating results. The potential effects of the fragile global economy are difficult to forecast and mitigate. As a consequence, our operating results for a particular period are difficult to predict, and, therefore, prior results are not necessarily indicative of results to be expected in future periods.
The economic crisis and recession has affected and may continue to affect our direct and indirect customers’ access to capital or willingness to spend capital on our products, and/or their levels of cash liquidity or willingness to pay for products that they will order or have already ordered from us. The effect of the current economic conditions on our customers may therefore lead to decreased demand, including order delays or cancellations, which in turn may result in lower revenue and may materially adversely affect our business, results of operations and financial condition.
Likewise, the current global economy may negatively affect our suppliers’ access to capital and liquidity with which to maintain their inventories and production levels and could cause them to raise prices or lower production levels, or result in their ceasing operations. The challenges that our suppliers may face in selling their products or otherwise in operating their businesses may lead to our inability to obtain the materials we use to manufacture our products. Indeed, we have observed a trend among our suppliers to have decreased inventory and therefore longer lead times in obtaining parts, supplies and other goods. These actions could cause us to have longer lead times in producing products for delivery to our customers, reductions in our revenue, increased price competition and increased operating costs, which could materially adversely affect our business, results of operations and financial condition.
The current economy and related market instability has made it difficult for us, our customers and our suppliers to accurately forecast future product demand trends, particularly in our communications equipment segment. If, as a result, we produce excess products, our inventory carrying costs will increase and result in obsolete inventory. Alternatively, due to the forecasting difficulty caused by the unstable economic conditions, we may be unable to satisfy demand for our products, which may in turn result in a loss of business opportunities and market share.
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We finance a portion of our sales through trade credit. While we perform ongoing credit evaluations of our customers’ financial condition, we could suffer significant losses if our customers are unable or unwilling to pay us. Our record of losses from being unable to recover accounts receivable has been good but while global economic conditions continue, there is a risk of losses of accounts receivable that may have a negative impact on our financial results.
Our defense and aerospace programs are highly dependent on economic and political factors which are outside of our control. Changes in defense budgets in countries around the world and/or changes in priorities on such spending could materially adversely affect our business.
We sell our commercial and military electronic devices primarily to OEMs, including manufacturers of aerospace and defense systems and industrial instruments. We are highly dependent on defense budgets to utilize our products in various electronic warfare applications. Changes in defense budgets and/or changes in priorities of defense budgets may reduce or redirect defense spending. If defense spending is reduced or redirected, it may affect our current contracts as well as our ability to procure additional defense contracts, which could have a negative effect on our business, results of operations and financial condition.
We are exposed to various legal, business, political and economic risks associated with our international operations, which could negatively affect our business.
We undertake various sales and marketing activities through our facilities in England and France. Sales by these foreign business units accounted for 95% our net sales in 2013. International operations are subject to many other inherent risks, including but not limited to:
| ● | fluctuations in currency exchange rates; | |
| ● | import and export license requirements and restrictions of the U.S. and each other country in which we operate; | |
| ● | exposure to different business practices and legal standards, particularly with respect to intellectual property; | |
| ● | repatriation of profits; | |
| ● | the imposition or changes to regulations, governmental controls and restrictions; | |
| ● | burdens of complying with a variety of foreign laws; | |
| ● | changes in taxation and tariffs; and | |
| ● | the reliance of the U.S. business on foreign governments. |
Any of the factors described above may have a material adverse effect on our ability to increase or maintain our foreign sales. Many of the factors described above, particularly currency exchange rates, have an impact on our financial results and/or on our liquidity and working capital position, which can be negative and can be material.
If our products fail to comply with evolving government and industry standards and regulations, we may have difficulty selling our products and/or we may incur significant warranty liabilities associated with existing products.
We design our products to comply with a significant number of industry standards and regulations, some of which are evolving as new technologies are deployed. Our products must comply with various regulations defined by the Federal Communications Commission and Underwriters Laboratories, the American National Standards Institute, among others, as well as industry standards such as those established by Telcordia Technologies, Inc. (communications), Federal Aviation Authority (aerospace) and The Boeing Company, among others. Internationally, our products must comply with standards established by the European Committee for Electro technical Standardization, the European Committee for Standardization, the European Telecommunications Standards Institute, and telecommunications authorities in various countries as well as with recommendations of the International Telecommunications Union, Airbus and various civil aviation authorities, among others. Our products for the military markets are typically tested and require the production of a first article and other prototypes, which are subject to testing to meet specific customer and government regulations. The failure of our products to comply, or delays in compliance, with the various existing and evolving standards could negatively affect our ability to manufacture and/or sell our products in the future and/or may result in significant warranty liability for noncompliance on existing products.
| 13 |
Financial statements of our foreign subsidiaries are prepared using the relevant foreign currency that must be converted into U.S. dollars for inclusion in our consolidated financial statements. As a result, exchange rate fluctuations have historically and may in the future materially adversely affect our reported results of operations.
Our subsidiaries in England and France prepare their financial statements in the relevant local foreign currency. In order to be included in our consolidated financial statements, the balance sheets are converted, at the then current exchange rate, into U.S. dollars, and the statements of operations are converted using average exchange rates for the applicable period. Fluctuations of the foreign currencies relative to the U.S. dollar have materially affected and may in the future materially affect our consolidated financial statements. Sales of our products and services from these subsidiaries outside of the U.S. accounted for approximately 95% of our net sales in each of 2013 and 2012. We have at times used derivatives to manage foreign currency rate risk for certain sales shipped from England. 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.
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 U.S. dollar. During 2013, these currencies included the euro and the British pound sterling. Any future translation gains or losses could be significantly higher or lower than those we recorded for these periods. The relevant rates for 2013 and 2012 were:
| U.S. Dollar equivalent | ||||||||
| At December 31, | 2013 | 2012 | ||||||
| Year-end rate | ||||||||
| £ Sterling | 1.65 | 1.62 | ||||||
| Euro | 1.38 | 1.32 | ||||||
| Average for the year | ||||||||
| £ Sterling | 1.56 | 1.59 | ||||||
| Euro | 1.33 | 1.29 | ||||||
Net foreign exchange translation gains and losses included in other income and expense in our consolidated statements of operations resulted in a loss of $130,000 for 2013 and a $61,000 loss for 2012. The future losses could be greater than in the past.
Our results of operations could be adversely affected as a result of impairments of goodwill and other intangible assets, which may cause the price of our common stock to fluctuate or decline.
When we acquire a business, we assign estimated values to certain intangible assets and we also record an asset called “goodwill” equal to the excess amount we pay for the business, including liabilities assumed, over the fair value of the tangible and intangible assets of the business we acquire. Guidance issued by the Financial Accounting Standards Board (“FASB”) under the FASB Accounting Standards Codification (the “Codification”) provides that goodwill and other intangible assets that have indefinite useful lives not be amortized, but instead be tested at least annually for impairment, and intangible assets that have finite useful lives continue to be amortized over their useful lives. The Codification provides specific guidance for testing goodwill and other non-amortized intangible assets for impairment. This guidance requires management to make certain estimates and assumptions when allocating goodwill to reporting units and determining the fair value of reporting unit net assets and liabilities, including, among other things, an assessment of market conditions, projected cash flows, investment rates, cost of capital and growth rates, which could significantly impact the reported value of goodwill and other intangible assets. Fair value is determined using a combination of the discounted cash flow, market multiple and market capitalization valuation approaches. Absent any impairment indicators, we perform our impairment tests annually at year end. As part of our 2013 and 2012 annual tests for impairment to goodwill and other intangible assets, we noted no events of impairment. Any future impairment, could negatively impact our results of operations for the period in which the impairment is recognized which, in turn, may cause our stock price to fluctuate or decline.
| 14 |
Because we believe that proprietary rights are material to our success, misappropriation of these rights could materially adversely affect our financial condition.
Our future success is highly dependent on proprietary technology, particularly in our communications equipment business. However, we do not hold any patents and we currently rely on a combination of contractual rights, copyrights, trademarks and trade secrets to protect our proprietary rights in this area. Our management believes that because of the rapid pace of technological change in the industries in which we operate, the legal intellectual property protection for our products is a less significant factor in our success than the knowledge, abilities and experience of our employees; the frequency of our product enhancements; the effectiveness of our marketing activities; and the timeliness and quality of our support services. Consequently, we rely to a great extent on trade secret protection for much of our technology. However, there can be no assurance that our means of protecting our proprietary rights will be adequate or that our competitors or customers will not independently develop comparable or superior technologies or obtain unauthorized access to our proprietary technology, which can be difficult and expensive to monitor and enforce. Our financial condition would be materially adversely affected if we were to lose our competitive position due to our inability to adequately protect our proprietary rights as our technology evolves.
Breaches of data security could negatively impact our business.
Our products, services, and systems may affect critical third party operations. Breaches in security could expose the Company, our customers or others to risks of loss, resulting in litigation and potential liability for us, as well as the loss of existing or potential customers and damage to our brand and reputation. In addition, the cost and operational consequences of implementing further data protection measures could be significant.
Because we depend on computer and telecommunications systems we do not own or control, we are potentially subject to the adverse effects of third party operational system failures.
We have entered into agreements with third parties for hardware, software, telecommunications and database services in connection with the operation of our facilities. We have several licenses from third parties. We may be subject to disruptions of our operational systems arising from events that are wholly or partially beyond our control (for example, natural disasters, acts of terrorism, epidemics, computer viruses and telecommunications outages). These third party systems and licenses on which we rely could also suffer operational system failure. Any interruptions to our arrangements with third parties, to our computing and communications infrastructure, or our information systems could significantly disrupt our business operations and result in potential liability or reputational damage or otherwise have an adverse impact on our financial results.
Risks Related to Our Common Stock
There is limited trading and investor interest in our stock which creates risks for investors when trying to sell our stock and limits the Company’s ability to raise cash for expansion or working capital by placing our stock.
Our stock is quoted on the OTCQB trading venue but trading volumes are low due to limited investor interest in Micro Cap stocks, lack of liquidity in the stock, a negative stock price trend and a very low market capitalization. The stock price is volatile and responds to relatively small blocks of shares being bought or sold with disproportionate price swings. This limits the Company’s ability to use the stock to raise capital or to fund any strategic growth initiatives including mergers or acquisitions without a significant dilution of existing stockholders.
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Our common stock price has been volatile, which has resulted in substantial losses for some investors purchasing shares of our common stock and could result in further losses or litigation against the Company.
The market prices of securities of technology-based companies have been and will likely continue to be highly volatile. The market price of our common stock has fluctuated significantly in the past. During 2013, the high and low closing sale prices of a share of our common stock were $0.84 and $0.44, respectively. Our stock price has exhibited volatility and may continue to do so in the future. In addition, the market price of our common stock may continue to fluctuate in response to the following factors, many of which are beyond our control:
| ● | our success or failure to execute on our business strategy; | |
| ● | whether the Company can become profitable and whether it can sustain profitability; | |
| ● | additions or departures of key personnel; | |
| ● | foreign currency translations gains or losses; | |
| ● | fluctuations in our quarterly or annual operating results and whether such results meet investor expectations; | |
| ● | changes in market valuations of similar companies and stock market price and volume fluctuations generally; | |
| ● | general global economic weakness; | |
| ● | economic conditions specific to the electronic devices or communications equipment industries; | |
| ● | announcements by us or our competitors of new or enhanced products, technologies or services or significant contracts, acquisitions, strategic relationships, joint ventures or capital commitments; | |
| ● | delays in our introduction of new products or technological innovations or problems in the functioning of these new products or innovations; | |
| ● | third parties’ infringement of our intellectual property rights, or our potential infringement of another party’s intellectual property rights; | |
| ● | changes in our pricing policies or the pricing policies of our competitors; | |
| ● | regulatory developments; | |
| ● | future sales of our common stock or other securities; and | |
| ● | perception and confidence of investors regarding future prospects for the Company. |
The price at which you purchase shares of common stock may not be indicative of the price of our stock that will prevail in the trading market. You may be unable to sell your shares of common stock at or above your purchase price, which may result in substantial losses to you. Moreover, in the past, securities class action litigation has often been brought against a company following periods of volatility in the market price of its securities. We may in the future be the target of similar litigation. Securities litigation could result in substantial costs and divert management’s attention and resources and could have a significant impact on profitability, future cash flows and stock price.
Future sales of shares of our common stock by our stockholders could cause our stock price to decline.
We cannot predict the effect, if any, that market sales of shares of our common stock or the availability of shares of common stock for sale will have on the market price prevailing from time to time. As of March 31, 2014, we had approximately 10.7 million shares of common stock outstanding and 0.3 million outstanding options. A substantial number of these shares are eligible for public resale. Sales of shares of our common stock in the public market, or the perception that those sales may occur, could cause the trading price of our common stock to decrease or to be lower than it might be in the absence of those sales or perceptions.
Because our common stock price is low, we could be a target for a buyer or subject to a hostile takeover at a depressed value.
Because of the Company’s current common stock price, aggregate market capitalization and potential market value of its assets, and its annual revenue, the Company may be an attractive target to a buyer or subject to a hostile takeover at a depressed value. Such price could be at a premium to the market price at the time of the transaction and still be significantly below the purchase price paid by most stockholders. The Company’s stock is concentrated in the hands of a limited number of groups of independent shareholders which could exercise their rights to influence the strategic direction of the Company to the detriment of the existing plans. Although the Company has certain anti-takeover measures in place, the Company does not have a shareholder rights plan, commonly known as a poison pill, in place. The lack of this particular anti-takeover measure could make a change in control of our Company easier to accomplish. If a takeover attempt occurred, it might cause distractions for our management and our Board and this might prevent us from executing on our strategic plans, preserving the value of the Company for creditors and stockholders and growing the Company. In addition, a successful takeover attempt might result in a change of the Company’s management and directors.
| 16 |
The volatility of our quarterly and annual operating results may cause the price of our common stock to fluctuate or decline.
Our quarterly operating results have varied significantly in the past and will likely continue to do so in the future due to a variety of factors, many of which are not within our control. Sometimes these factors can cause more prolonged periods of increased or decreased operating results, measured in quarters or years.
The cyclical nature of the communications equipment business due to the budgetary cycle of many of our key customers in this segment has had and will likely continue to have, for the foreseeable future, an effect on our quarterly operating results. Companies that utilize our communication equipment generally obtain approval for their annual budgets during the first quarter of each calendar year. If a company’s annual budget is not approved early in the calendar year or is insufficient to cover its desired purchases for the entire calendar year, then we are unable to sell products to the company during the period of the delay or shortfall. In addition, these budgets historically tend to vary significantly year by year, depending on a variety of factors, including overall economic conditions. A significant reduction in any one customer’s or group of customer’s budgets could reduce our overall sales, profits and cash flows in the future.
Sales of our electronic devices are often made in conjunction with large military or commercial aerospace contracts. The timing of required deliveries under these contracts can be delayed based on issues related to the overall contract, which can cause delays in our shipment schedules, revenue recognition, profits and cash flows. In periods between completion of one long term contract and commencement of sales under a new contract, our revenues could be reduced. The impact of these periods between contracts can last for months, quarters or, occasionally, years.
Quarter-to-quarter fluctuations may also result from the uneven pace of technological innovation, the development of products responding to these technological innovations by us and our competitors, our customers’ acceptance of these products and innovations, the varied degree of price, product and technological competition and our customers’ and competitors’ responses to these changes.
Due to these and other factors, including changes in general economic conditions, we believe that period-to-period comparisons of our operating results will not necessarily be meaningful in predicting future performance. If our operating results do not meet the expectations of investors, our stock price may fluctuate or decline.
Item 1B. Unresolved Staff Comments.
Not applicable.
| 17 |
As of March 31, 2014, we leased or owned approximately 81,000 square feet of administrative, engineering, production, storage and shipping space. 41% of this space, being the sites in Milpitas and Ashford, England, was leased from third parties. The following table represents our properties as of March 31, 2014:
| Approximate | ||||||||
| Business Unit | Location | Segment | Use | Size | ||||
| The Company leases the following premises: | ||||||||
| XCEL Power Systems, Ltd. and EMRISE Electronics Ltd. | Ashford, Kent, England | Electronic Devices | Administration, Engineering and Manufacturing and Testing | 27,000 sq. feet | ||||
| CXR Larus Corporation | Milpitas, CA, U.S. | Communications Equipment | Administration, Engineering, Manufacturing and Testing | 5,800 sq. feet | ||||
| The Company owns the following premises: | ||||||||
| Pascall Electronics Limited | Ryde, Isle of Wight, England | Electronic Devices | Administration, Engineering and Manufacturing and Testing | 35,000 sq. feet | ||||
| CXR AJ | Abondant, France | Communications Equipment | Administration, Engineering and Manufacturing and Testing |
13,000 sq. feet | ||||
We believe that these facilities are suitable for the purposes for which we use them. We believe that we have sufficient facilities to conduct our operations during 2014. The majority of our facilities have warehouse space that can be converted to production areas in the event that expansion is necessary without purchasing or leasing of additional property. We recognize the importance of flexibility to adjust our property to match the business requirements.
We are not currently involved in any litigation that we believe could have a materially adverse effect on our financial condition or results of operations. Except as disclosed below there is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our Company or any of our subsidiaries, threatened against or affecting our Company, our common stock, any of our subsidiaries or of our Company’s or our Company’s subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect. In January 2014, the collateral agent acting on behalf of the holders of the subordinated contingent promissory notes issued by the Company, with a value of $2.3 million, entered discussions with Company regarding the terms of the notes and the security given to the note holders. As a result of these discussions the Company decided to redeem the promissory notes earlier than scheduled using existing cash balances and an additional loan offered by the Company’s principal financiers Lloyds Bank. The redemption of the loan notes eliminated any claims that the collateral agent might have with regard to the terms of the Notes and the security held by the Note holders. The Company considers that any remaining claim that the collateral agent might have is not material and no reserve, accrual or contingent liability is required in the consolidated financial statements at December 31, 2013.
Item 4. Mine Safety Disclosures.
Not applicable.
| 18 |
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
(a) Market Information
Our common stock is currently trading on the OTC Markets Group Inc. trading venue in their OTCQB category under the symbol “EMRI” and has done so since February 7, 2011. Our common stock previously traded on NYSE Arca from March 8, 2006, under the symbol “ERI.” before transferring to the OTCBB and then the OTCQB. The table presented below shows, for each fiscal quarter, the high and low closing prices for shares of our common stock on the OTCQB. The prices shown reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not necessarily represent actual transactions.
| High | Low | |||||||
| Year ended December 31, 2013 | ||||||||
| First | $ | 0.60 | $ | 0.47 | ||||
| Second | $ | 0.55 | $ | 0.44 | ||||
| Third | $ | 0.55 | $ | 0.44 | ||||
| Fourth | $ | 0.84 | $ | 0.46 | ||||
| Year ended December 31, 2012 | ||||||||
| First | $ | 0.76 | $ | 0.41 | ||||
| Second | $ | 0.68 | $ | 0.50 | ||||
| Third | $ | 0.73 | $ | 0.52 | ||||
| Fourth | $ | 0.52 | $ | 0.40 | ||||
(b) Holders
As of March 31, 2014, we had 10,719,337 shares of common stock outstanding held of record by approximately 480 stockholders in addition to numerous stockholders whose holdings are held in Street Name. These holders of record include depositories that hold shares of stock for brokerage firms which, in turn, hold shares of stock for numerous beneficial owners. On March 31, 2014, the closing sale price of our common stock on the OTCQB was $0.80 per share.
(c) Dividends
We have not declared or paid any cash dividends on our capital stock in the past. We will pay dividends on our common stock only if and when declared by our Board. Our Board’s 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.
(d) Securities Authorized for Issuance under Equity Compensation Plans
Information regarding securities authorized for issuance under our existing equity compensation plans can be found in Part III, Item 12 herein.
Recent sales of Unregistered Securities
During the year ended December 31, 2013, there were no sales of unregistered securities.
Rule 10B-18 Transactions
During the year ended December 31, 2013, there were no repurchases of the Company’s common stock by the Company.
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Item 6. Selected Financial Data.
Not applicable.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion should be read in conjunction with our consolidated financial statements and the related notes thereto contained elsewhere in this Report. This Report and the following discussion contain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, 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 generate, expenses we might incur and profits we might earn if we are successful in implementing our business and growth strategies. The forward-looking statements and associated risks may include the risk factors described in detail in this Report and relate to or are qualified by other important factors, including, without limitation:
| ● | our ability to pay outstanding debt as it comes due; | |
| ● | our ability to successfully support the working capital needs of our company; | |
| ● | our ability to maintain our cost management activities implemented over the past years and to otherwise contain costs; | |
| ● | our ability to increase revenues through additional sales, customers, products and pricing; | |
| ● | our ability to reach sustained profitability; | |
| ● | our ability to continue to borrow funds under the financing arrangements currently in place (see “-Liquidity and Capital Resources”) or to secure additional financing in the future; | |
| ● | exposure to and impacts of various international risks including legal, business, political and economic risks associated with our international operations, also including the impact of foreign currency translation (see “- Foreign Currency Translation”); | |
| ● | the projected growth or contraction in the electronic devices and communications equipment markets in which we operate, including military and defense spending across the globe; | |
| ● | our strategies for expanding, maintaining or limiting our presence in these markets; | |
| ● | anticipated trends in our financial condition and results of operations; | |
| ● | our ability to distinguish ourselves from our current and future competitors; | |
| ● | our ability to secure long term purchase orders; | |
| ● | our ability to deliver against our existing or future book of shippable orders (backlog); | |
| ● | technical or quality issues experienced by us, our suppliers and/or our customers; | |
| ● | failure to comply with existing or future government or industry standards and regulations; | |
| ● | our ability to successfully locate, acquire and integrate any possible future acquisitions; | |
| ● | the impact of current and/or future economic conditions, including but not limited to, the overall condition of the stock market, the overall credit market, the global recession, political, economic and/or other constraints which are or may negatively impact the industries in which we participate and/or the ability for us to market the products which we sell; and | |
| ● | our ability to successfully compete against competitors that in many cases are larger than us, have access to significantly more working capital than we do and have significant resources in comparison to us. |
We do not undertake to update, revise or correct any forward-looking statements.
Any of the factors described above or in the “Risk Factors” sections contained in this Report 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 and/or decline.
| 20 |
Recent Transactions
Dispositions
On February 7, 2012, CXR Larus Corporation (“CXR Larus”), a wholly-owned subsidiary of EMRISE, entered into an agreement with LDDF Incorporated, doing business as TesCom, relating to the sale of certain assets relating solely to the CXR Halcyon product line of telecommunications test equipment (the “Test Product Line”). The Test Product Line was classified within our communications equipment segment. For purposes of the following discussion and analysis, the Test Product Line has been removed from the comparisons and is reported in the consolidated financial statements as a discontinued operation in 2012.
Business Description
We design, manufacture and market proprietary electronic devices and communications equipment for aerospace, defense, industrial, and communications applications. We have operations in the United States, England, and France. We organize our business in two operating segments: electronic devices and communications equipment. In 2013, our electronic devices segment contributed 68% of overall net sales while the communications segment contributed 32% of overall net sales. Our subsidiaries within our electronic devices segment design, develop, manufacture and market power supplies, RF, and microwave devices for defense, aerospace and industrial markets. Our subsidiaries within our communications equipment segment design develop, manufacture and market network access equipment, including network timing and synchronization products, for communications applications in public and private networks, defense and industrial markets, including utilities and transportation.
Within our electronic devices segment, we produce a range of power systems and RF and microwave devices. This segment is primarily “project” driven, with the majority of revenues being derived from custom products with long life cycles and high barriers to entry. The majority of manufacturing and testing is performed in-house or through sub-contract manufacturers. Our electronic devices are used in a wide range of military airborne, seaborne and land-based systems, and in-flight entertainment systems, including the latest next generation In-Flight Entertainment and Connectivity (“IFE&C’’) systems, such as applications for mobile phone, e-mail and internet communications and real time, on-board satellite and broadcast TV, which are being installed in new commercial aircraft as well as being retrofitted into existing commercial aircraft.
Within our communications equipment segment, we produce a range of network access equipment, including network timing and synchronization products, for public and private communications networks. This segment is “end-user product” based with a traditional cycle of internally funded development and marketing prior to selling via direct and indirect sales channels. Manufacturing is primarily outsourced. Our communications equipment is used in a broad range of network applications primarily for private communications networks, public communications carriers, and also for utility companies and military applications, including homeland security.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). The preparation of these financial statements requires us to make 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 devices and communications equipment products and services and extended warranty contracts. Our sales are based upon written agreements or purchase orders that identify the type and quantity of the item and/or services being purchased and the purchase price. We recognize revenues when shipment of products has occurred or services have been rendered, no significant obligations remain on our part, and collectability is reasonably assured based on our credit and collections practices and policies and our experience of prior dealings with our customers.
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We recognize revenues from domestic sales at the point of shipment of those products. An estimate of warranty cost is recorded at the time the revenue is recognized. Product returns are infrequent and require prior authorization because our sales are final and we quality test our products prior to shipment to ensure the products meet the specifications of the binding purchase orders under which those products are shipped. Normally, when a customer requests and receives authorization to return a product, the request is accompanied by a purchase order for a repair or for a replacement product.
Revenue recognition for products and services provided by our subsidiaries in United Kingdom 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 revenue deferred until recognized over the term of the contract on a percentage of completion basis. Production contracts provide for a specific quantity of products to be produced over a specific period of time. Customers issue binding purchase orders or enter into binding agreements for the products to be produced. We recognize revenues on these orders as the products are shipped. 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. An estimate of warranty cost is recorded at the time revenue is recognized. We offer extended warranty contracts for an additional cost to our customers, which we recognize ratably over the term of the extended warranty contract under either the milestone method or percentage of completion method, whichever is most appropriate under GAAP.
We recognize revenues for products sold by our subsidiary in France 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. An estimate of warranty cost is recorded at the time revenue is recognized.
Revenues from services such as repairs and modifications are recognized when the service is 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 contribute less than 5% of total revenue and, therefore, are considered to be immaterial to overall financial results.
Product Warranty Liabilities
Generally, our products carry a standard one-year, limited parts and labor warranty. In certain circumstances, we provide a two-year limited parts and labor warranty. We offer extended warranties beyond two years for an additional cost to our customers. Products returned under warranty typically are tested and repaired or replaced at our option. Historically, we have not experienced significant warranty costs or returns.
We record a liability for estimated costs that we expect to incur under our basic limited warranties when product revenue is recognized. Factors affecting our warranty liability include the number of units sold, the types of products involved, historical and anticipated rates of claim and historical and anticipated costs per claim. We periodically assess the adequacy of our warranty liability accrual based on changes in these factors.
Inventory Valuation
Our finished goods electronic devices 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 be served promptly. Our products consist of numerous electronic and other materials, which necessitate 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 cycle counts of inventories using an ABC inventory methodology, which groups inventory items into prioritized cycle counting categories, or we conduct 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 12 to 24 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 inventory that we determine to be obsolete, either in connection with the physical count or at other times of observation, is specifically reserved for and subsequently written-off.
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The electronic devices and communications equipment industries are 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. 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 approximately 95% of our net revenues in each of the fiscal years ended December 31, 2013 and 2012. At December 31, 2013 and 2012, our foreign subsidiaries contributed 96% and 94% of our total assets respectively. In preparing our consolidated financial statements, we are required to translate the financial statements of our foreign subsidiaries from the functional currencies in which they keep their accounting records into U.S. dollars, our reporting currency. The assets and liabilities of the foreign entities have been translated to U.S. dollars at the current rate of exchange as of the balance sheet date and an average exchange rate for the period is used to translate the statement of operations. Translation adjustments are included in other comprehensive income/(loss).
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 U.S. dollars, then any translation gains or losses arising after the date of the change would be included within our statement of operations.
Long-Lived Assets and Amortizing Intangible Assets
The Company reviews the carrying amount of its long-lived assets and other amortizing intangible assets, for possible impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.
Amortizing intangible assets are stated at cost, less accumulated amortization, and are amortized on the straight-line method over their estimated useful lives ranging from two to twenty years. The Company periodically reviews the original estimated useful lives of long-lived assets and makes adjustments when appropriate.
Goodwill and Indefinite Lived Intangible Assets
At December 31, 2013, our reported goodwill totaled $5.3 million and our reported indefinite-lived assets totaled $0.39 million, all of which belonged to the electronic devices reporting unit. The indefinite-lived assets consist of trademarks and trade names which are essential to our business and future income streams.
The Company evaluates goodwill and indefinite lived intangibles in accordance with Financial Accounting Standards Board’s Accounting Standard Codification (“ASC”) 350, Intangibles-Goodwill and Other. The Company annually tests for impairment of goodwill and indefinite lived intangibles and tests more frequently if an event occurs or circumstances change that suggest that there is an indicator of impairment. The Company’s test for goodwill impairment is based on the two step approach whereby in step one if the carrying value of the reporting unit exceeds the fair value of the reporting unit, an impairment is indicated and the amount of impairment is then calculated by the amount the carrying value of the goodwill exceeds the implied fair value of the goodwill. The Company’s reporting units have been identified as electronic devices and communications equipment. The Company performs its annual required tests of impairment as of December 31.
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Overview
Overall net sales declined 6% in 2013 compared to 2012. The reduction was primarily due to lower sales of Radio Frequency (’‘RF’’) products in our electronic devices business segment. We have noted this susceptibility to the variable demand for large projects such as RF products when reporting in previous years. Each RF order tends to be large and the order stream irregular. In 2013 we took substantial orders for RF products ($2.7 million compared with $1.3 million in 2012) but these are not scheduled for production and delivery until 2014 and beyond. Sales of network access products at our French communications equipment business unit improved in 2013 over 2012 but this was partially offset by lower sales in our U.S. communications equipment business unit as a result of a general decline in infrastructure spending in the U.S. by telecommunications companies and the U.S. government.
Overall gross profit as a percentage of sales (“gross margin”) was 30.5% in 2013. This showed a small but significant improvement over the comparable period in 2012, which was 29.4%. The Company pursues a policy of only taking on orders where it is anticipated that the gross margin percentage will meet its defined parameters and encouragingly, over the period the gross margin percentage has remained consistent in the electronic devices segment and increased by 3.4 percentage points in the communications segment. However, the fall in revenue, which has been caused in large part by delays in placing orders for the company’s RF products resulted in a small (3%) fall in gross profit in terms of US dollars compared with 2012.
Tight control of overhead costs, which benefited from the reduction of rent following the purchase of the Pascall property in the first quarter of 2013, reduced operating expenses to $9.5 million for the fiscal year ended 2013, compared with $10.1 million for 2012, resulting in a $300,000 increase in operating income compared with 2012. The loss after tax of $392,000 compares with net income of $94,000 in 2012 but the 2012 results included the benefit of $0.5 million of exceptional gains from insurance claims and $0.275 million early debt repayment discounts. Excluding these exceptional gains there was a year-over-year improvement in the net result of $311,000. The 2013 result is after charging severance costs of $34,000 in the U.S. communications equipment business unit and $66,000 in the U.K. as the workforce was realigned with market place demands.
Our 2013 results reflected a further tightening of control over overhead costs. The Company suffered large losses in 2010 and 2011 but the plans formulated in those years translated into a small loss in 2012 and a modest operating profit in 2013. We continue to maintain a strong backlog but we are cautious about our future, recognizing that growth is not without its challenges. We will need to continue to manage cash very closely to ensure that we have sufficient availability to make principal payments on debt and fund the anticipated shipments of backlog during 2014.
The custom nature of the majority of the Company’s electronic devices products, frequently results in long lead times between orders and requested delivery dates. This makes revenues and gross profit difficult to forecast and comparability of results between periods very sensitive to fluctuations influenced by specific large orders. Shipments of products can be accelerated or delayed due to many reasons including, but not limited to, not meeting customer contract requirements, a change in customer timing or specifications, technology related issues, delays in acquiring component parts, and other production related issues. For a significant portion of the Company’s business, customers issue binding purchase orders or enter into binding agreements for the products to be produced and shipped over time in the future. The Company’s “backlog” represents these orders and provides an insight into potential shipments and revenues.
Despite the temporary dip in deliveries for RF products, the continuing demand for the Company’s electronic devices products for the commercial aerospace market is encouraging and the order book for the segment remains strong. However, the Company generally experiences some uncertainty from customers over when they will schedule the delivery of these orders. The previously reported weakness in infrastructure spending in the United States by telecommunications companies and the U.S. government specifically for the Company’s synchronization and timing products and legacy network access products continues and there is only limited signs of this increasing in the next few months. Local sales teams continue to work to counter the fall in demand for synchronization and timing products with a ramp up of the Company’s network access products in the United States. International orders, including the strengthening of demand from North Africa for the Company’s French network access products have continued to provide a solid backlog of orders which remains substantially higher than in previous years.
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A significant portion of our products are produced to the unique specifications of our customers and are subject to variable timing of delivery, which makes comparability of our revenues and gross profit from period to period difficult. Shipments of products can be accelerated or delayed due to many reasons including, but not limited to, exceeding or not meeting customer contract requirements, a change in customer timing or specifications, technology related issues, delays in acquiring component parts, and other production related issues. For a significant portion of our business, customers issue binding purchase orders or enter into binding agreements for the products to be produced and shipped over time in the future. Our “backlog” represents these orders and provides a partial view into potential shipments and revenues.
The following is a more detailed discussion of our results of operations by business segment.
Results of Operations
Comparison of the Year Ended December 31, 2013 to the Year Ended December 31, 2012
Net Sales
| Year Ended December 31, | Variance
Favorable (Unfavorable) | |||||||||||||||
| (in thousands) | 2013 | 2012 | Dollar | Percent | ||||||||||||
| Electronic devices | $ | 21,717 | $ | 24,036 | $ | (2,319 | ) | (9.6 | )% | |||||||
| as % of net sales | 68.1 | % | 70.6 | % | ||||||||||||
| Communications equipment | 10,181 | 10,011 | 170 | 1.7 | % | |||||||||||
| as % of net sales | 31.9 | % | 29.4 | % | ||||||||||||
| Total net sales from continuing operations | $ | 31,898 | $ | 34,047 | $ | (2,149 | ) | (6.3 | )% | |||||||
Electronic Devices
The decrease in sales of our electronic devices in 2013 compared to 2012 was principally due to the sporadic inflow of orders for RF products. In 2012 our electronic devices segment had benefited from strong sales of these products but the expected orders for 2013 were delayed with the consequence that although the orders did eventually arrive they were too late in the year to translate into production and therefore income. (Orders for RF products in 2013 at $2.7 million exceeded the prior year by $1.4 million). Management believes that the 2014 order book for both IFE&C and RF products remains strong and the customer base robust.
At March 31, 2014, we had a backlog of $24 million compared with a backlog at March 31, 2013 of $21.7 million, for the electronic devices business, but the Company recognizes that there is a risk that customers may seek to delay production and delivery while the world economy continues to remain weak.
Communications Equipment
Net sales within our communications equipment segment increased principally as a result of increased sales for our network access products at our French business unit. Demand for the Company’s products in Europe and Africa consistently exceeded the comparable period in 2012 and the backlog remained strong totaling $2.5 million at December 31, 2013. As a result, sales in 2013 from CXR AJ, our French subsidiary, increased by 5% to $8.7 million compared with 2012. The strong performance in France was offset by a 14% ($250,000) decrease of sales from our U.S. business unit. We continue to actively work to expand the market reach for our French access products into the United States but this is against a backdrop of weak demand and no sign of increased purchasing by telecommunications companies or the U.S. government specifically for timing and synchronization and legacy network access products. This segment of the business has a shorter lead time on orders than the electronic devices segment. The backlog at March 31, 2014 was $2.8 million, compared with a figure of $2.8 million at March 31, 2013. This backlog is predominantly attributable to our French subsidiary.
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Gross Profit
| Year Ended December 31, | Variance Favorable/(Unfavorable) | |||||||||||||||
| (in thousands) | 2013 | 2012 | Dollar | Percent | ||||||||||||
| Electronic devices | $ | 6,280 | $ | 7,085 | $ | (805 | ) | (11.4 | )% | |||||||
| as % of net sales | 28.9 | % | 29.5 | % | ||||||||||||
| Communications equipment | 3,435 | 2,921 | 514 | 17.6 | % | |||||||||||
| as % of net sales | 33.7 | % | 29.2 | % | ||||||||||||
| Total gross profit from continuing operations | $ | 9,715 | $ | 10,006 | $ | 291 | (2.9 | )% | ||||||||
| Total gross margin from continuing operations | 30.5 | % | 29.4 | % | ||||||||||||
The gross margins in the Company’s segments are formed on different basis and therefore it is difficult to compare the two segments. The gross margin in the electronic devices segment reflects engineering costs and attributable overheads within cost of sales because this work is integral to specific customer design and production contracts whereas in the Communications segment engineering costs and attributable overheads fall outside the gross profit calculations because these costs are not necessarily specific to individual customer contracts.
Electronic Devices
Gross margin, as a percentage of net sales, for our electronic devices segment slipped to 28.9% in 2013 compared with 29.5% in 2012. The gross margin is heavily influenced by the sales mix, the competitive tendering for design and production contracts and the ability of our team to deliver the design according to specification. The custom-nature of our products makes year by year comparison difficult but the margins are in line with internal guidelines. The electronic devices segment’s products for the military market tend to benefit from higher margins than the Company’s products for the commercial market. The commercial market-place where volumes can be higher tends to be more competitive and hence margins are usually tighter.
Communications Equipment
The communications equipment segment has traditionally been able to command higher gross margins for its products than the electronic devices segment. This is partially due to the basis on which costs are allocated across the various cost headings. The Company’s gross margin in the communications equipment segment increased from 29.2% in 2012 to 33.7% in 2013. In France and territories served by the Company’s French business, this generally held true in the 2013, albeit that one significant contract yielded an appreciably lower margin. This improved margin coupled with the increased sales resulted in an increase in gross profit of more than $500,000. The relatively weak demand for the communication products in the U.S. marketplace has put pressure on margins in this territory but the gross margin at 24% for 2013 was still appreciably stronger than the comparable period in 2012, when the U.S. company reported a gross loss after write-downs against inventory, and consequently, the Company’s U.S. based communications company also improved its gross profit by $300,000.
Operating Expenses
| Year Ended December 31, | Variance
Favorable (Unfavorable) | |||||||||||||||
| (in thousands) | 2013 | 2012 | Dollar | Percent | ||||||||||||
| Selling, general and administrative | $ | 8,334 | $ | 8,794 | $ | 460 | 5.2 | % | ||||||||
| as % of net sales | 26.1 | % | 25.8 | % | ||||||||||||
| Engineering and product development | 1,132 | 1,267 | 135 | 10.7 | % | |||||||||||
| as % of net sales | 3.5 | % | 3.7 | % | ||||||||||||
| Total operating expenses from continuing operations | $ | 9,466 | $ | 10,061 | $ | 595 | 5.9 | % | ||||||||
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Selling, General and Administrative
Selling, general and administrative (“SG&A”) expenses for 2013 decreased for a third successive year as the Company continued to focus on containing costs. Despite inflationary pressures, sales and administrative costs declined by $460,000, or 5.2%, in comparison to 2012, with $225,000 of this saving stemming from cost reduction initiatives in the Company’s CXR Larus business in the U.S. following a reduction in staffing and refocusing of that business in the first half of 2013. The Company continued to reduce overhead costs wherever it was expedient to do so and corporate administrative costs declined by 8.5% during the year. The only business unit in the group where sales costs increased was in the Company’s French business unit, where costs increased marginally as a result of additional sales activity, generating a 5% increase in sales volume relative to 2012.
Engineering and product development
Engineering and product development costs are focused in the Company’s Communications Equipment segment rather than the Electronics Device segment where project driven engineering and product development costs are absorbed within the costs charged to customers. The net cost of engineering and product development costs charged against income decreased by $135,000 in 2013 compared with 2012.
Interest expense
Interest expense was $534,000 in 2013, which compares with $388,000 for the equivalent period in 2012. The 2013 charge included the additional interest cost attributable to the mortgage for the building housing Pascall’s operations, which in 2012 and previous years had been rented.
Other income and expense
The expense recognized under this heading 2013 was $86,000 as compared to net other income of $522,000 recorded for the equivalent period in 2012. The 2012 income included the receipt of insurance claims of $473,000, a gain of $275,000 on the extinguishment of debt and $89,000 benefit from the release of a provision against a currency derivative. There were no similar sources of income in 2013 to bolster the results. The 2013 charge principally relates to short term exchange rate losses arising at Pascall.
Gain on extinguishment of debt
Under the terms of its debt facility with PEM, which at one time was the Company’s senior lender, the Company was eligible for a discount of $275,000 if the loan was repaid prior to June 30, 2012. The debt was eliminated within the permitted timescale and the Company was therefore able to record the discount of $275,000 as income 2012. There was no comparable income in 2013.
Income tax provision
There was an income tax expense of $112,000 for 2013 compared to a charge in the comparable period of 2012 of $314,000. This sum is calculated on the basis of current United Kingdom Corporation tax rates on profits generated by the Company’s U.K. subsidiaries. In 2013 the U.K. companies benefitted from Research and Development tax credits which offset the Corporation tax arising on the trading activities. There were no tax liabilities elsewhere in the group for 2012 or 2013 and the group is able to carry forward substantial tax losses in the US and France but has recorded a full valuation allowance against the value of these deferred tax assets. There are no tax losses to carry forward in the U.K.
Income from discontinued operations
The small loss of $9,000 suffered in 2012 related to some residual costs in respect of the test equipment sale in February 2012.
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Net income/(loss)
The net loss, before discontinued operations, for 2013 was $392,000 compared with net income for 2012 of $103,000. The net income for 2012 included benefit from the gains on an insurance claim of $473,000, a gain on the extinguishment of debt of $275,000 and a write off of a reserve for a derivative contract of $89,000. Without these one-off benefits, there was a year-on-year reduction of $342,000 in the Company’s net loss. This reflected an improved performance from the communications equipment segment and a further reduction in corporate overhead.
Liquidity and Capital Resources
Liquidity
The Company relies on a combination of anticipated cash flows from operations and financing arrangements, to ensure that there is sufficient funding to support our working capital requirements for the next 12 months. We have a substantial backlog as of December 31, 2013, of which substantially all is for our foreign operations and a substantial proportion of the backlog is expected to ship within the next 12 months. In order to support our future expected growth, we will need to reinvest a substantial amount of cash from operations back into the business for inventory purchases, engineering and product development, and personnel. Therefore, the Company must closely manage cash and monitor the repatriation of cash from foreign subsidiaries to meet the Company’s corporate costs, the operational needs of the business and satisfy near-term debt service obligations. Our ability to support our business plan is dependent upon our ability to achieve profitable operations and positive cash flow.
In making an assessment of our liquidity, we believe that the items in our financial statements that are most relevant to our on-going operations are working capital, positive cash flow generated from operating activities and cash available from financing activities. We have a variety of financing arrangements to support working capital.
Working Capital
The Company funds its daily cash flow requirements through funds provided by operations and through borrowings under various financing arrangements. After recognizing the $2.1 million liability relating to the mortgage for the Pascall facility in the first quarter of 2013 and the cash payment of $0.5 million to pay for the building purchased for the Company’s Pascall subsidiary, the Company still retained cash of $1.2 million as of December 31, 2013. In addition, the Company met its obligation to repay $0.3 million of promissory notes in each of the first and third quarter of 2013. Net current assets less net current liabilities at December 31, 2013 were $4.3 million compared with $7.5 million as of December 31, 2012 but this reflects the purchase of the Pascall property and the debt repayment out of cash generated from operations. The Company has counteracted the impact of the losses from operations by managing its working capital tightly, translating inventory into sales and collecting receivables promptly. Strong cash collection from customers has funded increased purchases to meet the increasing production demanded by the Company’s order book. As of December 31, 2013, the Company had cash and cash equivalents of $1.2 million as compared with $1.5 million at December 31, 2012.
As of December 31, 2013, approximately 92% of the total $1.2 million of cash and cash equivalents were held by the Company’s foreign subsidiaries. The majority of the foreign cash balances are associated with earnings that have been represented to the Company’s lenders as permanently reinvested and which the Company plans to use to support continuing growth plans outside of the U.S. through funding of capital expenditures, engineering, operating expenses or other similar cash needs of the foreign operations. From time to time, cash is repatriated from the foreign subsidiaries to the U.S. for normal corporate operating needs through inter-company dividends and service and brand charges, but only from those earnings that have not been asserted to be permanently reinvested or which qualify as previously taxed income as defined by the United States Internal Revenue Code. However, the foreign subsidiaries previously issued guarantees to lenders on certain financing arrangements and, as a result, under the United States Internal Revenue Code, have been deemed to have distributed these earnings to fund U.S. operations. There are no tax liabilities arising from the repatriation of cash from foreign subsidiaries to the U.S. for the year to date. In addition, the Company has significant U.S. tax losses brought forward that will be sufficient to offset any U.S. tax liability arising from U.S. trading operations for the foreseeable future.
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The Company recognizes that cash flow will continue to be challenging throughout 2014 but will control its working capital tightly. The ability to generate cash from operations has been and will continue to be, impacted by the requirement to acquire inventory to satisfy increasing shipments associated with the Company’s substantial order book, as well as the timing of these shipments and the timing related to the collection of customer receivables accounts associated with these shipments. The Company continually monitors its need to invest in engineering and personnel to support such growth but it does not currently foresee any need to increase its headcount. There are no significant capital expenditure plans that will require funding from current working capital. Management evaluated the options surrounding the refinancing of the promissory notes scheduled for repayment in December 2014 and decided to redeem the notes in April 2014 using a combination of existing cash and new borrowing. The new borrowing in the form of a term loan repayable over three (3) years was at a slightly lower interest rate than the promissory notes.
At December 31, 2013, we had total debt obligations of $6.6 million. Total debt includes $1.2 million outstanding related to subsidiary financing arrangements, a mortgage of $2.3 million secured on a property owned and occupied by one of the Company’s UK subsidiaries, capital lease obligations of $0.1 million, a term loan with Lloyds TSB Bank plc of $0.7 million and promissory notes of $2.3 million (maturing during 2014 and discussed further below). The current portion of loans and obligations totaled $2.7 million.
Backlog
The Company’s future book of shippable orders (the “Backlog”) was $25.9 million as of December 31, 2013, compared to $22.6 million as of December 31, 2012. The amount of Backlog orders represents revenue that the Company anticipates 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 is currently in progress. As of December 31, 2013, approximately 90% of the Backlog related to the electronic devices business which has variable lead times for its manufacturing processes due to the custom nature of its products. Approximately $2.5 million of the Backlog related to the communications equipment business, which tends to deliver standard or modified standard products from stock as orders are received. A very substantial proportion of the Company’s Backlog relates to our international operations. A significant portion of our existing Backlog for 2014 production is associated with commercial markets, which tend to be more competitive resulting in lower margins than other markets. While we anticipate a slight upward trend in military market orders, the vast majority of our current production orders are for lower margin commercial aerospace applications. The Company believes that a significant portion of its current Backlog will be shipped within the next 12 months. However, there can be no assurance that the Company will be successful in fulfilling such orders and commitments in a timely manner or that it will ultimately recognize as revenue the amounts reflected as Backlog.
Financing Arrangements
On August 31, 2010, two of our subsidiaries in England, Pascall Electronics Limited (“Pascall”) and XCEL Power Systems, Ltd. (“XCEL”), entered into a Receivables Finance Agreement with Lloyds TSB Commercial Finance (“Lloyds”) (each, a “Receivables Finance Agreement” and, collectively, the “Receivables Finance Agreements”), pursuant to which Lloyds agreed to provide Pascall and XCEL a credit facility to support their operations in the aggregate principal amount of £2.75 million ($4.5 million based on the exchange rate on December 31, 2013), in each case at an advance rate of 85% of eligible receivables, with a service fee of 0.2%. The Receivables Finance Agreements bears interest at the London Inter-bank base rate plus 2.5% on the outstanding balance and is paid monthly. As of December 31, 2013, Pascall had outstanding borrowings of $0.4 million and XCEL had no outstanding borrowings under their respective Receivables Finance Agreement.
On September 20, 2010, our French subsidiary, CXR Anderson Jacobson (“CXR AJ”) entered into a Receivables Finance Agreement (the “CIC Agreement”) with FACTOCIC S.A., a subsidiary of CIC Group (“CIC”), pursuant to which CIC agreed to provide CXR AJ a financing arrangement to support its French operations in the aggregate principal amount of €1.35 million ($1.9 million based on the exchange rate on December 31, 2013) at an advance rate of 90% of presented trade receivables. The CIC Agreement bears interest at the three month EURIBOR plus 1.4%. As of December 31, 2013, CXR AJ had outstanding borrowings under the CIC Agreement of $0.8 million.
On November 15, 2010, CXR Larus Corporation (“CXR Larus”) and Bridge Bank, National Association (“Bridge Bank”) executed a Business Financing Agreement dated as of October 22, 2010 (the “Business Financing Agreement”), pursuant to which Bridge Bank agreed to provide to CXR Larus an advance facility of up to $800,000 on trade accounts receivable at an advance rate of 80% with interest at the Prime Rate plus 3.25%. CXR Larus withdrew from this agreement during 2013 and replaced the facility with a checking account with no borrowing facility. Consequently, there were no borrowings on this account as of December 31, 2013.
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Promissory Notes Payable
The promissory notes which were due to former shareholders of Advanced Control Components were subordinated contingent promissory notes, which were originally issued in May 2008. Since this date there have been further amendments, most recently, effective November 1, 2012 (the “Amended Subordinated Contingent Notes”). The Amended Subordinated Contingent Notes bear interest at the prime rate as reported in The Wall Street Journal plus 4% (previously prime rate plus 1%) and were scheduled to mature on December 15, 2014 (previously August 31, 2013) (the “2014 Maturity Date’‘). Interest was payable quarterly until the notes are redeemed. Principal payments amounting to $0.3 million were payable on March 15, 2014, and on September 15, 2014. The remaining principal balance of $1.7 million was due at the 2014 Maturity Date. As of December 31, 2013, the outstanding principal balance under the Amended Subordinated Contingent Notes was $2,277,000. Since the year-end the Company has redeemed the promissory notes through the payment of the scheduled $0.3 million on March 15, 2014 and a final early redemption payment of the remaining principal ($1,977,000) and accrued interest on April 7, 2014. There were no penalties or settlement discount for redeeming these notes.
Lloyds TSB Bank Term Loan
On August 2, 2011, EMRISE Electronics Limited (“EEL”), a wholly-owned subsidiary of EMRISE, entered into a term loan with Lloyds TSB Bank plc (“Lloyds Bank”) in the amount of £750,000 (“Lloyds Term Loan”) (or $1.2 million based on the exchange rate at December 31, 2013). As a condition to issuing the Lloyds Term Loan, each of the operating subsidiaries of EEL, being Pascall and XCEL, were required to provide £125,000 ($206,000 at the exchange rate at December 31, 2013) to an escrow account in each of the subsidiaries’ name. The funds were held in escrow at December 2012 but released during 2013. At December 31, 2012, the total amount of £250,000 ($413,000 based on the exchange rate at December 31, 2012) was included in the balance sheet as a non-current asset. The Lloyds Term Loan bears interest at a fixed rate of the aggregate of 4.75% per annum plus the rate quoted by the Lloyds Bank Wholesale Markets division at or about the time of borrowing. Principal and interest are payable monthly over 60 months commencing one month after the date of borrowing. The loan is subject to a financial covenant requiring the minimum net worth of EEL from and after December 31, 2013 to be not less than £4.4 million ($7.3 million at the exchange rate at December 31, 2013) and to increase annually by not less than £200,000 ($330,000 at the exchange rate at December 31, 2013). EEL was able to satisfy this covenant at December 31, 2013. As of December 31, 2013, $0.7 million was outstanding under the Lloyds Term Loan based on the December 31, 2013 exchange rate. Since the year-end date this loan has been fully repaid and a new loan of £1.1 million (approximately $1.8 million using the exchange rate at December 31, 2013) was drawn down on April 1 2014. The new loan from Lloyds Bank is repayable in monthly instalments over a period of 3 years expiring on April 4, 2017 at a fixed rate of interest of 6.6%. The major covenant on this loan requires that the net worth of EEL (defined, for the purposes of the loan, as the net assets less sums owed by the Company) should be at least £2 million ($3.3 million based on the exchange rate at December 31, 2013) and should increase annually by a minimum of £250,000 (approximately $400,000).
Lloyds TSB Bank Loan and Mortgage
In March 2013, the Company negotiated a business loan from Lloyds Bank of £1.4 million (approximately $2.3 million based on the exchange rate at December 31, 2013) for the purchase of a building in the United Kingdom. The loan is secured by a mortgage on the property. Principal and interest are being repaid over 20 years. This building is owned, occupied and was previously leased by Pascall. The balance outstanding at December 31, 2013 was $2.3 million and the carrying value of the land and building in the Company’s balance sheet is $3.1 million.
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.
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Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
We do not hold any derivative instruments and do not engage in any hedging activities.
Item 8. Financial Statements and Supplementary Data.
Our financial statements are contained in pages F-1 through F-28 which appear at the end of this Annual Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
There are no reportable events under this item for the year ended December 31, 2013.
Item 9A. Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Principal Executive Officer and our Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As of December 31, 2013, the Company carried out an assessment, under the supervision of and with the participation of the Company’s Principal Executive Officer and the Principal Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in the Exchange Act Rules 13a-15(e) and 15d-15(e)). The Principal Executive Officer and the Principal Financial Officer concluded that the Company’s disclosure controls and procedures were effective at a reasonable assurance level as of December 31, 2013.
(b) Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. The Company’s internal control system over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. The Company’s internal control over financial reporting includes those policies and procedures that:
(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;
(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in condition, or that the degree of compliance with the policies or procedures may deteriorate.
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Under the supervision and with the participation of management, including the Company’s Principal Executive Officer and Principal Financial Officer, the Company conducted an evaluation of the effectiveness of its internal control over financial reporting based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. This evaluation included an assessment of the design of the Company’s internal control over financial reporting and testing of the operational effectiveness of its internal control over financial reporting. Based on this evaluation, our Principal Executive Officer and our Principal Financial Officer concluded as of December 31, 2013, that our internal controls over financial reporting were effective.
This Report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the SEC that permit the Company to provide only management’s report in this Report.
Inherent Limitations on the Effectiveness of Controls
Management does not expect that their disclosure controls and procedures or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control systems are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in a cost-effective control system, no evaluation of internal control over financial reporting can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been or will be detected.
These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of a simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.
(c) Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
None.
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Item 10. Directors, Executive Officers and Corporate Governance.
Directors and Executive Officers
The names, ages and positions held by our directors and executive officers as of April 14, 2014, and their business experience are as follows:
| Name | Age | Titles | ||
| Carmine T. Oliva | 71 | Chairman of the Board, Chief Executive Officer, and Director | ||
| Graham Jefferies | 56 | Director, President and Chief Operating Officer | ||
| Timothy Blades | 57 | Chief Financial Officer | ||
| Otis W. Baskin (1) | 68 | Director | ||
| Frank P. Russomanno (1) | 66 | Director | ||
| Julie A. Abraham (1) | 56 | Director |
| (1) | Member of the Compensation Committee, Nominating and Corporate Governance Committee, Special Committee and Audit Committee. |
In addition to the above, during the year Laurence P. Finnegan served as an independent director until his retirement from the Board on June 12, 2013. Mr. Finnegan was a long serving member of the Board. During 2013 until the date of his retirement he was a member of the Compensation Committee.
Carmine T. Oliva has been Chairman of the Board, Chief Executive Officer and a Class III director of EMRISE Corporation since March 1997 and of our subsidiary, EEC, since he founded EEC Electronics Corporation in 1983. From March 1997 until July 2009, he was President of EMRISE. Mr. Oliva served as Acting Chief Financial Officer and Secretary of EMRISE Corporation from August 2006 to May 2007 and served as Acting Chief Financial Officer from April to July 2005. Mr. Oliva has been Chairman of the Board of EMRISE Electronics Ltd. since 1985 and Chairman and Chief Executive Officer of CXR Larus since March 1997. In 2002, Mr. Oliva obtained a French government work permit and assumed responsibility as President of our CXR-AJ subsidiary. From January 1999 to January 2000, Mr. Oliva served as a director of Digital Transmission Systems Inc. From 1980 to 1983, Mr. Oliva was Senior Vice President and General Manager, ITT Asia Pacific Inc. Prior to holding that position, Mr. Oliva held a number of executive positions with ITT Corporation and its subsidiaries over an eleven-year period. Mr. Oliva attained the rank of Captain in the United States Army and is a veteran of the Vietnam War. Mr. Oliva earned a B.A. degree from Seton Hall University and an M.B.A. degree from The Ohio State University. Mr. Oliva is the founder of EMRISE. This, in addition to his business acumen and experience in the aerospace and defense and communications equipment industries for over 40 years along with his judgment, integrity, reputation and his international business background, including his extensive acquisition and divestiture expertise, makes Mr. Oliva an ideal director of the Company as well as its chairman.
Graham Jefferies joined the Board as a Class II director on March 1, 2011. He was appointed as President in July 2009. He served as Executive Vice President from October 1999 until July 2009. Mr. Jefferies was also appointed as our President and Chief Operating Officer in January 2005, after having served as Chief Operating Officer of our Telecommunications Group since October 1999.Mr. Jefferies served as Executive Vice President of EMRISE from April 1999 through October 1999. Mr. Jefferies has served CXR-AJ as a director since March 1997 and as General Manager since July 2002, has served as Managing Director of Belix Power Conversions Ltd., Belix Wound Components Ltd. and Belix Company Ltd. since our acquisition of those companies in April 2000, as Managing Director of XCEL Power Systems, Ltd. since September 1996 and as Managing Director of EMRISE Electronics Ltd. since March 1992. Prior to joining us in 1992, he was Sales and Marketing Director of Jasmin Electronics PLC, a major United Kingdom software and systems provider, from 1987 to 1992. Mr. Jefferies held a variety of project management positions at GEC Marconi from 1978 to 1987. Mr. Jefferies earned a B.Sc. degree in Engineering from Leicester University and has experience in mergers and acquisitions. Mr. Jefferies is a citizen and resident of the United Kingdom. We believe Mr. Jefferies’ education and experience in several leadership roles, such as Chief Operating Officer and Managing Director, as well as his business acumen, judgment, integrity and reputation, make him an ideal director.
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Timothy J. Blades serves as the Company’s Chief Financial Officer and having served as the Company’s interim Director of Finance from April 11, 2012. In the period from March 6, 2012 to April 10, 2012, he provided accounting services to the Company. He became an employee of the Company on December 1, 2012 and was appointed as Chief Financial Officer on February 5, 2013. He is the Company’s Principal Accounting Officer and Corporate Secretary. Mr. Blades is based in England, where the Company’s primary business units, operations management and financial teams are located. He is a Chartered Accountant and an experienced international financial executive who has led multidisciplinary teams focused on profit improvement, fundraising, mergers and acquisitions and a range of essential finance and accounting functions throughout his career. He has extensive expertise in international finance, particularly in the U.S., Europe, the UK, and the Far East. During a career with Grant Thornton UK LLP of more than 30 years Mr. Blades was Managing Partner of Grant Thornton’s Northamptonshire and Cambridge offices, overseeing a staff of 250 and prior to that was the partner in charge of audit in Grant Thornton’s London office. From 2002 to 2010, he was a regional managing partner leading a 12-partner team directing a 300-member staff responsible for accounting, tax and financial planning. During this period, he built the Grant Thornton Cambridge office from a staff of 30 to more than 100 professionals. Mr. Blades graduated from the University of Sheffield in England earning a BA in Business. He has extensive training in U.S. and UK GAAP, IFRS (International Financial Reporting Standards), due diligence reporting and a range of regulatory matters. Mr. Blades is a trustee of a large defined benefit pension fund, a non-executive director of a trade and research organization, a member of the Court of Northampton University in England and is active in a number of charitable organizations.
Otis W. Baskin has served as a Class I director since February 2004. He was a Professor of Management at The George L. Graziadio School of Business and Management at Pepperdine University in Malibu, California from June 1995 to 2012 and also served as dean from 1995 to 2001. As dean at Pepperdine he was responsible for all aspects of the management of an organization with 200 employees and $47 million in annual revenue. He has been a member of the full-time faculty of the University of Houston - Clear Lake (1975-1987), where he served as Coordinator of the Management Faculty and Director of the Center for Advanced Management Programs. He has also been Professor of Management at Arizona State University, West Campus (1987-1991) and The University of Memphis (1991-1995), in addition to serving as dean at both universities. In each of these assignments he has had responsibilities for recruitment and setting compensation of both professional and support personnel. Dr. Baskin worked with AACSB International (Association for the Advancement of Collegiate Schools of Business) as Special Advisor to the President and as Chief Executive Officer from July 2002 to June 2004. He is an Associate with the Family Business Consulting Group, where he advises family owned and closely held businesses. He has served as an advisor to Exxon/Mobile Research and Engineering Corporation, NASA and the United States Air Force. Dr. Baskin is an expert in international business who has worked with companies and business schools in more than 40 countries. He earned a Ph.D. in Management, Public Relations and Communication Theory from The University of Texas at Austin, an M.A. degree in Speech Communication from the University of Houston, and a B.A. degree in Religion from Oklahoma Christian University. Dr. Baskin brings a unique blend of business, management, communications and leadership skills, experience and education, as well as his judgment, integrity and reputation, to his role as director and chair of the Compensation Committee.
Frank P. Russomanno joined the Board as a Class I director in March 2011. He served as Vice Chairman of Imation from March 2009 and a member of the board of directors and Chief Executive Officer of Imation from April 2007 until he retired from the company in May 2010. He also served as President of Imation from April 2007 to March 2009. Previously, Mr. Russomanno was Chief Operating Officer of Imation from November 2003 to April 2007 and from November 2006 to April 2007 was also acting Chief Executive Officer and President. Prior to November 2003, Mr. Russomanno was president of Imation’s Data Storage and Information Management business. Mr. Russomanno is active in industry and nonprofit organizations. Mr. Russomanno is a member of the board of directors of Hutchinson Technologies Incorporated. Mr. Russomanno is the former chairman of the board of the Content Delivery & Storage Association. He currently serves on the board of directors of the Greater Twin Cities United Way and Intellectual Takeout. In addition, he is a former member of the board of directors of Merrick Community Services in St. Paul, MN. Mr. Russomanno has a Bachelor of Arts degree in history from Seton Hall University. He has taken graduate courses at the University of Oklahoma and Monmouth College and served in the U.S. Army as an artillery officer in Vietnam, achieving the rank of Captain. Mr. Russomanno’s background and direct experience leading the operations of a large, diverse organization can be applied to helping the management of the Company and makes him an ideal director and chairman of our Nominating and Corporate Governance Committee.
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Julie A. Abraham joined the Board as a Class II director on February 2011. Since January 2011, Ms. Abraham has been the Chief Financial Officer of Essex, CT-based Structural Graphics LLC, a high-impact dimensional print company where she had previously served as a consulting Chief Financial Officer since July 2010. In 2008, Ms. Abraham began as a principal with Westbrook, CT-based The Edbraham Group LLC, a privately-held, national direct and digital marketing recruiting firm that she co-founded. During 2007 to 2008, she also served as a financial consultant to the Magnet Group LLC, a promotional products marketing firm. From 2004 to 2007, Ms. Abraham was CEO and majority owner of Newington, CT-based DMJ Search, an executive recruiting firm specializing in the direct marketing, print and mail industries. From 1985 to 2002, Ms. Abraham was employed at ADVO, Inc., a New York Stock Exchange-traded, national direct mail marketing firm, with her most recent position being Senior Vice President, Chief Financial Officer and Operating Committee Member, participating in running the day-to-day operations of the company. During her career at ADVO, she also held the titles of Senior Vice President of Finance and Controller and Operating Committee Member, Vice President and Controller, Vice President Financial Planning and Investor Relations and Vice President Shared Financial Services. Ms. Abraham earned a bachelor’s degree in accounting from the University of Vermont, and she became a certified public accountant in 1982. Ms. Abraham’s financial expertise in the public company arena and experience in strategic financial planning, as well as her direct knowledge of regulatory affairs, particularly with the SEC, financial controls and financial systems, Sarbanes-Oxley and financial due diligence in preparation for acquisitions will provide valuable insight and guidance to the Company and the Board and makes her an ideal director and chairperson of our Audit Committee.
Term of Office and Family Relationships
Our officers are appointed by, and serve at the discretion of, the Board. There are no family relationships among our executive officers and directors.
Board of Directors
Board Composition, Responsibilities and Leadership Structure
Our business, property and affairs are managed under the direction of our Board. Directors are kept informed of our business through discussions with our executive officers, by reviewing materials provided to them and by participating in meetings of our Board and its committees.
Our bylaws provide that our Board shall consist of at least four directors. Our Board is divided into three classes of directors: Class I, Class II and Class III. The term of office of each class of directors is three years, with one class expiring each year at our annual meeting of stock-holders. We currently have five directors on our Board, with no vacancies. Our current Board consists of two Class I directors whose terms expire at our 2015 annual meeting, two Class II directors whose term expires at our 2016 annual meeting, and one Class III director whose term expires at our 2014 annual meeting.
During 2013, our Board held 7 meetings. During 2013, none of our directors attended fewer than 75% of the aggregate of: (1) the total number of meetings of the Board (held during the period for which he/she has been a director); and (2) the total number of meetings held by all committees of the Board on which he/she served (during the periods that he/she served).
The independent members of our Board are selected because of their independence from management; depth of understanding of technology, manufacturing, sales and marketing, finance and/or other elements directly relevant to the technology and business of the Company; education and professional background; and judgment, skill, integrity and reputation.
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The leadership of our Company and our Board is split between the executive and chairman leadership of Mr. Oliva, our founder, on the one hand, and our independent directors, which make up 60% of the Board, on the other hand. Mr. Oliva has over 40 years of experience in the electronics and communications industry. His in-depth knowledge of each of our businesses and the competitive challenges each business faces, as well as his extensive experience as a director and senior member of management, make him the best qualified director to serve as chairman. Our independent directors are strong leaders with diverse educations, skills and backgrounds. They are appropriately skeptical, leading to thorough review and oversight of the strategies and actions proposed by the chairman and management. The independent members meet regularly in executive session, with the most qualified member taking the lead in such sessions based on the issues being discussed. The Board may subsequently decide to change its leadership structure, as there is no formal policy that requires the Chief Executive Officer and Chairman to be served by one person.
We believe the combination of Mr. Oliva, as our Chief Executive Officer and Chairman, in combination with our strong independent members of the Board has been an effective leadership structure for EMRISE. The division of duties and the level of communication between the board and our management provide the basis for the proper functioning of our board and its oversight of management.
Risk Oversight
Our Board provides consideration and oversight of risks facing EMRISE and its subsidiaries in the ordinary course of operating the businesses. Together with the Board’s standing committees, the Board is responsible for ensuring that material risks are identified and managed appropriately. The Board and its committees regularly review material strategic, operational, financial, compensation and compliance risks with senior management and discuss the key risks to our business. The committees communicate the risks they oversee with the other committees and the Board, as a whole. The Audit Committee is responsible for discussing overall risk assessment and risk management practices, as set forth in the Audit Committee’s charter. For example, the Audit Committee assists the Board in its risk oversight function by reviewing and discussing with management our system of disclosure controls and our internal controls over financial reporting. The Audit Committee also performs a central oversight role with respect to financial and compliance risks and meets at least quarterly with our independent auditor, BDO, LLP. The Nominating and Corporate Governance Committee assists the board in its risk oversight function by periodically reviewing and discussing with management important compliance and quality issues. The Compensation Committee considers risk in connection with its design of compensation programs for our executives.
Board Committees
Our Board currently has an Audit Committee, a Compensation Committee, a Nominating and Corporate Governance Committee and a Special Committee.
Audit Committee
The Audit Committee selects our independent registered public accountants; reviews the results and scope of the audit and other services provided by our independent registered public accountants; reviews our financial statements for each interim period and for our year end and our internal financial and accounting controls; and recommends, establishes and monitors our disclosure controls and procedures. All of our independent directors, Ms. Abraham, Mr. Baskin and Mr. Russomanno served on our Audit Committee throughout 2013, with Ms. Abraham serving as chairperson. Our Board has determined that Ms. Abraham is an audit committee financial expert. The Audit Committee operates pursuant to a charter approved by our Board and Audit Committee, according to the rules and regulations of the SEC. The Audit Committee held eight meetings in 2013.
Compensation Committee
The Compensation Committee is responsible for establishing and administering our policies involving the compensation of all of our executive officers and establishing and recommending to our Board the terms and conditions of all employee and consultant compensation and benefit plans. Our entire Board also may perform these functions with respect to our employee stock option plans. Messrs. Baskin, and Russomanno have served on the Compensation Committee throughout 2013. Mr. Finnegan was a member of this committee until June 2013 when, on his retirement from the Board, he was replaced by Ms. Abraham. Mr. Baskin serves as chairman. The Compensation Committee operates pursuant to a charter approved by our Board and Compensation Committee. The Compensation Committee held four meetings in 2013.
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Compensation Committee Interlocks and Insider Participation
None of the current members of the Compensation committee have served as an officer or employee of EMRISE. No executive officer of EMRISE served as a director or Compensation Committee member of any entity in which the members of the Compensation Committee or the Board were an executive officer or director.
Nominating and Corporate Governance Committee
The Nominating and Corporate Governance Committee reviews and provides oversight with regard to our corporate governance related policies and procedures and also recommends nominees to our Board and committees of our Board, develops and recommends to our Board corporate governance principles, and oversees the evaluation of the Board and management. Messrs. Baskin and Russomanno and Ms. Abraham have served on the Nominating and Corporate Governance Committee throughout 2013. Mr. Russomanno serves as chairman of the Nominating and Corporate Governance Committee. The Nominating and Corporate Governance Committee utilizes a variety of methods for identifying and evaluating nominees for director, including candidates that may be referred by stockholders. The Nominating and Corporate Governance Committee held four meetings in 2013.
The Nominating and Corporate Governance Committee will consider candidates for director recommended by any stockholder that is the beneficial owner of shares representing more than 1.0% of the then-outstanding shares of our common stock and that has beneficially owned those shares for at least one year. The Nominating and Corporate Governance Committee will evaluate those recommendations by applying its regular nominee criteria and considering the additional information described in the Nominating and Corporate Governance Committee’s below-referenced charter. Stockholders that desire to recommend candidates for the board for evaluation may do so by contacting EMRISE in writing, identifying the potential candidate and providing background and other information in the manner described in the Nominating and Corporate Governance Committee’s charter. Candidates may also come to the attention of the Nominating and Corporate Governance Committee through current board members, professional search firms and other persons. In evaluating potential candidates, the Nominating and Corporate Governance Committee will take into account a number of factors, including, among others, the following:
| ● | independence from management; |
| ● | depth of understanding of technology, manufacturing, sales and marketing, finance and/or other elements directly relevant to the technology and business of our company; |
| ● | education and professional background; |
| ● | judgment, skill, integrity and reputation; |
| ● | existing commitments to other businesses as a director, executive or owner; |
| ● | personal conflicts of interest, if any; and |
| ● | size and composition of the Board of Directors. |
In addition, prior to nominating a sitting director for re-election at an annual meeting of stockholders, the Nominating and Corporate Governance Committee considers the director’s past attendance at, and participation in, meetings of our Board and its committees and the director’s formal and informal contributions to their respective activities.
The Nominating and Corporate Governance Committee strives to maintain a Board with a diverse set of skills and qualifications, to ensure that the Board is adequately serving the needs of our stockholders. Before evaluating director candidates, the committee reviews the skills and qualifications of the directors currently serving on the board and identifies any areas of weakness or skills of particular importance. On the basis of that review, the committee will evaluate director candidates with those identified skills. While the Nominating and Corporate Governance Committee does not have a formal policy on board diversity, the committee takes into account a broad range of diversity considerations when assessing director candidates, including individual backgrounds and skill sets, professional experiences and other factors that contribute to our board having an appropriate range of expertise, talents, experiences and viewpoints, and considers those diversity considerations, in view of the needs of the board as a whole, when making decisions on director nominations.
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Special Committee
In 2013, the Board authorized the creation of the Special Committee to monitor and oversee the strategic direction of the Company. The Board appointed Messrs. Baskin and Russomanno and Ms. Abraham as members. Mr. Russomanno serves as the Chairman and Mr. Baskin serves as the Secretary. This committee meets as often as is deemed appropriate. In 2013 there were two formal meetings.
Committee Charters
The charters of our Audit, Compensation and Nominating and Corporate Governance Committees, and our Codes of Business Conduct and Ethics, are included on our website at www.emrise.com. The foregoing information is also available in print to any stockholder who requests it. All such requests should be in writing and should be sent to “c/o Secretary” at 2530, Meridian Parkway, Durham, North Carolina, 27713 or secretary@emrise.com.
Security Holder Communications with the Board of Directors
The Board has established a process to receive communications from security holders. Security holders and other interested parties may contact any member (or all members) of the Board, or the independent directors as a group, any committee of the Board or any chair of any such committee, by mail or electronically. To communicate with the Board, any individual directors or any group or committee of directors, correspondence should be addressed to the Board or any such individual directors or group or committee of directors by either name or title. All such correspondence should be sent “c/o Secretary” at 2530, Meridian Parkway, Durham, North Carolina, 27713.
All communications received as set forth in the preceding paragraph will be opened by the Secretary for the sole purpose of determining whether the contents represent a message to our Board. Any contents that are not in the nature of advertising, promotions of a product or service, patently offensive material or matters deemed inappropriate for the Board will be forwarded promptly to the addressee. In the case of communications to the Board or any group or committee of directors, our Secretary will make sufficient copies (or forward such information in the case of e-mail) of the contents to send to each director who is a member of the group or committee to which the envelope or e-mail is addressed.
Code of Ethics
Our Board has a Code of Business Conduct and Ethics that is regularly reviewed and updated to meet current best practices. This code applies to all of our directors, officers and employees and an additional Code of Business Ethics that applies to our Chief Executive Officer and senior financial officers. These codes are available on our website, located at www.emrise.com.
We intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K relating to amendments to or waivers from provision of these codes that relate to one or more of the items set forth in Item 406(b) f Regulation S-K by describing on our website within four business days following the date of a waiver or a substantive amendment, the date of the waiver or amendment, the nature of the amendment or waiver, and the name of the person to whom the waiver was granted.
Information on our Internet website is not, and shall not be deemed to be, a part of this Report or incorporated into any filings we make with the SEC.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our executive officers and directors, and persons who beneficially own more than 10% of a registered class of our common stock, to file initial reports of ownership and reports of changes in ownership with the SEC. These officers, directors and stockholders are required by the SEC regulations to furnish us with copies of all reports that they file.
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Based solely upon a review of copies of the reports furnished to us during the year ended December 31, 2013 and thereafter, or any written representations received by us from directors, officers and beneficial owners of more than 10% of our common stock that no other reports were required, we believe that, during 2013, (i) all Section 16(a) filing requirements applicable to our directors and officers were met and (ii) except for any Form 5 filings that may have been required, all Section 16(a) filing requirements applicable to the beneficial owners of more than 10% of our common stock were met.
Legal Proceedings
There are no material proceedings to which any director or officer, or any associate of any such director or officer, is a party that is adverse to our Company or any of our subsidiaries or has a material interest adverse to our Company or any of our subsidiaries. No director or executive officer has been a director or executive officer of any business which has filed a bankruptcy petition or had a bankruptcy petition filed against it during the past ten years. No director or executive officer has been convicted of a criminal offense or is the subject of a pending criminal proceeding during the past ten years. No director or executive officer has been the subject of any order, judgment or decree of any court permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities during the past ten years. No director or officer has been found by a court to have violated a federal or state securities or commodities law during the past ten years.
Item 11. Executive Compensation.
Summary Compensation Table
The following table provides information concerning the compensation for the previous three fiscal years for our principal executive officer, our current principal accounting officer, our former principal accounting officer and our chief operating officer, who served as executive officers during 2013 (collectively, the “named executive officers”).
| Name and Principal Position | Year | Salary
($) | Bonus ($) | Option Awards ($) | All other Compensation ($) | Total
($) | ||||||||||||||||||
| Carmine T. Oliva | 2011 | 414,984 | - | - | 77,846 | (1) | 492,830 | |||||||||||||||||
| Chairman and | 2012 | 414,984 | - | - | 24,078 | (2) | 439,062 | |||||||||||||||||
| Chief Executive Officer | 2013 | 405,567 | - | - | 24,078 | (3) | 429,645 | |||||||||||||||||
| Graham Jefferies (4) | 2011 | 276,324 | - | - | 99,219 | (5) | 375,543 | |||||||||||||||||
| Director, President, and | 2012 | 270,548 | - | - | 50,498 | (6) | 321,046 | |||||||||||||||||
| Chief Operating Officer | 2013 | 272,461 | - | - | 74,251 | (7) | 346,712 | |||||||||||||||||
| Timothy J. Blades (8) | 2011 | - | - | - | - | |||||||||||||||||||
| Principal Accounting Officer | 2012 | 149,523 | - | - | - | (9) | 149,523 | |||||||||||||||||
| from April 11, 2012 | 2013 | 192,741 | - | 19,095 | 7,849 | (10) | 219,685 | |||||||||||||||||
| Brandi L. Festa (11) | 2011 | 160,000 | - | - | 22,805 | (12) | 182,805 | |||||||||||||||||
| Principal Accounting | 2012 | 43,076 | - | - | - | (13) | 43,076 | |||||||||||||||||
| Officer until March 31, 2012 | 2013 | - | - | - | - | - | ||||||||||||||||||
None of the above received any non-equity Incentive plan compensation or non-qualified deferred compensation in 2013, 2012 or 2011.
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(1) In 2011 the amount included (i) $4,041 in insurance premiums we paid with respect to a $1.0 million term life insurance policy for the benefit of Mr. Oliva’s spouse, (ii) $31,055 associated with payments in consideration for modifications to the change in control provisions in his employment agreement in 2010, and (iii) perquisites or personal benefits provided, none of which individually exceeded the greater of $25,000 or 10% of the total amount of these benefits provided to Mr. Oliva.
(2) In 2012 the amount included $4,640 in insurance premiums paid with respect to a $1.0 million term life insurance policy for the benefit of Mr. Oliva’s spouse and other perquisites or personal benefits provided, none of which individually exceed the greater of $25,000 or 10% of the total amount of these benefits provided to Mr. Oliva.
(3) In 2013 the amount included $4,640 in insurance premiums paid with respect to a $1.0 million term life insurance policy for the benefit of Mr. Oliva’s spouse and other perquisites or personal benefits including Medicare and a car allowance, none of which individually exceed the greater of $25,000 or 10% of the total amount of these benefits provided to Mr. Oliva.
(4) Mr. Jefferies is based in the United Kingdom and receives his remuneration in British pounds sterling. The compensation amounts listed for Mr. Jefferies are shown in U.S. Dollars (“USD”), converted from British pounds sterling using the average of the daily conversion rates in effect in the years under review. Mr. Jefferies’ base salary in British pounds sterling was approximately £180,000 for both 2013 and 2012. Under the terms of his contract, Mr. Jefferies has the option to convert a proportion of this salary into contributions to a pension scheme.
(5) In 2011 the amount included (i) $27,007 in Company contributions to Mr. Jefferies’ retirement account, (ii) approximately $50,730 equivalent USD retention allowances to ensure retention of Mr. Jefferies’ employment due to his critical responsibilities governing the operations of the Company, (iii) $11,100 of auto allowance benefits, and (iv) other perquisites or personal benefits provided, none of which individually exceed the greater of $25,000 or 10% of the total amount of these benefits provided to Mr. Jefferies.
(6) In 2012 the amount included (i) $29,915 in Company contributions to Mr. Jefferies’ retirement account, (ii) $10,288 in auto allowance benefits, and (iii) other perquisites or personal benefits provided, none of which individually exceed the greater of $25,000 or 10% of the total amount of these benefits provided to Mr. Jefferies.
(7) In 2013 the amount included (i) $50,902 in Company contributions to Mr. Jefferies’ retirement account, (ii) 11,126 in auto allowance benefits, and (iii) other perquisites or personal benefits provided, none of which individually exceed the greater of $25,000 or 10% of the total amount of these benefits provided to Mr. Jefferies.
(8) Mr. Blades acted as interim Principal Accounting Officer from April 11, 2012. In the period from April 11, 2012 to November 30, 2012, his services were provided through TJB Business Advisory Services Limited (“TJB BAS”), a company under his control. Mr. Blades has been an employee of the Company since December 1, 2012. Mr. Blades is based in the United Kingdom. Compensation, for his services, paid through TJB BAS and paid as salary as an employee, have been paid in British pounds sterling. The compensation amounts listed for Mr. Blades are shown in USD, converted from British pounds sterling using the average of the daily conversion rates in effect in 2012. From December 1, 2012, Mr. Blades’ annual salary in British pounds sterling was at the rate of £120,000.
(9) Mr. Blades received $16,125 in salary for the period from December 1, 2012 to December 31, 2012. Prior to December 1, 2012, TJB BAS received $133,398 for providing his services in the period from April 11, 2012 to December 1, 2012.
(10) Mr. Blades was granted 50,000 options to purchase shares of the Company’s common stock in connection with his appointment as Chief Financial Officer on February 5, 2013. Other benefits included pension contributions and the provision of a car for a portion of the year. None of the other personal benefits provided exceeded the greater of $25,000 or 10% of the total amount of these benefits provided to Mr. Blades.
(11) Ms. Festa resigned as the Company’s Director of Finance and Administration, Secretary and Treasurer effective February 29, 2012. Ms. Festa entered into an agreement with the Company to serve as its acting Principal Accounting Officer through the completion and filing of the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.
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(12) In 2011 the amount included approximately $13,599 in medical and dental benefits. The value of perquisites and other personal benefits Ms. Festa received was less than $10,000 in aggregate.
(13) In 2012, subsequent to her departure as a direct employee of the Company, and in addition to the sums disclosed above, Ms. Festa received $7,204 for advisory services to the Company.
Termination Payments
Carmine T. Oliva
The Company has a two year employment agreement with Mr. Oliva which commenced on December 12, 2013. This agreement is automatically renewable thereafter for periods of one year unless Mr. Oliva has been given written notice of non-renewal. The Company may terminate Mr. Oliva’s employment at any time, with or without due cause. “Due cause” includes any intentional misapplication of our funds or other material assets, or any other act of dishonesty injurious to us, or conviction of a felony or a crime involving moral turpitude. “Due cause” also includes abuse of controlled substances or alcohol and breach, non-performance or non-observance of any of the terms of the agreement, provided that Mr. Oliva fails to satisfactorily remedy the performance problem following 30 days’ written notice.
Mr. Oliva may terminate his employment at any time, with or without good reason. However, termination for good reason must occur within 30 days of the occurrence of an event constituting good reason, and Mr. Oliva must furnish the Company with written notice of the event within 30 days after the initial existence of the event and provide the Company with at least a 60-day cure period. “Good reason” includes: a material diminution in his authority, duties, responsibilities, titles or offices; a purported reduction in Mr. Oliva’s base salary amounting to an enforced material diminution in his salary to an amount more than 10% below the base salary in effect at the time of the reduction; the Company’s failure to timely cure or diligently initiate a cure of any material breach within 30 days after Mr. Oliva gives us written notice of the breach.
If the Company terminates Mr. Oliva’s employment for due cause or due to Mr. Oliva’s breach of his employment agreement by refusing to continue his employment, or if Mr. Oliva terminates his employment without good reason, then all compensation and benefits for Mr. Oliva will cease, other than amounts under retirement and benefit plans and programs that were earned and vested by the date of termination, pro rata annual salary through the date of termination, any stock options that were vested as of the date of termination, and accrued vacation.
If Mr. Oliva dies or becomes incapacitated, the Company may terminate his employment under the agreement. If Mr. Oliva’s employment terminates due to his incapacity or death, Mr. Oliva or his estate or legal representative will be entitled to receive benefits under our retirement and benefits plans and programs that were earned and vested at the date of termination, a prorated incentive bonus for the fiscal year in which incapacity or death occurred (to the extent he would otherwise be eligible), and a lump sum cash payment in an amount equal to one year of his then current, annual salary.
If Mr. Oliva’s employment terminates for good reason, or because the contract is not- renewed or for reasons other than as a result of due cause, incapacity, death or retirement at Mr. Oliva’s own choice this will be deemed to be ‘constructive termination’. Under such circumstances Mr. Oliva will be entitled to his salary through the end of the month in which termination occurs plus credit for accrued vacation, and a prorated incentive bonus, if eligible, for the fiscal year during which termination occurred. In addition, under those circumstances, if Mr. Oliva enters into a separation and release agreement with us, then he will be entitled to receive the following:
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| (i) | a severance payment equal to two times his then current annual salary (paid, with interest, over a three year period); |
| (ii) | all medical insurance benefits to which he was entitled immediately prior to the date of termination for a period of eighteen months or the date that Mr. Oliva’s continued participation in our medical insurance plan was not possible under the plan, whichever was earlier; If the Company’s medical insurance plan does not allow Mr. Oliva’s continued participation in the plan, then Mr. Oliva will receive the estimated monthly COBRA premiums at the time of termination (taking into account all known or anticipated premium increases) to be used by Mr. Oliva to maintain his medical insurance coverage for an additional eighteen months; |
| (iii) | a lump-sum cash payment equal to twenty-four times the estimated monthly life insurance premiums at the time of termination (taking into account all known or anticipated premium increases) to be used by Mr. Oliva to maintain his existing group life insurance coverage and the $1,000,000 life insurance policy on his life for two years; |
| (iv) | 250,000 warrants (exercisable over a four year period) to purchase stock in the Company at the share price prevailing on the date of termination; and |
| (v) | other benefits, including an automobile allowance, charitable donations and contributions towards the cost of a personal assistant for a period of twelve months. Full details are set out in Mr. Oliva’s contract dated December 12, 2013. |
In the event of a change of control in the Company the above benefits due to Mr. Oliva will become payable immediately.
Graham Jefferies
Mr. Jefferies may terminate his employment at any time, with or without good reason. However, termination for good reason must occur within 30 days of the occurrence of an event constituting good reason. The term “good reason” has the same meaning as in Mr. Oliva’s employment agreement described above.
The Company may terminate Mr. Jefferies’ employment at any time, immediately upon written notice, with or without due cause. The term “due cause” has the same meaning as in Mr. Oliva’s employment agreement described above, except that Mr. Jefferies may satisfactorily remedy the performance problem following 90 days’ written notice. If we terminate Mr. Jefferies’ employment for due cause or due to Mr. Jefferies’s breach of his employment agreement by refusing to continue his employment, or if Mr. Jefferies terminates his employment without good reason, then all compensation and benefits for Mr. Jefferies will cease, other than amounts under retirement and benefit plans and programs that were earned and vested by the date of termination, pro rata annual salary through the date of termination, and any stock options that were vested as of the date of termination, and accrued vacation as required by applicable law.
If Mr. Jefferies becomes mentally or physically incapable of performing the services required under the agreement for a period of 180 consecutive days, the agreement terminates; provided, however, that Mr. Jefferies will remain an employee of EMRISE Electronics Ltd. and be entitled to remuneration in an amount equal to the amount paid under EMRISE Electronics Ltd.’s permanent health insurance scheme, subject to the paragraph immediately below. Upon Mr. Jefferies’ death, the agreement terminates immediately.
If Mr. Jefferies’ employment terminates due to his incapacity or death, Mr. Jefferies or his estate or legal representative will be entitled to receive benefits under our retirement and benefits plans and programs that were earned and vested at the date of termination, a prorated incentive bonus for the fiscal year in which incapacity or death occurred (to the extent he would otherwise be eligible), and a lump sum cash payment in an amount equal to one year of his then current annual salary, grossed up to cover applicable taxes that are deducted from such amount.
If Mr. Jefferies’ employment terminates for good reason or other than as a result of due cause, incapacity, death or retirement, Mr. Jefferies will be entitled to his salary through the end of the month in which termination occurs plus credit for accrued vacation, and a prorated incentive bonus, if eligible, for the fiscal year during which termination occurred. In addition, under those circumstances, if Mr. Jefferies enters into a separation and release agreement with us, then he will be entitled to receive a severance payment equal to two times his then current annual salary (to be paid, with interest, over thirty-six months), to receive all medical and life insurance benefits to which he was entitled immediately prior to the date of termination (or at the election of Mr. Jefferies in the event of a change in control, immediately prior to the date of the change in control) for a period of two years or the date or dates that Mr. Jefferies’ continued participation in our medical and/or life insurance plans was not possible under the plans, whichever was earlier. If our medical and/or life insurance plans did not allow Mr. Jefferies’ continued participation, then we will be required to pay to Mr. Jefferies, in monthly installments, the monthly premium or premiums that had been payable by us covering the two-year period.
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Timothy J. Blades
Mr. Blades’ contract requires notice by either the Company or Mr. Blades of three months. During this three month period Mr. Blades is required to work for the Company and the Company is required to pay Mr. Blades his salary at the rate pertaining at that time plus such other benefits that are provided under his employment contract. No other sums are payable.
Outstanding Equity Awards at December 31, 2013
The following table sets forth information about outstanding equity awards held by our named executive officers as of December 31, 2013:
| Option Awards | ||||||||||||||
| Number of Securities Underlying Unexercised Options | Number of Securities Underlying Unexercised Options | Option Exercise | Option | |||||||||||
| (#) Exercisable | (#) Unexercisable | Price ($) | Expiration Date | |||||||||||
| Carmine T. Oliva | ||||||||||||||
| 6,934 | - | 3.75 | 2/24/2014 | |||||||||||
| 13,334 | - | 7.50 | 12/29/2015 | |||||||||||
| 20,000 | - | 2.18 | 8/22/2018 | |||||||||||
| 20,000 | - | 3.06 | 8/22/2018 | |||||||||||
| 20,000 | - | 1.53 | 3/24/2019 | |||||||||||
| Graham Jefferies | ||||||||||||||
| 10,667 | - | 3.75 | 2/24/2014 | |||||||||||
| 13,334 | - | 7.50 | 12/29/2015 | |||||||||||
| 20,000 | - | 2.18 | 8/22/2018 | |||||||||||
| 20,000 | - | 3.06 | 8/22/2018 | |||||||||||
| 20,000 | - | 1.53 | 3/24/2016 | |||||||||||
| Timothy J. Blades | 50,000 | - | 0.55 | 2/5/2023 | ||||||||||
Director Compensation
Each non-employee director is entitled to receive $1,000 per month as compensation for his or her services. In addition, each member of the Board chairing a standing committee is entitled to receive $500 per month as compensation for his or her services. Additional compensation is provided to each member of the Board for attendance in person at meetings or attendance of teleconference meetings. The rates for this compensation, up to and including September 2013, were $2,000 plus 1,000 shares in restricted stock issued for in-person attendance at meetings and $750 for attendance of teleconference meetings of thirty minutes or longer in duration. After September 2013 the rate for in-person attendance at meetings became $1,000 and 2,000 shares in restricted stock. The compensation of $750 for attendance of teleconference meetings remained unchanged. We reimburse all directors for out-of-pocket expenses incurred in connection with attendance at Board and committee meetings. We may periodically award options or warrants to our directors under our existing option and incentive plans.
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The following table provides information concerning the compensation of our non-employee directors for the year ended December 31, 2013:
| Restricted |
2013 Total |
2012 Total | ||||||||||||||||
| Fees Earned | Stock | Option | ||||||||||||||||
| or Paid in Cash | Awards | Awards | ||||||||||||||||
| Name | ($) | ($)(1) | ($) | ($) | ($) | |||||||||||||
| Laurence P. Finnegan, Jr. (2) | 10,000 | - | - | 10,000 | 20,450 | |||||||||||||
| Otis W. Baskin (3) | 31,000 | 2,800 | - | 33,280 | 31,120 | |||||||||||||
| Frank Russomanno | 31,000 | 2,800 | - | 33,280 | 31,870 | |||||||||||||
| Julie Abraham | 31,000 | 2,800 | - | 33,280 | 31,870 | |||||||||||||
| (1) | The dollar amount reflected is the value of the restricted shares issued on the date of issue. Awards are restricted to transfer for a six month vesting period. |
| (2) | At December 31, 2012, Mr. Finnegan held vested and unvested options to purchase an aggregate of 60,934 shares of common stock. At December 31, 2013, these options had lapsed under the terms of the option awards, which requires that options lapse three months after an employee or director leaves the Company. Mr. Finnegan retired from the Board in June 2013. |
| (3) | At December 31, 2013 and 2012, Mr. Baskin held vested and unvested options to purchase an aggregate of 52,668 shares of common stock. |
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Beneficial Ownership Table
Except as otherwise indicated in the related footnotes, the following table sets forth information with respect to the beneficial ownership of our common stock as of March 31, 2014, by:
| ● | each person known by us to beneficially own more than 5% of the outstanding shares of our common stock; |
| ● | each of our directors; |
| ● | each of the named executive officers in the summary compensation table contained above; and |
| ● | all of our directors and our executive officers as a group. |
Beneficial ownership is determined in accordance with the rules of the SEC, and includes voting or dispositive power with respect to the securities. To our knowledge, except as indicated by footnote, and subject to community property laws where applicable, the persons named in the table below have sole voting and dispositive power with respect to all shares of common stock shown as beneficially owned by them. Except as indicated in the discussion of contractual beneficial ownership limitations below and except as indicated in the footnotes to the table below, shares of common stock underlying derivative securities, if any, that currently are exercisable or convertible or are scheduled to become exercisable or convertible for or into shares of common stock within 60 days after the date of the table are deemed to be outstanding in calculating the percentage ownership of each listed person or group but are not deemed to be outstanding as to any other person or group. Percentage of beneficial ownership is based on 10,713,337 shares of common stock outstanding as at December 31, 2013 and 10,719,337 shares of common stock outstanding as at April 14, 2014.
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The address of each of the following stockholders, unless otherwise indicated in the footnotes to the table, is c/o EMRISE Corporation, 2530, Meridian Parkway, Durham, North Carolina, 27713. Messrs. Oliva, Jefferies, Baskin and Russomanno and Ms. Abraham are current directors of EMRISE. Messrs. Oliva and Jefferies and Blades are named executive officers and current executive officers of EMRISE.
| Name of Beneficial Owner | Amount and Nature of Beneficial Ownership | Percent of Class |
||||||
| Carmine T. Oliva | 461,318 | (1) | 3.6% (6) | |||||
| Otis W. Baskin | 84,121 | (2) | * | |||||
| Frank P. Russomanno | 44,659 | * | ||||||
| Julie A. Abraham | 40,000 | * | ||||||
| Graham Jefferies | 77,780 | (3) | * | |||||
| Timothy J. Blades | 50,000 | (4) | * | |||||
| All executive officers and directors as a group (6 persons) | 757,878 | (5) | 4.8% (7) | |||||
| * | Less than 1.00% |
| (1) | Includes 21,837 shares held individually by Mr. Oliva’s spouse, and 73,334 shares underlying vested options. |
| (2) | Includes 39,334 shares underlying vested options. |
| (3) | Includes 73,334 shares underlying vested options. |
| (4) | Includes 50,000 shares underlying vested options. |
(5) (6) (7) |
Includes 236,002 shares underlying vested options and 21,837 outstanding shares held individually by Mr. Oliva’s wife. Current shareholding as percentage of current shares in issue. If all current options are exercised holding is 4.3%. Current shareholding as percentage of current shares in issue. If all current options are exercised holding is 7.1%. |
Securities Authorized for Issuance under Equity Compensation Plans
The following table gives information about our common stock that may be issued upon the exercise of options, warrants and rights under all of our existing equity compensation plans as of December 31, 2013:
| Plan category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a) | |||||||||
| 2000 plan | (a) | (b) | (c) | |||||||||
| Equity compensation plans approved by security holders | 117,611 | $ | 6.17 | 1,882,389 | ||||||||
| Equity compensation plans not approved by security holders | - | - | - | |||||||||
| 2007 plan | ||||||||||||
| Equity compensation plans approved by security holders | 233,336 | 1.94 | 4,766,664 | |||||||||
| Equity compensation plans not approved by security holders | - | - | - | |||||||||
| Total | 350,947 | $ | 3.36 | 6,649,053 |
(1) Represents shares of common stock underlying options that are outstanding under our Amended and Restated 2000 Stock Option Plan and our 2007 Stock Incentive Plan. The material features of these plans are described in note 11 to our consolidated financial statements for the year ended December 31, 2013.
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Changes in Control
We are not aware of any arrangements that may result in “changes in control” as that term is defined by the provisions of Item 403(c) of Regulation S-K.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Director Independence
The Company recognizes the importance and value of having independent directors and maintains a high level of Corporate Governance. Independent directors are not a prerequisite of the OTC Markets Board, on which the Company’s stock is quoted, but the Company has appointed four independent directors because we believe that they can bring additional skills, control and experience to the Board. The following information concerning director independence is based on the director independence standards of the NYSE.
The Board has determined that each of Messrs. Baskin and Russomanno and Ms. Abraham is independent in accordance with the definition of independence of the NYSE exchange because none of those directors has, or during the past three years has had, a material relationship with us, either directly or as a partner, stockholder or officer of an organization that has a relationship with us, and none of those directors is disqualified from being deemed independent under the NYSE rules. The Board has also determined that each member of the Audit Committee is independent.
The non-management members of the Board must meet at regularly scheduled executive sessions without management, with a non-management director presiding over each executive session. A presiding director for each session is selected by the board members in attendance at the session based upon the topics to be discussed at the session. The non-management directors can be contacted by calling the chairman of the audit committee. Further, if the non-management directors include directors who are not independent, then we should at least once a year schedule an executive session including only independent directors.
Transactions with Related Persons
We are party to indemnification agreements with each of our directors and executive officers. The indemnification agreements and our certificate of incorporation and bylaws require us to indemnify our directors and officers to the fullest extent permitted by Delaware law. The Nominating and Corporate Governance Committee reviews, approves and ratifies any transactions between the Company and related persons.
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Item 14. Principal Accounting Fees and Services.
Fees and Services
Our principal accountants for the audit of our consolidated financial statements for the years ended December 31, 2013 and 2012 were BDO LLP, based in the United Kingdom and for the year ended December 31, 2011were BDO USA, LLP, based in the USA. The following table sets forth the aggregate fees billed to us by BDO LLP, and BDO USA, LLP, in 2013 and 2012, for professional services:
| BDO LLP | BDO USA LLP | |||||||||||||||
| Fee Category | 2013 | 2012 | 2013 | 2012 | ||||||||||||
| Audit Fees | $ | 283,000 | $ | 57,000 | - | 197,000 | ||||||||||
| Audit-Related Fees | - | - | - | 5,000 | ||||||||||||
| Tax Fees | 16,000 | 18,000 | 41,000 | 47,000 | ||||||||||||
| All Other Fees | - | - | - | - | ||||||||||||
| Total | $ | 299,000 | $ | 75,000 | 41,000 | 249,000 | ||||||||||
Audit Fees. Audit fees consist of fees billed for professional services for (i) audit of our 2013 and 2012 consolidated financial statements, (ii) review of the interim consolidated financial statements included in our 2013 and 2012 quarterly reports, and (iii) services that are normally provided by an independent registered public accounting firm in connection with statutory and regulatory filings or engagements.
Audit-Related Fees. Audit related fees in 2012 consisted of fees billed for professional services performed with respect to the retirement benefit plan audit and internal control documentation review.
Tax Fees. Tax fees for 2013 and 2012 consisted of fees billed for professional services for tax compliance, tax advice and tax planning and equity transaction related activities. These services include assistance regarding federal, state and international tax compliance, tax audit defense, customs and duties, mergers and acquisitions, and international tax planning.
Pre-Approval Policies and Procedures
Our audit committee pre-approves all services provided by our principal accountant. Our audit committee also considers in advance whether or not to approve any non-audit services to be performed by the independent accounting firm required to be approved by the audit committee pursuant to any applicable rules and regulations.
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Item 15. Exhibits and Financial Statement Schedules.
| Exhibit No. | Description of Exhibit | |
| 2.1 | Stock Purchase Agreement dated July 13, 2004 between MicroTel International Inc.; Noel C. McDermott; Warren P. Yost; Noel C. McDermott, as Trustee of the Noel C. McDermott Revocable Living Trust dated December 19, 1995; and Warren P. Yost and Gail A. Yost, as Co-Trustees Under Declaration of Trust dated March 9, 1988 (Filed as an exhibit to the Registrant’s current report on Form 8-K for July 13, 2004 and incorporated herein by reference) | |
| 2.2 | Agreement dated March 1, 2005 among Intelek Properties Limited, XCEL Corporation Limited, Intelek PLC and EMRISE Corporation relating to the sale and purchase of the outstanding capital shares of Pascall Electronic (Holdings) Limited (Filed as an exhibit to the Registrant’s current report on Form 8-K for March 18, 2005 and incorporated herein by reference) | |
| 2.3 | Supplemental Agreement dated March 18, 2005 among Intelek Properties Limited, XCEL Corporation Limited, Intelek PLC and EMRISE Corporation (Filed as an exhibit to the Registrant’s current report on Form 8-K for March 18, 2005 and incorporated herein by reference) | |
| 2.4 | Loan Agreement dated March 18, 2005 among XCEL Corporation Limited, Pascall Electronics Limited and Pascall Electronic (Holdings) Limited (Filed as an exhibit to the Registrant’s current report on Form 8-K for March 18, 2005 and incorporated herein by reference) | |
| 2.5 | Asset and Stock Purchase Agreement, dated March 20, 2009, by and among EMRISE Corporation, EMRISE Electronics Corporation, Electro Switch Corp., and ESC Worldwide, Inc. (Filed as an exhibit to the Registrant’s current report on Form 8-K for March 20, 2009 and incorporated herein by reference) | |
| 2.6 | Asset Purchase Agreement by and among Astrodyne Corporation, RO Associates Incorporated and EMRISE Electronics Corporation dated March 22, 2010. The schedules to the Asset Purchase Agreement in this exhibit 2.11 have been omitted pursuant to Item 601(b) of Regulation S-K. A description of the omitted schedules is contained within the Asset Purchase Agreement. The Company hereby agrees to furnish a copy of any omitted schedule to the Commission upon request. (Filed as an exhibit to the Registrant’s current report on Form 8-K for March 22, 2010 and incorporated herein by reference) | |
| 2.7 | Stock Purchase Agreement, dated June 7, 2010, by and among Aeroflex Incorporated and EMRISE Electronics Corporation (Filed as an exhibit to the Registrant’s current report on 8-K for June 7, 2010 and incorporated herein by reference) | |
| 3.1 | Amended and Restated Certificate of Incorporation of EMRISE Corporation filed with the Secretary of State of Delaware on May 9, 2005 (Filed as an exhibit to the Registrant’s current report on Form 8-K for May 6, 2005 and incorporated herein by reference) | |
| 3.2 | Amended and restated Bylaws of EMRISE Corporation (Filed as an exhibit to the Registrant’s definitive proxy statement for the Registrant’s annual meeting of stockholders held October 19, 2004 and incorporated herein by reference) |
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| 3.3 | Amendment to Bylaws adopted by the Board of Directors of the Corporation on July 23, 2008 (Filed as an exhibit to the Registrant’s current report on Form 8-K for July 23, 2008 and incorporated herein by reference) | |
| 3.4 | Certificate of Amendment to Certificate of Incorporation of EMRISE Corporation, filed on November 19, 2008 (Filed as an exhibit to the Registrant’s current report on Form 8-K for November 19, 2008 and incorporated herein by reference) | |
| 10.1 | 1993 Stock Option Plan (#) (Filed as an exhibit to the Registrant’s annual report on Form 10-K for the year ended December 31, 2000 and incorporated herein by reference) | |
| 10.2 | Employee Stock and Stock Option Plan (#) (Filed as an exhibit to the Registrant’s definitive proxy statement for the Registrant’s annual meeting of stockholders held June 11, 1998 and incorporated herein by reference) | |
| 10.3 | 1997 Stock Incentive Plan (#) (Filed as an exhibit to the Registrant’s definitive proxy statement for the special meeting of stockholders held January 16, 2001 and incorporated herein by reference) | |
| 10.4 | Amended and Restated 2000 Stock Option Plan (#) (Filed as an exhibit to the Registrant’s Post-Effective Amendment No. 1 to Form S-1 Registration Statement filed on August 31, and incorporated herein by reference) | |
| 10.5 | Form of Executive Officer and Director Indemnification Agreement entered into between the Registrant and each of Carmine T. Oliva, Laurence P. Finnegan, Jr., Otis W. Baskin, Frank Russomanno, Julie Abraham, and Graham Jefferies (Filed as an exhibit to the Registrant’s current report on Form 8-K for December 8, 2004 and incorporated herein by reference) | |
| 10.6 | Description of Compensation of Directors (#) (Filed as an exhibit to the Registrant’s annual report on Form 10-K for the year ended December 31, 2005 and incorporated herein by reference) | |
| 10.7 | Pledge and Security Agreement dated July 13, 2004 between MicroTel International Inc.; Noel C. McDermott, as Collateral Agent; Noel C. McDermott, as Trustee of the Noel C. McDermott Revocable Living Trust dated December 19, 1995; and Warren P. Yost and Gail A. Yost, as Co-Trustees Under Declaration of Trust dated March 9, 1988 (Filed as an exhibit to the Registrant’s quarterly report on Form 10-Q for June 30, 2004 and incorporated herein by reference) | |
| 10.8 | Intercreditor Agreement dated July 13, 2004 between MicroTel International Inc.; Noel C. McDermott, as Trustee of the Noel C. McDermott Revocable Living Trust dated December 19, 1995; and Warren P. Yost and Gail A. Yost, as Co-Trustees Under Declaration of Trust dated March 9, 1988 (Filed as an exhibit to the Registrant’s quarterly report on Form 10-Q for June 30, 2004 and incorporated herein by reference) | |
| 10.9 | Continuing Guarantee dated July 13, 2004 made by Larus Corporation in favor of Noel C. McDermott, as Trustee of the Noel C. McDermott Revocable Living Trust dated December 19, 1995, and Warren P. Yost and Gail A. Yost, as Co-Trustees Under Declaration of Trust dated March 9, 1988 (Filed as an exhibit to the Registrant’s quarterly report on Form 10-Q for June 30, 2004 and incorporated herein by reference) |
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| 10.10 | Continuing Guarantee dated July 13, 2004 made by Vista Labs Incorporated in favor of Noel C. McDermott, as Trustee of the Noel C. McDermott Revocable Living Trust dated December 19, 1995, and Warren P. Yost and Gail A. Yost, as Co-Trustees Under Declaration of Trust dated March 9, 1988 (Filed as an exhibit to the Registrant’s quarterly report on Form 10-Q for June 30, 2004 and incorporated herein by reference) | |
| 10.11 | Continuing Guarantee dated July 13, 2004 made by CXR Telcom in favor of Noel C. McDermott, as Trustee of the Noel C. McDermott Revocable Living Trust dated December 19, 1995, and Warren P. Yost and Gail A. Yost, as Co-Trustees Under Declaration of Trust dated March 9, 1988 (Filed as an exhibit to the Registrant’s quarterly report on Form 10-Q for June 30, 2004 and incorporated herein by reference) | |
| 10.12 | Security Agreement dated July 13, 2004 made by Larus Corporation in favor of Noel C. McDermott, as Trustee of the Noel C. McDermott Revocable Living Trust dated December 19, 1995, and Warren P. Yost and Gail A. Yost, as Co-Trustees Under Declaration of Trust dated March 9, 1988 (Filed as an exhibit to the Registrant’s quarterly report on Form 10-Q for June 30, 2004 and incorporated herein by reference) | |
| 10.13 | Security Agreement dated July 13, 2004 made by Vista Labs Incorporated in favor of Noel C. McDermott, as Trustee of the Noel C. McDermott Revocable Living Trust dated December 19, 1995, and Warren P. Yost and Gail A. Yost, as Co-Trustees Under Declaration of Trust dated March 9, 1988 (Filed as an exhibit to the Registrant’s quarterly report on Form 10-Q for June 30, 2004 and incorporated herein by reference) | |
| 10.14 | Security Agreement dated July 13, 2004 made by CXR Telcom in favor of Noel C. McDermott, as Trustee of the Noel C. McDermott Revocable Living Trust dated December 19, 1995, and Warren P. Yost and Gail A. Yost, as Co-Trustees Under Declaration of Trust dated March 9, 1988 (Filed as an exhibit to the Registrant’s quarterly report on Form 10-Q for June 30, 2004 and incorporated herein by reference) | |
| 10.15 | Executive Employment Agreement dated November 1, 2007 by and between the Registrant and Carmine T. Oliva (#) (Filed as an exhibit to the Registrant’s quarterly report on Form 10-Q for September 30, 2007 and incorporated herein by reference) | |
| 10.16 | Executive Employment Agreement dated November 1, 2007 by and between the Company and Graham Jefferies (#) (Filed as an exhibit to the Registrant’s quarterly report on Form 10-Q for September 30, 2007 and incorporated herein by reference) | |
| 10.17 | Amendment No. 1 to Employment Agreement dated as of June 17, 2010 by and between Carmine T. Oliva and EMRISE Corporation (Filed as an exhibit to the Registrant’s current report on 8-K for June 17, 2010 and incorporated herein by reference)(#) | |
| 10.18 | Amendment No. 1 to Employment Agreement dated as of June 18, 2010 by and between Graham Jefferies and EMRISE Corporation (Filed as an exhibit to the Registrant’s current report on 8-K for June 17, 2010 and incorporated herein by reference)(#) | |
| 10.19 | Loan Agreement dated March 18, 2005 among XCEL Corporation Limited, Pascall Electronics Limited and Pascall Electronic (Holdings) Limited (Filed as an exhibit to the Registrant’s current report on Form 8-K for November 19, 2008 and incorporated herein by reference) |
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| 10.20 | Form of Incentive Stock Option Agreement Under Amended and Restated 2000 Stock Option Plan (#) (Filed as an exhibit to the Registrant’s current report on Form 8-K for December 30, 2005 and incorporated herein by reference) | |
| 10.21 | Form of Non-Qualified Stock Option Agreement Under Amended and Restated 2000 Stock Option Plan (#) (Filed as an exhibit to the Registrant’s current report on Form 8-K for December 30, 2005 and incorporated herein by reference) | |
| 10.22 | 2007 Stock Incentive Plan (#) (Filed as an exhibit to the Registrant’s definitive proxy statement for the Registrant’s annual meeting of stockholders held December 12, 2007 and incorporated herein by reference) | |
| 10.23 | Credit Agreement by and among EMRISE Corporation, EMRISE Electronics Corporation, CXR Larus Corporation and RO Associates and GVEC Resource IV Inc dated November 30, 2007 (Filed as an exhibit to the Registrant’s current report on Form 8-K for November 30, 2007 and incorporated herein by reference) | |
| 10.24 | Security Agreement between EMRISE Corporation, Emrise Electronics Corporation, CXR Larus Corporation and RO Associates Incorporated and GVEC Resource IV Inc dated November 30, 2007 (Filed as an exhibit to the Registrant’s current report on Form 8-K for November 30, 2007 and incorporated herein by reference) | |
| 10.25 | Patent Security Agreement between EMRISE Corporation, RO Associates Incorporated and GVEC Resource IV Inc dated November 30, 2007 (Filed as an exhibit to the Registrant’s current report on Form 8-K for November 30, 2007 and incorporated herein by reference) | |
| 10.26 | Trademark Security Agreement between EMRISE Corporation, EMRISE Electronics Corporation and RO Associates Incorporated and GVEC Resource IV Inc dated November 30, 2007 (Filed as an exhibit to the Registrant’s current report on Form 8-K for November 30, 2007 and incorporated herein by reference) | |
| 10.27 | Revolver Loan Note dated November 30, 2007 executed by EMRISE Corporation, Emrise Electronics Corporation, CXR Larus Corporation and RO Associates Incorporated in favor of GVEC Resource IV Inc. (Filed as an exhibit to the Registrant’s current report on Form 8-K for November 30, 2007 and incorporated herein by reference) | |
| 10.28 | Term Loan A Note dated November 30, 2007 executed by EMRISE Corporation, Emrise Electronics Corporation, CXR Larus Corporation and RO Associates Incorporated in favor of GVEC Resource IV Inc. (Filed as an exhibit to the Registrant’s current report on Form 8-K for November 30, 2007 and incorporated herein by reference) | |
| 10.29 | Guaranty dated November 30, 2007 by and among Emrise Electronics Ltd., XCEL Power Systems, Ltd. Pascall Electronic (Holdings) Limited, Pascall Electronics Limited, Belix Would Components Ltd. and The Belix Company Ltd. and GVEC Resource IV Inc. (Filed as an exhibit to the Registrant’s current report on Form 8-K for November 30, 2007 and incorporated herein by reference) | |
| 10.30 | Composite Debenture dated November 30, 2007 by and among Emrise Electronics Ltd., XCEL Power Systems, Ltd. Pascall Electronic (Holdings) Limited, Pascall Electronics Limited, Belix Would Components Ltd. and The Belix Company Ltd. and GVEC Resource IV Inc. (Filed as an exhibit to the Registrant’s current report on Form 8-K for November 30, 2007 and incorporated herein by reference) |
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| 10.31 | Share Charge dated November 30, 2007 by and between Emrise Electronics Corporation and GVEC Resource IV Inc. (Filed as an exhibit to the Registrant’s current report on Form 8-K for November 30, 2007 and incorporated herein by reference) | |
| 10.32 | Guaranty dated November 30, 2007 by and between CXR Anderson Jacobson, SAS and GVEC Resource IV Inc. (Filed as an exhibit to the Registrant’s current report on Form 8-K for November 30, 2007 and incorporated herein by reference) | |
| 10.33 | Agreement for the Pledge of Account of Financial Instruments Relating to Shares of CXR Anderson Jacobson SAS dated November 30, 2007 by and between Emrise Corporation and GVEC Resource IV Inc. (Filed as an exhibit to the Registrant’s current report on Form 8-K for November 30, 2007 and incorporated herein by reference) | |
| 10.34 | Convention de Nantissement de fonds de commerce dated November 30, 2007 by and between CXR Anderson Jacobson, SAS and GVEC Resource IV Inc. (Filed as an exhibit to the Registrant’s current report on Form 8-K for November 30, 2007 and incorporated herein by reference) | |
| 10.35 | Going Concern Pledge (Filed as an exhibit to the Registrant’s current report on Form 8-K for November 30, 2007 and incorporated herein by reference) | |
| 10.36 | Form of Subordinated Secured Contingent Promissory Notes issued by the Company to Charles S. Brand, Thomas P. M. Couse, Joanne Couse and Michael Gaffney (Filed as an exhibit to the Registrant’s current report on Form 8-K for August 20, 2008 and incorporated herein by reference) | |
| 10.37 | Master Agreement, dated June 7, 2010, by and among EMRISE Corporation, Emrise Electronics Corporation, CXR Larus Corporation, Pascall Electronics Limited, XCEL Power Systems, Ltd., CXR Anderson Jacobson SAS, Charles S. Brand, Thomas P.M. Couse, Joanne Couse and Michael Gaffney (Filed as an exhibit to the Registrant’s current report on 8-K for June 7, 2010 and incorporated herein by reference) | |
| 10.38 | Credit Agreement, dated November 30, 2007, by and among EMRISE Corporation, EMRISE Electronics Corporation, CXR Larus Corporation, and RO Associates Incorporated and GVEC Resource IV Inc. (Filed as an exhibit to the Registrant’s current report on Form 8-K for August 20, 2008 and incorporated herein by reference) | |
| 10.39 | Amendment Number 1 to Loan Documents, dated August 20, 2008, by and among EMRISE Corporation, EMRISE Electronics Corporation, CXR Larus Corporation, RO Associates Incorporated, Advanced Control Components, Inc., Custom Components, Inc. and GVEC Resource IV Inc. (Filed as an exhibit to the Registrant’s current report on Form 8-K for August 20, 2008 and incorporated herein by reference) | |
| 10.40 | Collateral Assignment of Rights under Purchase Agreement, dated August 20, 2008, by and among EMRISE Corporation, Emrise Electronics Corporation and GVEC Resource IV Inc. (Filed as an exhibit to the Registrant’s current report on Form 8-K for August 20, 2008 and incorporated herein by reference) | |
| 10.41 | Form of Stock Option Agreement issued to EMRISE Corporation’s directors and executive officers under 2007 Stock Incentive Plan (#)(Filed as an exhibit to the Registrant’s current report on Form 8-K for August 20, 2008 and incorporated herein by reference) |
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| 10.42 | Amendment to Forbearance Agreement and Amendment Number 3 to Loan Documents, dated April 9, 2009, by and among EMRISE Corporation, EMRISE Electronics Corporation, CXR Larus Corporation, RO Associates Incorporated, Advanced Control Components, Inc., Custom Components, Inc. and GVEC Resource IV Inc. (Filed as an exhibit to the Registrant’s current report on Form 8-K for April 9, 2009 and incorporated herein by reference) | |
| 10.43 | Amendment Number 4 to Loan Documents dated April 14, 2009, by and among EMRISE Corporation, EMRISE Electronics Corporation, CXR Larus Corporation, RO Associates Incorporated, Advanced Control Components, Inc., Custom Components, Inc. and GVEC Resources IV Inc. (Filed as an exhibit to the Registrant’s annual report on Form 10-K for the year ended December 31, 2008 and incorporated herein by reference) | |
| 10.44 | Amendment Number 2 to Loan Documents dated February 12, 2009 by and among EMRISE Corporation, EMRISE Electronics Corporation, CXR Larus Corporation, RO Associates Incorporated, Advanced Control Components, Inc., Custom Components, Inc. and GVEC Resource IV Inc. (Filed as an exhibit to the Registrant’s current report on Form 8-K for February 12, 2009 and incorporated herein by reference) | |
| 10.45 | Letter Agreement, dated May 14, 2009, by and among EMRISE Corporation, EMRISE Electronics Corporation, CXR Larus Corporation, RO Associates Incorporated, Advanced Control Components, Inc., Custom Components, Inc. and GVEC Resource IV Inc. (Filed as an exhibit to the Registrant’s current report on Form 8-K for May 14, 2009 and incorporated herein by reference) | |
| 10.46 | Amendment Number 5 to Loan Documents, dated August 14, 2009, by and among EMRISE Corporation, EMRISE Electronics Corporation, CXR Larus Corporation, RO Associates Incorporated, Advanced Control Components, Inc., Custom Components, Inc. and GVEC Resource IV Inc. (Filed as an exhibit to the Registrant’s quarterly report on Form 10-Q for June 30, 2009 and incorporated herein by reference) | |
| 10.47 | Amendment Number 6 to Loan Documents, dated November 3, 2009, by and among EMRISE Corporation, EMRISE Electronics Corporation, CXR Larus Corporation, RO Associates Incorporated, Advanced Control Components, Inc., Custom Components, Inc. and GVEC Resource IV Inc. (Filed as an exhibit to the Registrant’s current report on Form 8-K for November 3, 2009 and incorporated herein by reference) | |
| 10.48 | Amendment Number 7 to Loan Documents, dated November 13, 2009, by and among EMRISE Corporation, EMRISE Electronics Corporation, CXR Larus Corporation, RO Associates Incorporated, Advanced Control Components, Inc., Custom Components, Inc. and GVEC Resource IV Inc. (Filed as an exhibit to the Registrant’s current report on Form 8-K for November 3, 2009 and incorporated herein by reference) | |
| 10.49 | Amendment Number 8 to Loan Documents dated as of December 31, 2010, by and among EMRISE Corporation, EMRISE Electronics Corporation, CXR Larus Corporation, RO Associates Incorporated, Advanced Control Components, Inc. and Custom Components, Inc. and GVEC Resource IV Inc. (Filed as an exhibit to the Registrant’s annual report on Form 10-K for the year ended December 31, 2009 and incorporated herein by reference) (±) | |
| 10.50 | Amendment No. 1 to Subordinated Contingent Secured Promissory Notes, dated as of November 20, 2009, by and between EMRISE Electronics Corporation and Charles S. Brand (Filed as an exhibit to the Registrant’s current report on Form 8-K for November 20, 2009 and incorporated herein by reference) |
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| 10.51 | Amendment No. 1 to Subordinated Contingent Secured Promissory Notes, dated as of November 20, 2009, by and between EMRISE Electronics Corporation and Thomas P.M. Couse (Filed as an exhibit to the Registrant’s current report on Form 8-K for November 20, 2009 and incorporated herein by reference) | |
| 10.52 | Amendment No. 1 to Subordinated Contingent Secured Promissory Notes, dated as of November 20, 2009, by and between EMRISE Electronics Corporation and Joanne Couse (Filed as an exhibit to the Registrant’s current report on Form 8-K for November 20, 2009 and incorporated herein by reference) | |
| 10.53 | Amendment Number 9 to Loan Documents dated April 13, 2010, by and among EMRISE Corporation, EMRISE Electronics Corporation, CXR Larus Corporation, Advanced Control Components, Inc., Custom Components, Inc., GVEC Resource IV Inc. and Private Equity Management Group LLC (Filed as an exhibit to the Registrant’s annual report on Form 10-K for the year ended December 31, 2009 and incorporated herein by reference) (±) | |
| 10.54 | Amendment Number 10 to Loan Documents dated as of May 3, 2010, by and among EMRISE Corporation, EMRISE Electronics Corporation, CXR Larus Corporation, Advanced Control Components, Inc., Custom Components, Inc., GVEC Resource IV Inc. and Private Equity Management Group LLC (Filed as an exhibit to the Registrant’s quarterly report on Form 10-Q for June 30, 2010 and incorporated herein by reference) (±) | |
| 10.55 | Amendment Number 11 to Loan Documents dated as of May 17, 2010, by and among EMRISE Corporation, EMRISE Electronics Corporation, CXR Larus Corporation, Advanced Control Components, Inc., Custom Components, Inc., GVEC Resource IV Inc. and Private Equity Management Group LLC (Filed as an exhibit to the Registrant’s quarterly report on Form 10-Q for June 30, 2010 and incorporated herein by reference) (±) | |
| 10.56 | Amendment Number 12 to Loan Documents dated as of June 1, 2010, by and among EMRISE Corporation, EMRISE Electronics Corporation, CXR Larus Corporation, Advanced Control Components, Inc., Custom Components, Inc., GVEC Resource IV Inc. and Private Equity Management Group LLC (Filed as an exhibit to the Registrant’s quarterly report on Form 10-Q for June 30, 2010 and incorporated herein by reference) (±) | |
| 10.57 | Amendment Number 13 to Loan Documents dated as of June 17, 2010, by and among EMRISE Corporation, EMRISE Electronics Corporation, CXR Larus Corporation, Advanced Control Components, Inc., Custom Components, Inc., GVEC Resource IV Inc. and Private Equity Management Group LLC (Filed as an exhibit to the Registrant’s quarterly report on Form 10-Q for June 30, 2010 and incorporated herein by reference) (±) | |
| 10.58 | Amended and Restated Term Loan A Note, dated August 31, 2010, executed by EMRISE Corporation, EMRISE Electronics Corporation, and CXR Larus Corporation in favor of GVEC Resource IV Inc. (Filed as an exhibit to the Registrant’s current report on Form 8-K for August 30, 2010 and incorporated herein by reference) | |
| 10.59 | Amendment Number 14 to Loan Documents dated as of July 16, 2010 by and among EMRISE Corporation, EMRISE Electronics Corporation, CXR Larus Corporation, Advanced Control Components, Inc., Custom Components, Inc., GVEC Resource IV Inc. and Private Equity Management Group LLC (Filed as an exhibit to the Registrant’s quarterly report on Form 10-Q for September 30, 2010 and incorporated herein by reference) |
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| 10.60 | Amendment Number 15 to Loan Documents dated as of July 31, 2010 by and among EMRISE Corporation, EMRISE Electronics Corporation, CXR Larus Corporation, Advanced Control Components, Inc., Custom Components, Inc., GVEC Resource IV Inc. and Private Equity Management Group LLC (Filed as an exhibit to the Registrant’s quarterly report on Form 10-Q for September 30, 2010 and incorporated herein by reference) | |
| 10.61 | Amendment Number 16 to Loan Documents dated as of August 31, 2010 by and among EMRISE Corporation, EMRISE Electronics Corporation, CXR Larus Corporation, Advanced Control Components, Inc., Custom Components, Inc., GVEC Resource IV Inc. and Private Equity Management Group LLC (Filed as an exhibit to the Registrant’s current report on Form 8-K for August 30, 2010 and incorporated herein by reference) | |
| 10.62 | Amended and Restated Security Agreement, dated as of August 31, 2010, by and among EMRISE Electronics Corporation, EMRISE Corporation, CXR Larus Corporation, Pascall Electronics Limited, XCEL Power Systems, Ltd., Charles S. Brand, Thomas P.M. Couse and Joanne Couse (Filed as an exhibit to the Registrant’s current report on Form 8-K for August 30, 2010 and incorporated herein by reference) | |
| 10.63 | Form of Amendment No. 2 to Subordinated Contingent Secured Promissory Notes issued by EMRISE Electronics Corporation, Charles S. Brand, Thomas P.M. Couse, and Joanne Couse (Filed as an exhibit to the Registrant’s current report on Form 8-K for August 30, 2010 and incorporated herein by reference) | |
| 10.64 | Stock Issuance Agreement, dated August 31, 2010, by and between Charles Brand and EMRISE Corporation (Filed as an exhibit to the Registrant’s current report on Form 8-K for August 30, 2010 and incorporated herein by reference) | |
| 10.65 | Form of Receivables Finance Agreement, dated August 31, 2010, between Lloyds TSB Commercial Finance Limited and Pascall Electronics Limited (Filed as an exhibit to the Registrant’s current report on Form 8-K for August 30, 2010 and incorporated herein by reference) | |
| 10.66 | Form of Receivables Finance Agreement, dated August 31, 2010, between Lloyds TSB Commercial Finance Limited and XCEL Power Systems Limited (Filed as an exhibit to the Registrant’s current report on Form 8-K for August 30, 2010 and incorporated herein by reference) | |
| 10.67 | Form of All Assets Debenture Given by Pascall Electronics Limited in Favour of Lloyds TSB Commercial Finance Limited (Filed as an exhibit to the Registrant’s current report on Form 8-K for August 30, 2010 and incorporated herein by reference) | |
| 10.68 | Form of All Assets Debenture Given by XCEL Power Systems Limited in Favour of Lloyds TSB Commercial Finance Limited (Filed as an exhibit to the Registrant’s current report on Form 8-K for August 30, 2010 and incorporated herein by reference) | |
| 10.69 | Warrant Purchase Agreement, dated August 30, 2010, by and among EMRISE Corporation and Private Equity Management Group, LLC (Filed as an exhibit to the Registrant’s current report on Form 8-K for August 30, 2010 and incorporated herein by reference) | |
| 10.70 | Form of Separation and Release Agreement, dated August 31, 2010, by and between EMRISE Corporation and D. John Donovan (Filed as an exhibit to the Registrant’s current report on Form 8-K for August 30, 2010 and incorporated herein by reference) |
| 55 |
| 10.71 | The English translation of a Factoring Agreement, dated September 20, 2010, by and between CXR Anderson Jacobson and Factocic S.A. (Filed as an exhibit to the Registrant’s quarterly report on Form 10-Q for September 30, 2010 and incorporated herein by reference) | |
| 10.72 | Business Financing Agreement, dated October 22, 2010 and executed November 15, 2010, between Bridge Bank, National Association and CXR Larus Corporation (Filed as an exhibit to the Registrant’s current report on Form 8-K for November 15, 2010 and incorporated herein by reference) | |
| 10.73 | Guaranty, dated October 22, 2010 and executed November 15, 2010, between Bridge Bank, National Association and EMRISE Corporation (Filed as an exhibit to the Registrant’s current report on Form 8-K for November 15, 2010 and incorporated herein by reference) | |
| 10.74 | Subordination Agreement, dated November 8, 2010 and executed November 15, 2010, by and between GVEC Resource IV, Inc and Private Equity Management Group LLC and Bridge Bank, National Association (Filed as an exhibit to the Registrant’s current report on Form 8-K for November 15, 2010 and incorporated herein by reference) | |
| 10.75 | Subordination Agreement, dated October 22, 2010 and executed November 15, 2010, by and between Charles S. Brand and Bridge Bank, National Association (Filed as an exhibit to the Registrant’s current report on Form 8-K for November 15, 2010 and incorporated herein by reference) | |
| 10.76 | Subordination Agreement, dated October 22, 2010 and executed November 15, 2010, by and between Thomas P.M. Couse and Bridge Bank, National Association (Filed as an exhibit to the Registrant’s current report on Form 8-K for November 15, 2010 and incorporated herein by reference) | |
| 10.77 | Subordination Agreement, dated October 22, 2010 and executed November 15, 2010, by and between Joanne Couse and Bridge Bank, National Association (Filed as an exhibit to the Registrant’s current report on Form 8-K for November 15, 2010 and incorporated herein by reference) | |
| 10.78 | Amendment Number 17 to Loan Documents dated as of February 8, 2012, by and among EMRISE Corporation, EMRISE Electronics Corporation and CXR Larus Corporation, GVEC Resources IV Inc. and Private Equity Management Group LLC (Filed as an exhibit to the Registrant’s current report on Form 8-K for February 7, 2012 and incorporated herein by reference) | |
| 10.79 | Second Amended and Restated Term Loan A Note, dated February 8, 2012, executed by EMRISE Corporation, EMRISE Electronics Corporation, and CXR Larus Corporation in favor of GVEC Resource IV Inc. (Filed as an exhibit to the Registrant’s current report on Form 8-K for February 7, 2012 and incorporated herein by reference) | |
| 10.80 | Amendment No. 3 to Subordinated Contingent Secured Promissory Note entered into by and between EMRISE Electronics Corporation and Charles Brand (Filed as an exhibit to the Registrant’s current report on Form 8-K for November 12, 2012 and incorporated herein by reference) | |
| 10.81 | Amendment No. 3 to Subordinated Contingent Secured Promissory Note entered into by and between EMRISE Electronics Corporation and Joanne Couse (Filed as an exhibit to the Registrant’s current report on Form 8-K for November 12, 2012 and incorporated herein by reference) |
| 56 |
| 10.82 | Contract for the Sale of freehold land, dated February 28, 2013, by and among Longford Estates Limited (In Administration), Matthew James Cowlishaw and Richard Michael Hawes, and Pascall Electronics Limited (Filed as an exhibit to the Registrant’s current report on Form 8-K for March 4, 2013 and incorporated herein by reference) | |
| 10.83 | Mortgage Deed, dated February 28, 2013, by and between Lloyds TSB Bank and Pascall Electronics Limited (Filed as an exhibit to the Registrant’s current report on Form 8-K for March 4, 2013 and incorporated herein by reference) | |
| 10.84 | All Assets Debenture, dated August 31, 2010, given by XCEL Power Systems Limited in Favour of Charles S. Brand* | |
| 10.85 | All Assets Debenture, dated August 31, 2010, given by Pascall Electronics Limited in Favour of Charles S. Brand* | |
| 10.86 | Business Loan Agreement, dated August 2, 2011, by and between Lloyds TSB Bank PLC and EMRISE Electronics Limited* | |
| 10.87 | Business Loan Agreement, dated February 21, 2013, by and between Lloyds TSB Bank PLC and Pascall Electronics Limited* | |
| 10.88 | Business Loan Agreement, dated March 28, 2014, by and between Lloyds TSB Bank PLC and EMRISE Electronics Limited* | |
| 14.1 | Amended and Restated Code of Business Conduct and Ethics (Filed as an exhibit to the Registrant’s annual report on Form 10-K for the year ended December 31, 2005 and incorporated herein by reference) | |
| 14.2 | Code of Business Ethics for CEO and Senior Financial Officers (Filed as an exhibit to the Registrant’s annual report on Form 10-K for the year ended December 31, 2005 and incorporated herein by reference) | |
| 21.1 | Subsidiaries* | |
| 23.1 | Consent of BDO, LLP Independent Registered Public Accounting Firm * | |
| 31.1 | Certification of Principal Executive Officer Required by Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 * | |
| 31.2 | Certification of Principal Financial Officer Required by Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 * | |
| 32.1 | Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* | |
| 32.2 | Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* | |
| 100.1 | The following financial information from EMRISE Corporation's Annual Report on Form 10-K for the year ended December 31, 2013 formatted in XBRL: (i) consolidated balance sheets as of December 31, 2013 and December 31, 2012; (ii) Consolidated Statements of Operations for the years ended December 31, 2013 and 2012; (iii) Consolidated Statements of Stockholders' Equity for the year ended December 31, 2013; (iv) Consolidated Statements of Cash Flows for the years ended December 31, 2013 and 2012; and (v) Notes to the Consolidated Financial Statements.* |
* Filed herewith.
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Pursuant to the requirements of Section 13 or 15(d) 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 on this 15th day of April, 2014.
| EMRISE CORPORATION | ||
| By: | /s/ Carmine T. Oliva | |
| Carmine T. Oliva, | ||
| Chairman of the Board and | ||
| Chief Executive Officer (principal executive officer) | ||
| By: | /s/ Timothy J. Blades | |
| Timothy J. Blades, | ||
| Chief Financial Officer (principal financial officer) | ||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Signature | Capacity | Date | ||
| /s/ Carmine T. Oliva | Chairman of the Board, Chief Executive | April 15, 2014 | ||
| Carmine T. Oliva | Officer (principal executive officer) and Director | |||
| /s/ Timothy J. Blades | Chief Financial Officer (principal financial | April 15, 2014 | ||
| Timothy J. Blades | officer) | |||
| /s/ Graham Jefferies | President and Chief Operating Officer | April 15, 2014 | ||
| Graham Jefferies | Director | |||
| /s/ Otis W. Baskin | Director | April 15, 2014 | ||
| Otis W. Baskin | ||||
| /s/ Frank P. Russomanno | Director | April 15, 2014 | ||
| Frank P. Russomanno | ||||
| /s/ Julie A. Abraham | Director | April 15, 2014 | ||
| Julie A. Abraham |
| 58 |
Index to Consolidated Financial Statements
| 59 |
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
EMRISE Corporation
Durham, North Carolina
We have audited the accompanying consolidated balance sheets of EMRISE Corporation (the “Company”) as of December 31, 2013 and 2012 and the related consolidated statements of comprehensive income, stockholders’ equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of EMRISE Corporation at December 31, 2013 and 2012, and the results of its operations and its cash flows the years then ended, in conformity with accounting principles generally accepted in the United States of America.
BDO LLP
London, United Kingdom
April 15, 2014
| F-1 |
Consolidated Balance Sheets
(in thousands, except share and per share amounts)
| December 31, 2013 | December 31, 2012 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 1,170 | $ | 1,519 | ||||
| Accounts receivable, net of allowances for doubtful accounts of $70 at December 31, 2013 and $75 at December 31, 2012 | 7,435 | 6,784 | ||||||
| Inventories, net | 6,357 | 7,255 | ||||||
| Deferred income taxes | 46 | 128 | ||||||
| Prepaid and other current assets | 897 | 1,138 | ||||||
| Total current assets | 15,905 | 16,824 | ||||||
| Property, plant and equipment, net | 4,475 | 973 | ||||||
| Goodwill | 5,283 | 5,146 | ||||||
| Intangible assets other than goodwill, net | 457 | 584 | ||||||
| Deferred tax assets | 53 | 59 | ||||||
| Restricted cash | - | 407 | ||||||
| Other assets | 286 | 405 | ||||||
| Total assets | $ | 26,459 | $ | 24,398 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 3,201 | $ | 2,970 | ||||
| Accrued expenses | 4,259 | 3,759 | ||||||
| Lines of credit | 1,196 | 1,122 | ||||||
| Current portion of long-term debt | 2,672 | 942 | ||||||
| Income taxes payable | 36 | 307 | ||||||
| Other current liabilities | 261 | 274 | ||||||
| Total current liabilities | 11,625 | 9,374 | ||||||
| Long-term debt | 2,664 | 3,033 | ||||||
| Deferred income taxes | 17 | - | ||||||
| Other liabilities | 992 | 896 | ||||||
| Total liabilities | 15,298 | 13,303 | ||||||
Commitments and contingencies (see note 17) | - | - | ||||||
| Stockholders’ equity: | ||||||||
| Preferred stock, $0.01 par value. Authorized 10,000,000 shares, no shares issued or outstanding | - | - | ||||||
| Common stock, $0.0033 par value. Authorized 75,000,000 shares; 10,713,337 and 10,683,337 shares issued and outstanding at December 31, 2013 and 2012, respectively | 128 | 128 | ||||||
| Additional paid-in capital | 44,205 | 44,177 | ||||||
| Accumulated deficit | (31,924 | ) | (31,532 | ) | ||||
| Accumulated other comprehensive loss | (1,248 | ) | (1,678 | ) | ||||
| Total stockholders’ equity | 11,161 | 11,095 | ||||||
| Total liabilities and stockholders’ equity | $ | 26,459 | $ | 24,398 | ||||
The accompanying Notes are an integral part of these Consolidated Financial Statements
| F-2 |
Consolidated Statements of Comprehensive Income
(in thousands, except per share amounts)
| Year Ended December 31, | ||||||||
| 2013 | 2012 | |||||||
| Net sales | $ | 31,898 | $ | 34,047 | ||||
| Cost of sales | 22,183 | 24,041 | ||||||
| Gross profit | 9,715 | 10,006 | ||||||
| Operating expenses: | ||||||||
| Selling, general and administrative | 8,334 | 8,794 | ||||||
| Engineering and product development | 1,132 | 1,267 | ||||||
| Total operating expenses | 9,466 | 10,061 | ||||||
| Income/ (Loss) from operations | 249 | (55 | ) | |||||
| Other income/ (expense): | ||||||||
| Interest income | 92 | 63 | ||||||
| Interest expense | (534 | ) | (388 | ) | ||||
| Other, net | (87 | ) | 522 | |||||
| Gain on early extinguishment of debt | - | 275 | ||||||
| Total other income/ (expense), net | (529 | ) | 472 | |||||
(Loss)/Income before income taxes | (280 | ) | 417 | |||||
| Income tax provision | 112 | 314 | ||||||
(Loss)/Income from continuing operations | (392 | ) | 103 | |||||
| Discontinued operations: | ||||||||
| Loss from discontinued operations | - | (9 | ) | |||||
| Net income/(loss) | $ | (392 | ) | $ | 94 | |||
| Other Comprehensive income | ||||||||
| Foreign currency translation adjustment | 430 | 388 | ||||||
| Comprehensive income | 38 | 482 | ||||||
| Weighted average shares outstanding Basic and diluted | 10,703 | 10,688 | ||||||
(Loss)/Income per share: | ||||||||
| Basic and diluted | ||||||||
| Continuing operations | $ | (0.04 | ) | $ | 0.01 | |||
| Discontinued operations | $ | - | $ | - | ||||
| Net income/(loss) | $ | (0.04 | ) | $ | 0.01 | |||
The accompanying Notes are an integral part of these Consolidated Financial Statements
| F-3 |
Consolidated Statements of Stockholders’ Equity
(in thousands)
| Common Stock | Additional | Accumulated | Accumulated Other Comprehensive | |||||||||||||||||||||
| Shares | Amount | Paid-In Capital | Deficit | Loss | Total | |||||||||||||||||||
| Balance at December 31, 2011 | 10,683 | $ | 128 | $ | 44,162 | $ | (31,626 | ) | $ | (2,066 | ) | $ | 10,598 | |||||||||||
| Stock-based compensation expense | 15 | - | 15 | - | - | 15 | ||||||||||||||||||
| Net income and comprehensive income | - | - | - | 94 | 388 | 482 | ||||||||||||||||||
| Balance at December 31, 2012 | 10,698 | $ | 128 | $ | 44,177 | $ | (31,532 | ) | $ | (1,678 | ) | $ | 11,095 | |||||||||||
| Stock-based compensation expense | 15 | - | 28 | - | - | 28 | ||||||||||||||||||
| Net loss and comprehensive income | - | - | - | (392 | ) | 430 | 38 | |||||||||||||||||
| Balance at December 31, 2013 | 10,713 | $ | 128 | $ | 44,205 | $ | (31,924 | ) | $ | (1,248 | ) | $ | 11,161 | |||||||||||
The accompanying Notes are an integral part of these Consolidated Financial Statements
| F-4 |
Consolidated Statements of Cash Flows
(in thousands)
| Year
Ended December 31, | ||||||||
| 2013 | 2012 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
Net (loss)/income | $ | (392 | ) | $ | 94 | |||
Adjustments to arrive at net (loss)/income from continuing operations | - | 9 | ||||||
Net (loss)/income from continuing operations | (392 | ) | 103 | |||||
| Reconciliation to net cash provided by/(used in) operating activities: | ||||||||
| Depreciation and amortization | 479 | 413 | ||||||
| Provision for doubtful accounts | (8 | ) | 28 | |||||
| Provision for warranty reserve | 30 | 230 | ||||||
| Provision for inventory reserve | 146 | 698 | ||||||
| Deferred taxes | (165 | ) | (25 | ) | ||||
| Loss on sale of assets | 30 | - | ||||||
| Amortization of debt premium | - | (34 | ) | |||||
| Stock-based compensation expense | 28 | 15 | ||||||
| Gain loss on extinguishment of debt | - | (275 | ) | |||||
| Changes in assets and liabilities: | ||||||||
| Accounts receivable | (187 | ) | (586 | ) | ||||
| Inventories | 1,042 | 146 | ||||||
| Prepaid and other assets | 767 | 159 | ||||||
| Accounts payable and accrued expenses | 301 | (268 | ) | |||||
| Operating cash flow provided by continuing operations | 2,071 | 604 | ||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Purchases of property, plant and equipment | (3,615 | ) | (254 | ) | ||||
| Proceeds from sale of subsidiary operations, net of cash | - | 300 | ||||||
| Net cash provided by/(used in) investing activities | (3,615 | ) | 46 | |||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Proceeds from issuance of debt | 2177 | - | ||||||
| Net borrowings from lines of credit | 10 | 590 | ||||||
| Repayments of long-term debt | (1,017 | ) | (1,131 | ) | ||||
| Net cash provided by/(used in) financing activities | 1170 | (541 | ) | |||||
| Effect of exchange rate changes | 25 | 605 | ||||||
| Net (decrease)/increase in cash and cash equivalents | (349 | ) | 714 | |||||
| Cash and cash equivalents at beginning of period | 1,519 | 805 | ||||||
| Cash and cash equivalents at end of period | $ | 1,170 | $ | 1,519 | ||||
The accompanying Notes are an integral part of these Consolidated Financial Statements
| F-5 |
EMRISE CORPORATION
Consolidated Statements of Cash Flows (Continued)
(in thousands)
| Year Ended December 31, | ||||||||
| 2013 | 2012 | |||||||
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: | ||||||||
| Cash paid during the year for: | ||||||||
| Interest | $ | 534 | $ | 388 | ||||
| Income taxes | $ | 383 | $ | 136 | ||||
| SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES: | ||||||||
| Acquisition of equipment through capital leases | $ | 531 | $ | 91 | ||||
The accompanying Notes are an integral part of these Consolidated Financial Statements
| F-6 |
Notes to Consolidated Financial Statements
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Business
EMRISE Corporation (the “Company”) designs, manufactures and markets proprietary electronic devices and communications equipment for aerospace, defense, industrial, and communications applications. The Company has operations in the United States, England and France. The Company conducts its business through two operating segments: electronic devices and communications equipment. The subsidiaries within the electronic devices segment design, develop, manufacture and market electronic devices for defense, aerospace and industrial markets and operate out of facilities located in England. The subsidiaries within the communications equipment segment design, develop, manufacture and market network access equipment, including network timing and synchronization products and operate out of facilities located in the United States and France.
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and include the accounts of the Company and each of its subsidiaries, after elimination of intercompany accounts and transactions.
During the fourth quarter of 2011, CXR Larus Corporation (“CXR Larus”), a wholly-owned subsidiary of the Company, committed to the sale of certain assets relating solely to the CXR Halcyon product line of telecommunications test equipment (the “Test Product Line”). The Test Product Line was classified within the communications equipment segment. The accompanying financial statements include the Test Product Line as a discontinued operation for all periods presented.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions 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 amounts of revenues and expenses during the reporting period. Actual results could materially differ from those estimates.
Cash and Cash Equivalents
The Company considers cash and cash equivalents to include cash in banks, commercial paper and deposits with financial institutions that can be liquidated without prior notice or penalty. The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.
Accounts Receivable
Accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable. The Company determines the allowance based on historical write-off experience, customer payment history, and current economic data. The Company reviews its allowance for doubtful accounts monthly. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. Accounts receivable are generally due within 30 days in the Company’s U.S. and France operations and 60 days in its England operations and are stated net of an allowance for doubtful accounts. Accounts outstanding for longer than the contractual payment terms are considered past due. Provisions for uncollectible accounts are made based on the Company’s specific assessment of the collectability of all past due accounts. Credit losses are provided for in the financial statements and consistently have been within management’s expectations. The activity in the allowance for bad debts and doubtful accounts was as follows:
| 2013 | 2012 | |||||||
| Opening balance | $ | 75 | $ | 123 | ||||
| Provision for Bad debt | 40 | 28 | ||||||
| Amounts written off | (19 | ) | (39 | ) | ||||
| Amounts subsequently recovered | (29 | ) | (40 | ) | ||||
| Translation adjustment | 3 | 3 | ||||||
| Closing balance | $ | 70 | $ | 75 | ||||
| F-7 |
Fair Value of Financial Instruments
The carrying amount of cash and cash equivalents, accounts receivable and accounts payable are reasonable estimates of their fair value because of the short maturity of these items. The Company believes the carrying amounts of its notes payable and long-term debt approximate fair value because the interest rates on these instruments are subject to change with, or approximate, market interest rates.
Inventories
The Company’s finished goods inventories for its electronic devices segment are generally built to order. The Company’s communications equipment inventories generally are built to forecast, which requires production of a larger amount of finished goods in the communications equipment business so that customers can be served promptly. The Company’s products consist of numerous electronic parts and other materials, which necessitates the exercise of detailed inventory management. The Company values its inventory at the lower of the actual cost to purchase or manufacture the inventory (first-in, first-out) or the current fair value less selling cost or net realizable value. The Company performs cycle counts of inventories using an ABC inventory methodology, which groups inventory into cycle counting categories, or conducts physical inventories at least once a year. The Company regularly reviews inventory quantities on hand and records a provision for excess and obsolete inventory based primarily on its estimated forecast of product demand and production requirements for the next 12 to 24 months. Additionally, to determine inventory write-down provisions, the Company reviews product line inventory levels and individual items as necessary and periodically reviews assumptions about forecasted demand and market conditions. Any inventory that the Company determines to be obsolete, either in connection with the physical count or at other times of observation, are reserved for and subsequently written-off.
Property, Plant and Equipment
Property, plant and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization are computed principally using the straight-line method over the useful lives of the assets (or lease term, if shorter) as follows:
| Buildings | 40-50 years | |
| Machinery, equipment and fixtures | 3-7 years | |
| Leasehold improvements | 5 years |
Maintenance and repairs are expensed as incurred, while renewals and betterments are capitalized.
Long-Lived Assets and Amortizing Intangible Assets
The Company reviews the carrying amount of its long-lived assets and other amortizing intangible assets, for possible impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets and an adjustment is recorded to reduce the carrying amount accordingly. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.
| F-8 |
Amortizing intangible assets are stated at cost, less accumulated amortization, and are amortized on the straight-line method over their estimated useful lives ranging from two to twenty years. The Company periodically reviews the original estimated useful lives of long-lived assets and makes adjustments when appropriate.
Goodwill and Indefinite Lived Intangible Assets
The Company evaluates goodwill and indefinite lived intangibles in accordance with Financial Accounting Standards Board’s (’‘FASB’’) Accounting Standard Codification (“ASC”) Topic Number 350, Intangibles-Goodwill and Other. The Company annually tests for impairment of goodwill and indefinite lived intangible and tests more frequently if an event occurs or circumstances change that suggest that there is an indicator of impairment. The Company’s test for goodwill impairment is based on the two step approach whereby in step one if the carrying value of the reporting unit exceeds the fair value of the reporting unit, an impairment is indicated and the amount of impairment is then calculated by the amount the carrying value of the goodwill exceeds the implied fair value of the goodwill. The Company’s reporting units have been identified as electronic devices and communications equipment. The Company performs its annual required tests of impairment as of December 31. In performing the valuation, the Company used cash flows that reflected management’s forecasts and discount rates that reflect the risks associated with the current market. The Company considered the results of an income approach in determining the fair value of the reporting units.
At December 31, 2013 and 2012, reported goodwill totaled $5.3 million and $5.1 million, respectively, all of which belonged to the electronic devices reporting unit. Based on the results of the first step in testing for goodwill impairment, the fair values of the electronic devices reporting unit exceeded its book values of the goodwill and therefore there was no indication of impairment and accordingly no impairment adjustments were recorded in 2013 or 2012.
The provisions of Accounting Standards Update 2012-02, “Intangibles-Goodwill and Other (Topic 350)” (“ASU 2012-02”), allows us to use qualitative factors to determine whether it is more likely than not that the fair values of our indefinite-lived intangible assets are less than their carrying values. At December 31, 2013 and 2012, our reported indefinite lived intangible assets totaled $0.39 million and $0.38 million, respectively, all of which belonged to the electronic devices reporting unit. Based on the results of the qualitative assessment, it was concluded that it was more likely than not that the fair values of our indefinite-lived intangible assets exceeded their carrying values and therefore there was no indication of impairment and accordingly no impairment adjustments were recorded in 2013 or 2012. In the qualitative assessment we considered such factors as industry and market considerations, macroeconomic conditions and the underlying financial performance to which the value of the indefinite-lived assets is linked.
Product Warranty Liabilities
Generally, the Company’s products carry a standard one-year, limited parts and labor warranty. In certain circumstances, the Company provides a two-year limited parts and labor warranty on communications test instruments and network access products. The Company offers extended warranties beyond two years for an additional cost to its customers. Products returned under warranty typically are tested and repaired or replaced at the Company’s option. Historically, the Company has not experienced significant warranty costs or returns.
The Company records a liability for estimated costs that it expects to incur under the basic limited warranties when product revenue is recognized. Factors affecting the warranty liability include the number of units sold, historical and anticipated rates of claim and costs per claim. The Company periodically assesses the adequacy of its warranty liability accrual based on changes in these factors.
Stock-Based Compensation
The Company estimates the fair value of its stock option plans using the Black-Scholes option pricing model (the “Option Model”). The Option Model requires the use of subjective and complex assumptions, including the option’s expected term and the estimated future price volatility of the underlying stock, which determine the fair value of the stock-based awards. In accordance with FASB guidance on fair value, stock-based compensation expense recognized during a period is based on the value of the portion of the stock-based awards that are expected to vest with employees. Accordingly, the recognition of stock-based compensation expense has been reduced for estimated future forfeitures. FASB guidance requires forfeitures to be estimated at the time of grant with adjustments recorded in subsequent period compensation expense if actual forfeitures differ from those estimates. 50,000 stock options were granted during 2013 at a price equal to the market price at the date of issue. The fair value was calculated to be $19,000. No stock options were granted during 2012.
| F-9 |
Income/(Loss) Per Share
Income/(Loss) per share is calculated according to FASB guidance which requires that basic loss per share includes no dilution and is computed by dividing net income available to common stockholders by the weighted average number of shares outstanding during the year. Diluted loss per share reflects the potential dilution of securities that could share in the earnings of the Company. The average exercise price of the outstanding options was greater than the market price of the common stock throughout 2013 and 2012. As a result of this and the losses incurred in 2013, the potentially dilutive common shares have been excluded from the earnings per share computation for this period because their inclusion would have been anti-dilutive.
Foreign Currency Translation
The accounts of foreign subsidiaries have been translated using the local currency as the functional currency. Accordingly, foreign currency denominated assets and liabilities have been translated to U.S. dollars at the current rate of exchange on the balance sheet date and at the average for the period reported for the statement of operations. The effects of translation are recorded as a separate part of our net equity under the caption “accumulated other comprehensive loss.” Exchange gains and losses arising from transactions denominated in foreign currencies are translated at the exchange rates applicable on the dates of the transactions and are included in operations.
Foreign Currency Transactions
Transactions in currencies other than the functional currency of the underlying operation are recorded at the rates of exchange prevailing at the date of the transactions and recorded as a realized foreign currency gain or loss in the Statement of Operations. Unrealized and realized gains or losses, from foreign currency transactions are reflected in the consolidated statements of operations in accordance with the provision of FASB ASC 830 “Foreign Currency Matters’’. Included in other income/(expense) were net losses of $86,000 and $61,000 for the years ended December 31, 2013 and 2012, respectively.
Concentration of Credit Risk
Financial instruments, which potentially expose the Company to concentration of credit risk, consist primarily of cash and accounts receivable. The Company places its cash with high quality financial institutions. At times, cash balances may be in excess of the amounts insured by the Federal Deposit Insurance Corporation.
The Company’s accounts receivable result from sales to a broad customer base. The Company extends credit to its customers based upon an evaluation of the customer’s financial condition and credit history and generally does not require collateral. One customer represented 11.6% of total net sales in 2013 and this customer represented 10.8% of the Company’s total net sales during 2012.
Revenue Recognition
The Company derives revenues from sales of electronic devices and communications equipment products and services. The Company’s sales are based upon written agreements or binding purchase orders that identify the type and quantity of the item and/or services being purchased and the purchase price. The Company recognizes revenues when shipment of products has occurred or services have been rendered, no significant obligations remain on the part of the Company, and collectability is reasonably assured based on the Company’s credit and collections practices and policies and our experience of prior dealings with our customers.
The Company recognizes revenues from sales of its U.S. communications equipment business units at the point of shipment of those products. An estimate of warranty cost is recorded at the time the revenue is recognized. Product returns are infrequent and require prior authorization because sales are final and the Company quality tests its products prior to shipment to ensure products meet the specifications of the binding purchase orders under which those products are shipped. Normally, when a customer requests and receives authorization to return a product, the request is accompanied by a purchase order for a repair or for a replacement product.
| F-10 |
The Company recognizes revenues for products sold by its subsidiary in France 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. An estimate of warranty cost is recorded at the time revenue is recognized.
Revenue recognition for products and services provided by the Company’s subsidiaries in England 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 revenue deferred until recognized over the term of the contract on a percentage of completion basis. Production contracts provide for a specific quantity of products to be produced over a specific period of time. Customers issue binding purchase orders or enter into binding agreements for the products to be produced. The Company recognizes revenues on these orders as the products are shipped. 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. An estimate of warranty cost is recorded at the time revenue is recognized. The Company offers extended warranty contracts for an additional cost to its customers, which are recognized ratably over the term of the extended warranty contract.
Revenues from services such as repairs and modifications are recognized when the service is completed and invoiced. For repairs that involve shipment of a repaired product, the Company recognizes repair revenues when the product is shipped back to the customer. Service revenues contribute less than 5% of total revenue and, therefore, are considered to be immaterial to overall financial results.
Research and Development Costs
Research and development costs are charged to expense as incurred. The Company maintains engineering departments which develop products, processes and techniques. The cost of research and development in 2013 was $1,132,000 and in 2012 the comparable cost was $1,267,000.
Shipping and Handling Costs
Shipping and handling costs recorded in cost of goods sold were $367,000 and $252,000 in 2013 and 2012 respectively. Shipping and handling costs recorded in selling, general and administrative expenses were $12,000 in 2013 and $11,000 in 2012.
Advertising Costs
Advertising costs are charged to expense as incurred. Because of the custom nature of the Company’s products and the high quality of the reputation that the Company enjoys there is minimal advertising spend for product promotion. Advertising costs for 2013 and 2012 were immaterial.
Income Taxes
Income taxes are accounted for using an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial statement and tax bases of assets and liabilities at the applicable tax rates. A valuation allowance is provided when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company evaluates the realizability of its deferred tax assets by assessing its valuation allowance and by adjusting the amount of such allowance, if necessary. The factors used to assess the likelihood of realization are the Company’s forecast of future taxable income and available tax planning strategies that could be implemented to realize the net deferred tax assets. Failure to achieve forecasted taxable income in applicable tax jurisdictions could affect the ultimate realization of deferred tax assets and could result in an increase in the Company’s effective tax rate on future earnings. The provision for income taxes represents the tax payable for the year and the change during the year in deferred tax assets and liabilities.
| F-11 |
The Company adopted ASC topic 740-10-05, Income Tax, which provides guidance for recognizing and measuring uncertain tax positions, it prescribes a threshold condition that a tax position must meet for any of the benefits of the uncertain tax position to be recognized in the financial statements. It also provides accounting guidance on derecognizing, classification and disclosure for these uncertain tax positions. As of December 31, 2013 and 2012, the Company had recorded no net unrecognized tax benefits associated with uncertain income tax positions.
Comprehensive Income/Loss
Comprehensive income/loss includes all changes in equity during a period except those that resulted from investments by or distributions to the Company’s stockholders. Other comprehensive income refers to revenues, expenses, gains and losses that, under GAAP, are included in comprehensive income, but excluded from net income/loss as these amounts are recorded directly as an adjustment to stockholders’ equity. The Company’s other comprehensive income consists of foreign currency translation adjustments.
New Accounting Pronouncements
Management has assessed the potential impact of recently issued, but not yet effective, accounting standards and determined that the provisions are either not applicable to the Company or are not anticipated to have a material impact on our consolidated financial statements
NOTE 2 - LIQUIDITY
The Company’s liquidity is closely monitored by management. The Company uses cash flow forecasting linked to production forecasts and existing and projected credit and bank facilities, to ensure there are sufficient resources to fulfil its short term needs and strategic plans. At December 31, 2013, the Company had a long term bank facility in the UK with Lloyds Bank which extended to August 2016. In April 2014 this loan was surrendered and a new, increased facility with the same bank totaling $1.8 million was drawn down. This loan has a covenant that links to the net worth of the UK holding Company. The Company was in compliance with existing covenants at both December 31, 2013 and 2012. Further detail of this borrowing is set out below.
At December 31, 2013, the Company had promissory notes totaling $2.277 million which were due for redemption during 2014. Subsequent to the year end the Company has redeemed these notes through the payment of $300,000 on March 15, 2014 with the balance of the principal and accrued interest being paid on April 7, 2014. The funds to enable the Company to redeem the promissory notes were generated from the new loan of $1.8 million plus existing cash generated from profits.
Short-term credit facilities are heavily dependent upon the sales and underlying profitability of the Company’s subsidiaries. Credit facilities for the operating subsidiaries are a function of accounts receivable. In the first quarter of 2013, the Company purchased the property occupied by one of the UK subsidiaries (see note 21). The Company negotiated a bank loan of $2.1 million secured by a mortgage over the property and utilized $0.6 million of cash generated from operations to make this purchase. There are no other major capital expenditure plans which will absorb working capital and management considers that the current level of working capital is adequate for the Company’s current requirements. The majority of the Company’s cash is held by its foreign subsidiaries. The net worth covenant which pertains to the Lloyds Bank loan, described above, imposes practical limitations on the amounts that may be repatriated for use in paying corporate expenses and paying corporate debt. The overseas companies pay management charges to the parent Company for management services and brand name use and also pay dividends if and when appropriate.
As a result of the combination of forecasted cash flows from operations and existing financing arrangements, the Company believes it has sufficient funding to support its working capital requirements during the next 12 months. The Company has a substantial backlog as of December 31, 2013 and March 31, 2014 and the Company continues to experience good booking levels to support future shipments. In order to support future expected growth, the Company plans to reinvest a substantial amount of cash from operations back into the business for inventory purchases, engineering and product development. The Company recognizes the need to closely manage cash from operations to meet the operational needs of the business and satisfy near-term debt service obligations. The Company’s ability to support its business plan is dependent upon its ability to achieve profitable operations, manage costs and satisfy long-term debt service obligations. The Company’s promissory notes which were originally to be repaid in tranches through 2014 starting with $300,000 in March 2014 and culminating with a payment of $1.7 million in December 2014 were repaid on April 7, 2014. At March 28, 2014, a new three (3) year loan facility had been negotiated with Lloyds Bank giving the Company access to additional funds of approximately $1,150,000. This money was drawn down on April 1, 2014. Taking these factors into consideration, management believes the Company will be able to satisfy its long-term debt service obligations for the next twelve months from the date of issuance of these financial statements, and meet its short term obligations and commitments.
| F-12 |
NOTE 3 - DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALE
Test Product Line
During the first quarter of 2012, the sale of the test equipment product line closed and the Company recognized a loss on disposal of $9,000. During the fourth quarter of 2011, CXR Larus committed to the sale of the Test Product Line.
NOTE 4 - INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or market (net realizable value) and consisted of the following at December 31, (in thousands):
| December 31, 2013 | December 31, 2012 | |||||||
| Gross Inventory | ||||||||
| Raw materials | $ | 6,697 | $ | 6,369 | ||||
| Work-in-process | 1,553 | 1,989 | ||||||
| Finished goods | 2,799 | 3,361 | ||||||
| Total gross inventories | $ | 11,049 | $ | 11,719 | ||||
| Inventory Reserve | ||||||||
| Raw materials | $ | 3,150 | $ | 2,986 | ||||
| Work-in-process | 431 | 389 | ||||||
| Finished goods | 1,111 | 1,089 | ||||||
| Total reserve | $ | 4,692 | $ | 4,464 | ||||
| Net Inventory | ||||||||
| Raw materials | $ | 3,547 | $ | 3,383 | ||||
| Work-in-process | 1,122 | 1,600 | ||||||
| Finished goods | 1,688 | 2,272 | ||||||
| Total net inventories | $ | 6,357 | $ | 7,255 | ||||
The movement in the Inventory reserve was as follows:
| Inventory reserve at January 1 | $ | 4,464 | $ | 3,788 | ||||
| Current year reserve | 583 | 698 | ||||||
| Written off in year | (438 | ) | (148 | ) | ||||
| Foreign currency translation | 83 | 126 | ||||||
| Inventory reserve at December 31 | $ | 4,692 | $ | 4,464 |
| F-13 |
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following as of December 31, (in thousands):
| 2013 | 2012 | |||||||
| Land and buildings | $ | 3,401 | $ | 227 | ||||
| Machinery, equipment and fixtures | 3,407 | 3,112 | ||||||
| Leasehold improvements | 731 | 646 | ||||||
| 7,539 | 3,985 | |||||||
| Accumulated depreciation and amortization | (3,064 | ) | (3,012 | ) | ||||
| Total property, plant and equipment | $ | 4,475 | $ | 973 | ||||
The net book value of assets held under capital leases at December 31, 2013 and 2012 totaled $318,000 and $411,000, respectively, after accounting for depreciation in the year of $117,000 and $112,000, respectively. The Company recorded depreciation expense associated with its property, plant and equipment of $0.3 million and $0.4 million for the years ended December 31, 2013 and 2012, respectively.
NOTE 6 - GOODWILL AND INTANGIBLE ASSETS
The Company had goodwill of $5.3 million and $5.1 million at December 31, 2013 and 2012, respectively, all of which was associated with its electronic devices reporting unit.
The Company performed its annual impairment test for goodwill for the electronic devices reporting unit as of December 31, 2013 and 2012. In performing the valuations, the Company used cash flows that reflected management’s forecasts, an assessment of the current backlog and anticipated orders and discount rates that reflect the risks associated with the current market. The Company considered the results of an income approach in determining the fair value of the reporting unit discounting the projected cash flows at the Company’s weighted average cost of capital to determine the fair value for the electronic devices reporting unit. For the income approach, growth at rates between 3% and 5% per annum was assumed as a result of expected shipments on existing contracts and future opportunities. The projected cash flows were discounted at the Company’s weighted average cost of capital of 15% to determine the fair value for the electronic devices reporting unit.
Based on the results of this testing at December 31, 2013, the fair values of the electronic devices reporting unit exceeded its book values.
The following table reflects changes in the Company’s goodwill balances for continuing operations, for the year ended December 31, 2013 and 2012 (in thousands):
| Electronic
Devices | ||||
| Balance at December 31, 2011 | 4,970 | |||
| Foreign currency translation | 176 | |||
| Balance at December 31, 2012 | $ | 5,146 | ||
| Foreign currency translation | 137 | |||
| Balance at December 31, 2013 | $ | 5,283 | ||
| F-14 |
Other intangible assets consist primarily of trademarks, trade names and technology acquired. The original cost and accumulated amortization of these intangible assets from continuing operations consisted of the following at December 31 (in thousands):
| 2013 | 2012 | |||||||||||||||||||||||
| Electronic | Communications | Electronic | Communications | |||||||||||||||||||||
| Devices | Equipment | Total | Devices | Equipment | Total | |||||||||||||||||||
| Intangibles with definite lives: | ||||||||||||||||||||||||
| Technology acquired | $ | - | $ | 1,150 | $ | 1,150 | $ | - | $ | 1,150 | $ | 1,150 | ||||||||||||
| Customer relationships | - | 200 | 200 | - | 200 | 200 | ||||||||||||||||||
| Covenant-not-to-compete | 200 | - | 200 | 200 | - | 200 | ||||||||||||||||||
| Backlog | 200 | - | 200 | 200 | - | 200 | ||||||||||||||||||
| 400 | 1,350 | 1,750 | 400 | 1,350 | 1,750 | |||||||||||||||||||
| Accumulated amortization | (400 | ) | (1,282 | ) | (1,682 | ) | (400 | ) | (1,147 | ) | (1,547 | ) | ||||||||||||
| Carrying value | - | 68 | 68 | - | 203 | 203 | ||||||||||||||||||
| Intangibles with indefinite lives: | ||||||||||||||||||||||||
| Trademarks and trade names | 500 | - | 500 | 500 | - | 500 | ||||||||||||||||||
| Foreign currency translation | (111 | ) | - | (111 | ) | - | - | (119 | ) | |||||||||||||||
| Trademarks and trade names | 389 | - | 389 | 381 | - | 381 | ||||||||||||||||||
| Total intangible assets, net | $ | 389 | $ | 68 | $ | 457 | $ | 381 | $ | 203 | $ | 584 | ||||||||||||
In accordance with FASB guidance for accounting for the impairment or disposal of long-lived assets, the Company re-evaluates the carrying value of identifiable intangible and long-lived assets, except for trademarks and trade names, for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. No events or changes in circumstances occurred during 2013 or 2012 that would have required an impairment analysis to be performed.
Assuming no additions, disposals or adjustments are made to the carrying values and/or useful lives of the assets, annual amortization expense on intangible assets with definite lives is estimated to be approximately $68,000 in 2014. This will eliminate the carrying value by June 30, 2014. The Company’s current definite lived intangible assets have an average remaining useful life of approximately 6 months.
NOTE 7 - ACCRUED LIABILITIES
Accrued expenses as of December 31, consisted of the following (in thousands):
| 2013 | 2012 | |||||||
| Accrued payroll and benefits | $ | 1,136 | $ | 638 | ||||
| Pension obligation (see note 16) | 455 | 453 | ||||||
| Advance payments from customers, current portion | 694 | 314 | ||||||
| Warranty reserve | 675 | 548 | ||||||
| Foreign currency exposure provision | 321 | 315 | ||||||
| Accrued taxes (other than income taxes) | 125 | 513 | ||||||
| Accrued engineering contract costs | 501 | 559 | ||||||
| Other accrued expenses | 352 | 419 | ||||||
| Total accrued expenses | $ | 4,259 | $ | 3,759 | ||||
No other individual item represented more than 5% of total current liabilities.
| F-15 |
NOTE 8 - OTHER LIABILITIES
The Company has an obligation to a former owner of a business, which was once owned by the Company, to pay an inflation linked monthly sum for the remaining life of the former owner. The liability is calculated by reference to actuarial data relating to life expectancy. The expected payments are discounted by the Company’s weighted average cost of capital. The liability at December 31, 2013 was $697,000. This is split between current and long term liabilities, with $261,000 included in ‘Other current liabilities’, and $436,000 in ‘Other liabilities’. At December 31, 2012, the comparative figures were: $274,000 in ‘Other current liabilities’, and $415,000 in ‘Other liabilities’.
NOTE 9 - FINANCING ARRANGEMENTS
The Company has a variety of debt and credit facilities to satisfy the financing requirements of its operations and the countries within which it operates. These arrangements are tabulated below.
| All amounts are in $ thousands | ||||||||
| Lines of credit | December 31, 2013 | December 31, 2012 | ||||||
| Lloyds TSB Commercial Finance | 443 | 37 | ||||||
| FACTOCIC | 753 | 964 | ||||||
| Bridge Bank | - | 121 | ||||||
| Total lines of credit | $ | 1,196 | $ | 1,122 | ||||
| Long-term debt | December 31, 2013 | December 31, 2012 | ||||||
| Lloyds TSB term loan | 711 | 928 | ||||||
| Lloyds TSB mortgage | 2,255 | - | ||||||
| Promissory notes payable | 2,277 | 2,877 | ||||||
| Capital lease obligations | 93 | 170 | ||||||
| 5,336 | 3,975 | |||||||
| Current portion of long-term debt | (2,672 | ) | (942 | ) | ||||
| Long-term debt | $ | 2,664 | $ | 3,033 | ||||
Details of the borrowings set out in the table above are explained below.
Lloyds TSB Commercial Finance
On August 31, 2010, two of the Company’s UK subsidiaries, Pascall Electronics Limited (“Pascall”) and XCEL Power Systems, Ltd. (“XCEL”), each entered into a Receivables Finance Agreement with Lloyds TSB Commercial Finance Limited (“Lloyds”) (each, a “Receivables Finance Agreement” and, collectively, the “Receivables Finance Agreements”), pursuant to which Lloyds agreed to provide Pascall and XCEL with a credit facility to support their UK operations in the aggregate principal amount of £2.75 million ($4.5 million based on the exchange rate on December 31, 2013), in each case at an advance rate of 88% for UK customers and 85% for invoices issued to customers outside the UK. The facility carries a discount charge of 2.5% above the base rate, and a service fee of 0.2%. The interest and service charge are paid monthly. The Receivables Finance Agreement between Pascall and Lloyds is secured by the All Assets Debenture, dated August 31, 2010, given by Pascall in favor of Lloyds and the Receivables Finance Agreement between XCEL and Lloyds is secured by the All Assets Debenture, dated August 31, 2010, given by XCEL in favor of Lloyds. At December 31, 2013, Lloyds had approved invoices totaling £3,384,000 as eligible for discounting yielding potential draw-down of $2,942,000. As of December 31, 2013, outstanding borrowings under the Receivable Finance Agreements were $443,000 and unutilized capacity for borrowing was $2,498,000. At December 31, 2012, borrowings under this facility were $42,000.
| F-16 |
FACTOCIC
On September 20, 2010, the Company’s French subsidiary, CXR AJ, entered into an accounts receivable financing arrangement (the “CIC Agreement”) with FACTOCIC S.A., a subsidiary of CIC Group (“CIC”), pursuant to which CIC agreed to provide CXR AJ a financing arrangement to support its French operations in the aggregate principal amount of €1.35 million ($1.9 million based on the exchange rate on December 31, 2013) at an advance rate of 90% of presented receivables. The CIC Agreement bears interest at the three month EURIBOR plus 1.4%. As of December 31, 2013, CXR AJ had the equivalent of $753,000 of outstanding borrowings under the CIC Agreement (2012, $964,000). The total of accounts receivable at the year-end was $2,300,000. The accounts receivable which had been financed under this arrangement were $920,000 and $1,070,000 at December 31, 2013 and 2012, respectively.
Bridge Bank
On November 15, 2010, CXR Larus and Bridge Bank, National Association (“Bridge Bank”) executed a Business Financing Agreement dated as of October 22, 2010 (the “Business Financing Agreement”) pursuant to which Bridge Bank agreed to provide to CXR Larus up to $800,000 of advance on trade accounts receivable at an advance rate of 80% with interest at the Prime Rate plus 3.25%. To secure Bridge Bank’s obligations, CXR Larus granted Bridge Bank a continuing security interest in certain collateral. As of December 31, 2012, CXR Larus had outstanding borrowings of $121,000 under the Business Financing Agreement. The related accounts receivable which had been financed under this arrangement were $151,000 at December 31, 2012. CXR Larus withdrew from this finance facility during 2013 and therefore there was no amount outstanding at the year-end.
NOTE 10 - DEBT
Lloyds TSB Bank Term Loan
On August 2, 2011, EMRISE Electronics Limited (“EEL”), a wholly-owned subsidiary of the Company, entered into an agreement for a term loan with Lloyds TSB Bank plc (“Lloyds Bank”) in the amount of £750,000 (“Lloyds Term Loan”). As a condition to issuing the Lloyds Term Loan, the two operating subsidiaries of EEL, being Pascall and XCEL, were required to provide the sterling equivalent of $202,500 to an escrow account in each subsidiary’s name. The agreement required the funds to be held in escrow. Since the timing of release of the restricted funds was uncertain and Lloyds Bank could renew the restriction annually for the term of the loan, the total amount of £250,000 ($405,000 based on the exchange rate at December 31, 2012) was included in the accompanying balance sheet as a non-current asset at December 31, 2012. These sums were released from escrow during 2013. The Lloyds Term Loan bore interest at a fixed rate of the aggregate of 4.75% per annum and the rate quoted by the Lloyds Bank Wholesale Markets division at the time of borrowing. Principal and interest were payable monthly over 60 months commencing one month after the date of borrowing. The Lloyds Term Loan was subject to a financial covenant requiring a minimum net worth at EEL from and after December 31, 2011 of not less than £4,200,000 and was scheduled to increase annually by not less than £200,000. The Company was in compliance with this covenant at both December 31, 2013 and 2012. As of December 31, 2013, £431,000 ($711,000 based on the exchange rate at December 31, 2013) was outstanding under the Lloyds Term Loan. At December 31, 2012, £560,000 or $928,000 was outstanding, based on the exchange rate at December 31, 2012. On April 1, 2014, the Company replaced this loan with a new three year loan with Lloyds Bank of £1.1 million (approximately $1.8 million, using the exchange rate at March 31, 2014). The loan carries a fixed rate of interest of 6.6% per annum and includes a covenant which requires the net worth of the EEL, after deducting inter-company balances, to not fall below £2 million (approximately $3.3 million using the exchange rate at March 31, 2014). The value of this net worth covenant increases by approximately $400,000 each calendar year.
Lloyds TSB Mortgage
On March 4, 2013, the Company entered into a mortgage with Lloyds Bank for the sum of £1.4 million (approximately $2.3 million at the rate of exchange on December 31, 2013) to purchase the property occupied by Pascall. This mortgage is repayable over 20 years. Interest is fixed at an annual rate of 4.8% for 15 years. Thereafter the interest reverts to a rate linked to the London Inter-bank lending rate. The loan is secured by a fixed lien over the property and any fixed plant and machinery within the building. The loan agreement contains financial covenants requiring the loan to value ratio to be a minimum of 80%, the net worth of EEL, the immediate parent company of Pascall, to be at least £4,776,000 and annual retained profits not to fall below £300,000 (approximately $7.9 million and $0.5 million respectively, using the exchange rate at December 31, 2013). At December 31, 2013, the consolidated net worth of EEL, as defined by the loan agreement, was £6.1 million and the profit for the year ended December 31, 2013 was £0.7 million. The Company met these covenants at December 31, 2013. As of December 31, 2013, the loan balance outstanding was $2.3 million. The carrying cost of the property is $3.1 million.
| F-17 |
Promissory Notes payable
The promissory notes were subordinated contingent promissory notes, which were issued to former owners of ACC in May 2008 and were originally scheduled to mature on August 31, 2013. The notes were subordinated to the term loan from Lloyds TSB described above. Since the date of issuance the notes have been amended numerous times, most recently, effective November 1, 2012 (the “Amended Subordinated Contingent Notes”). The Amended Subordinated Contingent Notes bore interest at the prime rate as reported in The Wall Street Journal plus 4% (previously prime rate plus 1%) and were scheduled to mature on December 15, 2014 (the “Maturity Date”) (previously August 31, 2013). Interest was payable quarterly through to the Maturity Date. Principal payments of $300,000 were due on March 15, 2014, and September 15, 2014 with the outstanding principal balance of $1.7 million due at the Maturity Date. At December 31, 2013, the outstanding principal balance under the Amended Subordinated Contingent Notes was $2,277,000. Subsequent to the year end, the payment of principal of $300,000, due on March 15, 2014, was paid on schedule and the balance of the principal and accrued interest was paid on April 7, 2014.
Capital Leases
The Company has capital leases relating to capital equipment. The leases generally contain purchase options and expire at various dates through December 31, 2015. Capitalized lease obligations are calculated using interest rates appropriate at the inception of the lease and range from 6% to 18%. Leases are amortized over the lease term using the effective interest method.
Principal maturities related to debt, as of December 31, 2013, were as follows (in thousands):
| Lloyds mortgage | Lloyds
Term Loan | Promissory notes Payable | Capitalized
Lease Obligations | Total | |||||||||||||||||
| Year ending December 31, | |||||||||||||||||||||
| 2014 | $ | 73 | $ | 252 | $ | 2,277 | $ | 69 | $ | 2,671 | |||||||||||
| 2015 | 76 | 269 | - | 24 | 369 | ||||||||||||||||
| 2016 | 81 | 190 | - | - | 271 | ||||||||||||||||
| 2017 | 85 | - | - | - | 85 | ||||||||||||||||
| 2018 | 90 | 90 | |||||||||||||||||||
| 2019 and beyond | 1,850 | - | - | - | 1,850 | ||||||||||||||||
| $ | 2,255 | $ | 711 | $ | 2,277 | $ | 93 | $ | 5,336 | ||||||||||||
| F-18 |
NOTE 11 - STOCK-BASED COMPENSATION
At December 31, 2013, a variety of the Company’s stock-based compensation grants or awards were outstanding for employees (including executive officers) and members of the Board of Directors (the “Board”) of the Company. All stock-based compensation plans were approved by the Company’s Board.
Description of Stock Option Plans
The Company has five stock option plans, the following two of which continue to be available for issuance:
| ● | The 2000 Stock Option Plan was adopted by the Board in November 2000 and approved by the stockholders on January 16, 2001. The Board adopted the Amended and Restated 2000 Stock Option Plan (the “2000 Plan”) effective as of August 3, 2001. Under the 2000 Plan, options granted may be either incentive or nonqualified options. Incentive options must have an exercise price of not less than the fair market value of a share of common stock on the date of grant. Nonqualified options must have an exercise price of not less than 85% of the fair market value of a share of common stock on the date of grant. Up to 2,000,000 options may be granted under the 2000 Plan. No option may be exercised more than ten years after the date of grant. The Board does not intend to issue any additional options under this plan. | |
| ● | The 2007 Stock Incentive Plan (the “2007 Plan”) was adopted by the Board in November 2007 and approved by the stockholders on December 12, 2007. Under the 2007 Plan, the administrator may grant or issue stock options (incentive or nonqualified), stock appreciation rights (“SARs”), restricted stock, restricted stock units, performance awards and stock payments, or any combination thereof. Up to 5,000,000 shares of common stock may be granted pursuant to awards under the 2007 Plan. Incentive and nonqualified options must have an exercise price of not less than the fair market value of a share of common stock on the date of grant and may not be exercised more than ten years after the date of grant. However, incentive options granted to an individual who owns (or is deemed to own) more than 10% of the total combined voting power of all class of the Company’s stock must have an exercise price of not less than 110% of the fair market value of a share of common stock on the date of grant and may not be exercised more than five years after the date of grant. The base price of any SAR granted under the 2007 Plan must be at least 100% of the fair market value of a share of common stock on the date of grant. SARs will be settled in shares of common stock. Restricted stock may have a price as determined by the administrator. Restricted stock units entitle the holder to receive vested shares of common stock. Neither restricted stock or restricted stock units may be sold or otherwise hypothecated or transferred. Performance awards will be paid in shares of common stock and may be granted to employees, consultants or independent directors based on specific performance criteria. Stock payments may be issued to employees, independent directors or consultants in the form of common stock or an option or other right to purchase common stock and may be issued as part of a deferred compensation arrangement that would otherwise be paid in cash. |
Stock option activity for the years ended December 31, 2013 and 2012 was as follows:
| 2013 | 2012 | |||||||||||||||
| Shares (in 000’s) | Weighted Average Exercise Price | Shares (in 000’s) | Weighted Average Exercise Price | |||||||||||||
| Outstanding, beginning of year | 449 | $ | 3.56 | 513 | $ | 3.61 | ||||||||||
| Granted | 50 | $ | 0.55 | - | $ | - | ||||||||||
| Exercised | - | $ | - | - | $ | - | ||||||||||
| Forfeited (including expirations) | (148 | ) | $ | 3.01 | (64 | ) | $ | 4.00 | ||||||||
| Outstanding, end of year | 351 | $ | 3.36 | 449 | $ | 3.56 | ||||||||||
| Exercisable, end of year | 351 | $ | 3.36 | 449 | $ | 3.56 | ||||||||||
As of December 31, 2013, the Company had 351,000 fully-vested stock options, with a weighted average exercise price of $3.36 and remaining term of 4.1 years.
| F-19 |
The following table summarizes information about stock options outstanding at December 31, 2013:
| Options Outstanding | Options Exercisable | |||||||||||||||||
| Weighted | Weighted | Weighted | ||||||||||||||||
| Range of | Options | Average Remaining | Average Exercise | Options | Average Exercise | |||||||||||||
| Exercise Prices | (in 000’s) | Life in Years | Price | (in 000’s) | Price | |||||||||||||
| $0.01 to $1.00 | 50 | 9.0 | $ | 0.55 | 50 | $ | 0.55 | |||||||||||
| $1.01 to $3.00 | 117 | 4.4 | $ | 1.90 | 117 | $ | 1.90 | |||||||||||
| $3.01 to $5.00 | 108 | 2.9 | $ | 3.33 | 108 | $ | 3.33 | |||||||||||
| $5.01 to $7.50 | 76 | 2.0 | $ | 7.50 | 76 | $ | 7.50 | |||||||||||
| Total options | 351 | 351 | ||||||||||||||||
Total stock-based compensation expense included in wages, salaries and related costs was $27,500 and $15,600 for the year ended December 31, 2013 and 2012, respectively. These compensation expenses were charged to selling, general and administrative expenses. As of December 31, 2013, the Company had no unrecognized compensation expense related to stock option grants, to be recognized over future years.
Included within the stock-based compensation expense, under the 2007 Plan, restricted stock was awarded to the members of the Board as partial compensation for Board meeting attendance. Restricted stock compensation expense of $8,000 was recorded during the year ended December 31, 2013. In 2012 the equivalent expense was $9,000. The stock option charge for 2013 and 2012 was $19,000 and $6,000 respectively.
NOTE 12 – WARRANTS
There were no warrants outstanding at December 31, 2013 or 2012.
NOTE 13 - NET INCOME/ (LOSS) PER SHARE
Basic income/(loss) per share is computed by dividing net income/(loss) by the weighted average common shares outstanding during a period. Diluted income/(loss) per share is based on the treasury stock method and includes the dilutive effect of stock options outstanding during the period. Common share equivalents have been excluded where their inclusion would be anti-dilutive. The average stock option price of options outstanding at the year- end exceeds the market value. As a result of this and the losses from continuing operations incurred by the Company in 2013, the potentially dilutive common shares have been excluded because their inclusion would have been anti-dilutive.
| NUMERATOR: | ||||||||
| Net income/(loss) | $ | (392 | ) | $ | 94 | |||
| DENOMINATOR: | ||||||||
| Basic weighted average common shares outstanding | 10,703 | 10,688 | ||||||
| Effect of dilutive securities: | ||||||||
| Dilutive stock options and warrants | - | - | ||||||
| Diluted weighted average common shares outstanding | 10,703 | 10,688 | ||||||
Basic (loss)/earnings per share | (0.04 | ) | 0.01 | |||||
Diluted (loss)/earnings per share | (0.04 | ) | 0.01 | |||||
| F-20 |
The following table shows the common stock equivalents that were outstanding as of December 31, 2013 and 2012, but were not included in the computation of diluted earnings per share as a result of the loss incurred by the Company:
| Number
of Shares | Range
of Exercise Price Per Share | |||||||
| Anti-dilutive common stock options: | ||||||||
| As of December 31, 2013 | 351,000 | $ 1.31 - 7.50 | ||||||
| As of December 31, 2012 | 449,000 | $ 1.31 - 7.50 | ||||||
NOTE 14 - INCOME TAXES
The Company files a consolidated U.S. federal income tax return. State tax returns are filed on a consolidated, combined or separate basis depending on the applicable laws relating to the Company and its domestic subsidiaries. Additionally, the Company files tax returns in England and France.
The Company’s income from continuing operations before provision for income taxes was generated from the U.S. and foreign operations for the years ended December 31 as follows (in thousands):
| 2013 | 2012 | |||||||
| Earnings (loss) before income taxes: | ||||||||
| U.S. | $ | (2,040 | ) | $ | (2,659 | ) | ||
| Foreign | 1,760 | 3,076 | ||||||
| Earnings (loss) before income taxes | $ | (280 | ) | $ | 417 | |||
The Company’s provision for income taxes on continuing operations consisted of the following for the years ended December 31 (in thousands):
| 2013 | 2012 | |||||||
| Current: | ||||||||
| Federal | $ | - | $ | - | ||||
| State | - | 11 | ||||||
| Foreign | 172 | 320 | ||||||
| Total current | 172 | 331 | ||||||
| Deferred: | ||||||||
| Federal | - | - | ||||||
| State | - | 1 | ||||||
| Foreign | (60 | ) | (17 | ) | ||||
| Total deferred | (60 | ) | (17 | ) | ||||
| Total provision for income taxes | $ | 112 | $ | 314 | ||||
| F-21 |
Income tax expense on continuing operations differed from the amount obtained by applying the statutory federal income tax rate of 34% to income before income taxes as follows for the years ended December 31 (in thousands):
| 2013 | 2012 | |||||||
| Federal income tax at statutory rates | $ | (121 | ) | $ | 143 | |||
| State income taxes, net of federal benefit | - | 11 | ||||||
| Foreign income taxes | (461 | ) | (744 | ) | ||||
| Changes in valuation allowances | 521 | 287 | ||||||
| Foreign income inclusion - IRC 956 | 165 | 607 | ||||||
| Permanent differences | 8 | 10 | ||||||
| $ | 112 | $ | 314 | |||||
As a result of the Company’s extensive net operating loss carry-forwards in the United States and France and certain tax credits for research and development expense in the United Kingdom and France the Company paid no United States federal income tax in 2013 or 2012 and no foreign income tax in France in 2013 or 2012. The Company paid foreign income taxes in the United Kingdom for 2013 and 2012.
The Company’s business is subject to regulations under a wide variety of U.S. federal, state and foreign tax laws, regulations and policies. The majority of the earnings and profits of the Company’s foreign subsidiaries are deemed to have been distributed to the United States, with the exception of undistributed earnings of approximately $1.4 million which have not been taxed in the U.S. and which are deemed to have been reinvested indefinitely outside the United States. These earnings will continue to be indefinitely reinvested but could become subject to an additional tax charge if they were remitted as dividends or were loaned to the Company. No deferred taxes have been provided on these earnings.
Under the terms of the promissory notes described in Note 10, the Company’s foreign subsidiaries had issued guarantees on U.S. credit facilities and, as a result, under Section 956 of the Code, had been deemed to have distributed some of their earnings to fund U.S. operations. Subsequent to December 31, 2013, the promissory notes have been redeemed and these guarantees no longer apply. Further, certain of the Company’s foreign subsidiaries have advanced cash funds to the U.S. entities to meet cash needs. This has resulted in U.S. federal taxable income and an increase in U.S. tax liability, which has been reduced through the utilization of available net operating loss carry-forwards and foreign tax credits.
The Company had U.S. federal net operating loss carry-forwards of approximately $13.8 million as of December 31, 2013 which will expire at various dates beginning in 2014 through 2033. The use of the net operating carry-forwards for state tax purposes is governed by rules specific to each state. As of December 31, 2013 and 2012, the Company recorded a valuation allowance on the deferred tax asset. Management believes sufficient uncertainty exists regarding the realizability of the deferred tax asset items and that a valuation allowance is required. Management considers projected future taxable income and tax planning strategies in making this assessment. The amount of the deferred tax assets considered realizable, however, could materially change in the near future if estimates of future taxable income during the carry-forward period are changed.
In addition, the Company has approximately €1.8 million in net operating loss carry forwards at CXRAJ, its French operating unit, which can be used to offset tax arising on future profits at this subsidiary.
As a result of the Company’s extensive net operating loss carry-forwards and certain tax credits for research and development expense both in the United States and abroad apart from Delaware taxes the Company paid no United States federal income tax in 2013 and no foreign income tax in France in 2013, 2012 or 2011. The Company paid foreign income taxes in the United Kingdom for 2013 and 2012.
Utilization of the Company’s net operating loss and tax credit carry-forwards may be subject to substantial annual limitation should the Company experience an ownership change triggering limitations provided by the Code and similar state provisions. Such an annual limitation could result in the expiration or elimination of the net operating loss and tax credit carry-forwards before utilization.
| F-22 |
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities were as follows as of December 31 (in thousands):
| 2013 | 2012 | |||||||
| Current deferred tax assets: | ||||||||
| Allowance for doubtful accounts | $ | 5 | $ | 1 | ||||
| Inventory reserves and uniform capitalization | 982 | 661 | ||||||
| Other accrued liabilities | 91 | 178 | ||||||
| 1,078 | 840 | |||||||
| Valuation allowance-current deferred tax assets | (1,032 | ) | (712 | ) | ||||
| Total current deferred tax assets | 46 | 128 | ||||||
| Long-term deferred tax assets: | ||||||||
| Depreciation on property, plant & equipment | 26 | 142 | ||||||
| Non-qualified stock option expense | 13 | 3 | ||||||
| Deferred compensation | 240 | 246 | ||||||
| Deferred income | 3 | - | ||||||
| Tax credits | 55 | 114 | ||||||
| Net operating loss carry-forwards | 6,900 | 5,095 | ||||||
| Other, net | 448 | 45 | ||||||
| 7,685 | 5,645 | |||||||
| Valuation allowance-long-term deferred tax assets | (7,632 | ) | (5,586 | ) | ||||
| Total long-term deferred tax assets | 53 | 59 | ||||||
| Deferred tax liabilities: | ||||||||
| Intangible assets other than goodwill | (17 | ) | - | |||||
| Total deferred tax assets (long-term) | 36 | - | ||||||
| Net deferred tax assets | $ | 82 | $ | 187 | ||||
The adoption of ASC 740-10 Income Taxes-Tax Positions did not result in a material adjustment to the Company’s liability for unrecognized income tax benefits. The Company has not recognized benefits for any uncertain tax positions that it believes would be more-likely-than-not upheld in an examination by any tax authorities. The Company currently has no open matters with tax authorities nor is it engaged in an examination by any tax authority. The Company’s policy on classification of any interest and penalties relating to unrecognized income tax positions, is to classify interest as interest expense and penalties as other expenses. No interest or penalties were recognized during 2013 or 2012.
| F-23 |
The Company files income tax returns in the United States federal jurisdiction, the United Kingdom and France, and in the state jurisdictions of California, Texas, Pennsylvania and New Jersey. The Company is no longer subject to United States federal and state tax examinations for years before 2009 and 2008, respectively, and is no longer subject to tax examinations for the United Kingdom for years prior to 2012, and for France for years prior to 2009.
NOTE 15 - OPERATING SEGMENTS
The Company has two reportable operating segments: electronic devices and communications equipment. The electronic devices segment manufactures and markets electronic power supplies, RF and microwave devices and subsystem assemblies. The electronic devices segment consists of the Company’s two electronic device subsidiaries, located in England, both of which offer the same or similar products to the same or similar customers.
The communications equipment segment designs, manufactures and distributes network access products including timing and synchronization products. The communications equipment segment consists of operating entities CXR Larus located in the United States and CXR AJ located in France, both of which offer the same or similar products to similar customers. Both segments operate primarily in the U.S., European and North African markets, but they have distinctly different customers, design and manufacturing processes and marketing strategies. Each segment has discrete financial information and a separate management structure.
The Company evaluates performance based upon contribution margin of the segments and also upon profit or loss from operations before income taxes exclusive of nonrecurring gains and losses. The Company accounts for intersegment sales at pre-determined prices negotiated between the individual segments.
Included in the Company’s reconciliation of segment financial data to the consolidated amounts is unallocated corporate expenses. Selected financial data for each of the Company’s operating segments reconciled to the consolidated totals is shown below (in thousands):
| Year ended December 31, | ||||||||
| 2013 | 2012 | |||||||
| Net sales | ||||||||
| Electronic devices | $ | 21,717 | $ | 24,036 | ||||
| Communications equipment | 10,181 | 10,011 | ||||||
| Total | $ | 31,898 | $ | 34,047 | ||||
| Gross profit | ||||||||
| Electronic devices | $ | 6,280 | $ | 7,085 | ||||
| Communications equipment | 3,435 | 2,921 | ||||||
| Total | $ | 9,715 | $ | 10,006 | ||||
| Depreciation and amortization | ||||||||
| Electronic devices | $ | 288 | $ | 237 | ||||
| Communications equipment | 176 | 172 | ||||||
| All other | 10 | 4 | ||||||
| Total | $ | 474 | $ | 413 | ||||
| Operating income (loss) | ||||||||
| Electronic devices | $ | 2,681 | $ | 3,355 | ||||
| Communications equipment | 46 | (703 | ) | |||||
| Corporate and other | (2,478 | ) | (2,707 | ) | ||||
| Total | $ | 249 | $ | (55 | ) | |||
| F-24 |
| December 31, 2013 | December 31, 2012 | |||||||
| Total assets | ||||||||
| Electronic devices | $ | 20,134 | $ | 17,222 | ||||
| Communications equipment | 6,266 | 7,018 | ||||||
| Corporate and other | 59 | 158 | ||||||
| Total | $ | 26,459 | $ | 24,398 | ||||
One customer of the electronic devices segment accounted for 11.6% of total sales in 2013. This customer accounted for 10.8% of sales in 2012. No other customer in either segment accounted for 10% or more of net sales during 2013 or 2012.
The Company’s segments operate in different geographic areas. The following table is a summary of the Company’s net sales by geographic area of origination for the year ended December 31 (in thousands):
| 2013 | 2012 | |||||||||||||||
| Electronic Devices | Communications Equipment | Electronic Devices | Communications Equipment | |||||||||||||
| United States | $ | - | $ | 1,465 | $ | - | $ | 1,712 | ||||||||
| United Kingdom | 21,717 | - | 24,036 | - | ||||||||||||
| France | - | 8,716 | - | 8,299 | ||||||||||||
| Total net sales | $ | 21,717 | $ | 10,181 | $ | 24,036 | $ | 10,011 | ||||||||
Sales and purchases between geographic areas have been accounted for on the basis of prices set between the geographic areas, generally at cost plus 40%. Net sales by geographic area have been determined based upon the country from which the product was shipped.
The following table is a summary of the Company’s total assets by geographic area at December 31 (in thousands):
| 2013 | 2012 | |||||||
| United States | $ | 1,022 | $ | 1,426 | ||||
| United Kingdom | 20,134 | 17,222 | ||||||
| France | 5,303 | 5,750 | ||||||
| Total assets | $ | 26,459 | $ | 24,398 | ||||
| F-25 |
NOTE 16 - RETIREMENT PLANS
The Company contributes to 401K deferred tax plans covering substantially all U.S. domestic employees. The Company’s contributions to these plans were $3,000 and $5,000 in the years ended December 31, 2013 and 2012, respectively. In the UK, the Company contributes to certain defined contribution pension plans for eligible employees who choose to join the schemes. The rates of the Company contributions range from 2% to 8% of eligible earnings. The Company’s contributions to these UK pension plans were $535,000 in 2013 and $439,000 in 2012.
The Company’s subsidiary in France has a retirement plan. Employee benefits are based on years of service and the employees’ compensation during their employment. The plan does not have specifically identified, segregated assets but the projected cost has been accrued in these accounts and the projected benefit obligation is included in accrued liabilities. The liabilities are calculated by external actuarial consultants. No contributions were paid in either of the periods presented. The actuarially computed components of net periodic benefit cost included the following components for the years ended December 31, (in thousands):
| 2013 | 2012 | |||||||
| Service costs | $ | 20 | $ | 16 | ||||
| Interest costs | 13 | 16 | ||||||
| Amortization of unrecognized prior service cost | 4 | 3 | ||||||
| Net periodic pension expense | $ | 37 | $ | 35 | ||||
The following table sets forth the funded status and amounts recognized in the Company’s consolidated statement of operations for the years ended December 31, (in thousands):
| 2013 | 2012 | |||||||
| Change in benefit obligation: | ||||||||
| Projected benefit obligation, beginning of year | $ | 453 | $ | 337 | ||||
| Service cost | 20 | 16 | ||||||
| Interest cost | 13 | 16 | ||||||
| Exchange rate movement | 20 | 7 | ||||||
| Actuarial (gain)/loss | (51 | ) | 77 | |||||
| Projected benefit obligation, end of year | $ | 455 | $ | 453 | ||||
| Unfunded status | $ | 455 | $ | 453 | ||||
| Unrecognized loss | - | - | ||||||
| Net amount recognized | $ | 455 | $ | 453 | ||||
The weighted average assumptions used to determine pension benefit obligations at December 31, were as follows:
| 2013 | 2012 | |||||||
| Discount rate | 3.15 | % | 2.8 | % | ||||
| Average remaining service life at year end | 13.1 yrs. | 12.8 yrs. | ||||||
| Average rate of future compensation increase | 2.0 | % | 2.0 | % | ||||
| F-26 |
NOTE 17 - COMMITMENTS AND CONTINGENCIES
Leases
The Company conducts its operations from freehold sites and from leased facilities under operating leases that expire at various dates from 2014 through 2033. The leases generally require the Company to pay all maintenance, insurance, property tax costs, and contain provisions for rent increases. Total rent expense, net of sublease income, was $0.3 million for 2013 and $0.7 million for 2012.
At the year end the future minimum rental payments required under operating leases that have initial or remaining non-cancellable lease terms in excess of one year were as follows:
| Year ending December 31, | Amount | |||
| 2014 | $ | 448 | ||
| 2015 | 373 | |||
| 2016 | 316 | |||
| Thereafter | 3,024 | |||
| Total | $ | 4,161 | ||
Litigation
The Company is not currently a party to any material legal proceedings. However, the Company and its subsidiaries are, from time to time, involved in legal proceedings, claims and litigation arising in the ordinary course of business. While the amounts claimed may be substantial, the ultimate liability cannot presently be determined because of considerable uncertainties that exist. Therefore, it is possible the outcome of such legal proceedings, claims and litigation could have a material effect on quarterly or annual operating results or cash flows when resolved in a future period. However, based on facts currently available, management believes such matters will not have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.
NOTE 18 - RELATED PARTIES
Notes payable to Former Shareholders of ACC
Promissory notes were issued in May 2008 in connection with the acquisition of ACC, a company acquired and subsequently sold by the Company. Since the date of issuance, such notes were amended on numerous occasions (the “Amended Subordinated Contingent Notes”) and subsequent to the year-end some of the promissory notes were transferred to a third party with no prior relationship with the Company. The note holders own shares in the Company and, therefore, are deemed to be related parties. The total balance of the Amended Subordinated Contingent Notes at December 31, 2013 was $2.3 million. The Amended Subordinated Contingent Notes bear interest at the prime rate, as reported in The Wall Street Journal, plus 4% and mature on December 15, 2014 (“2014 Maturity Date”). Interest is payable quarterly through the 2014 Maturity Date. Payments of principal were made in January and September 2013. On April 7, 2014, the Company repaid the outstanding balance due under the Amended Subordinated Contingent Notes. There were no penalties or settlement discount arising from redeeming the promissory notes ahead of schedule.
Other related parties
There are no guarantees by, fees paid to, or loans to or from officers or directors of the Company other than the compensation disclosed in Part III of this Report.
| F-27 |
NOTE 19 - FAIR VALUE MEASUREMENTS
FASB guidance for fair value measurements defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants and also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The fair value hierarchy distinguishes between three levels of inputs that may be utilized when measuring fair value as follows:
Level 1 - Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date.
Level 2 - Inputs are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, inputs other than quoted prices that are observable, and inputs derived from or corroborated by observable market data.
Level 3 - Inputs that are unobservable inputs which reflect the reporting entity’s own assumptions on what assumptions the market participants would use in pricing the asset or liability based on the best available information.
Cash, accounts receivable and accounts payable reflected in the Consolidated Balance Sheets are a reasonable estimate of their fair value due to the short term nature of these instruments. The carrying value of the Company’s borrowings is a reasonable estimate of its fair value as borrowings under the Company’s credit arrangements have variable rates that reflect currently available terms and conditions for similar debt. As of December 31, 2013, the Company did not have any material financial assets and liabilities measured at fair value on a recurring basis that would be subject to the disclosure provisions of FASB guidance noted above.
Fair values used in the Company’s goodwill impairment reviews are measured mostly by using Level 3 inputs as defined in the fair value hierarchy.
NOTE 20 - CASUALTY LOSS
The Company’s French subsidiary, CXR AJ, sustained significant damage to a portion of its premises as a result of a fire in 2010. Building, inventory and equipment were impaired or totally destroyed. The Company’s insurers met immediate costs to replace or repair assets. Income of $300,000, for actual and anticipated proceeds in excess of the net book value of assets lost, was recognized in 2011. Further sums were payable and the remaining amount recognized in the Statement of Operations for the year ended December 31, 2012 was $473,000.
NOTE 21 - SUBSEQUENT EVENTS
As noted above on April 7, 2014, the Company repaid the outstanding balance due under the Amended Subordinated Contingent Notes to the value of $ 2.277 million and a new, fixed interest rate, three year term loan from Lloyds Bank was negotiated and drawn down on April 1, 2014.
The new loan facility from Lloyds Bank was signed on March 28, 2013 and cash was drawn down on April 1, 2014. This loan replaced the existing term loan from Lloyds Bank which at the time it was replaced had a balance of approximately $0.7 million outstanding. The new term loan was for approximately $1.8 million giving the Company a net, new facility, of approximately $1.1 million. The new loan has a fixed interest rate of 6.6% and repayments of capital are due over 36 equal monthly sums. This new loan combined with existing cash facilities was used to repay the promissory notes. These notes were scheduled for redemption in December 2014 but the new loan enabled the Company to redeem the notes early without penalty.
| F-28 |
ALL ASSETS DEBENTURE
GIVEN BY
PASCALL ELECTRONICS LIMITED
IN FAVOUR OF
THE COLLATERAL AGENT
THIS DEBENTURE is made on 31s’ August 2010
(1) PASCALL ELECTRONICS LIMITED (Company Number 01316674) whose registered office is at Brunswick Road, Cobbs Wood, Ashford, Kent, TN23 1EB; (“the Chargor”); and
(3) CHARLES S. BRAND of Boundary Road, Colts Neck, New Jersey 07722 (“Collateral Agent”).
WHEREAS
A) Emrise Electronics Corporation (“Borrower”) and the Lenders are parties to that certain Stock Purchase Agreement dated as of May 23, 2008 (the “Stock Purchase Agreement”) relating to the purchase by Borrower of all of the issued and outstanding shares of capital stock (collectively, the “Shares”) of (i) Advanced Control Components, Inc., a New Jersey corporation (“ACC”) owned by Custom Components, Inc., Thomas P. M, Couse. Joanne Couse and Michael Gaffney and (ii) Custom Components, Inc. owned by Charles S. Brand. As a result of the consummation of the Stock Purchase Agreement, Borrower beneficially owned all of the capital stock of ACC.
B) Pursuant to the terms of the Stock Purchase Agreement, on 20 August 2008 Borrower issued certain subordinated secured contingent promissory notes (to the Lenders (together, as amended, the “Subordinated Contingent Notes”) to satisfy a portion of the aggregate consideration to be paid by Borrower for the purchase of the Shares. The Subordinated Contingent Notes were amended in November 2009 to add additional payment amounts, and to modify the payment date and terms.
C) Capitalised terms used but not otherwise defined herein shall have the meanings ascribed to them in the Subordinated Contingent Notes.
D) Emrise Corporation, a Delaware corporation (“Parent”), the ultimate parent of Borower, delivered a Continuing Guaranty dated August 20, 2008 (the “Guaranty”) in favour of the Lenders pursuant to which the obligations of Borrower to the Lenders under the Subordinated Contingent Notes were guaranteed by Parent.
E) On June 7, 2010, Borrower entered into an agreement to sell its direct and indirect interests in the Shares (the “Sale Transaction”). In connection with the Sale Transaction, the Borrower, Parent and the Lenders entered into a Master Agreement, pursuant to which the Lenders agreed to release their lien on all of the assets or property of ACC (the “Original Collateral”) and to amend the Subordinated Contingent Notes.
F) In consideration of the Lenders agreeing to release the Original Collateral, Parent, Borrower and the Borrower’s subsidiaries including the Chargor have entered into an Amended and Restated Security Agreement of even date set out in Schedule 1 (“Amended Security Agreement”) under which they have granted to the Collateral Agent, for the benefit of himself and the Lenders, a security interest in the collateral (“New Collateral”) described in the Amended Security Agreement as substitute collateral for the Original Collateral.
G) The Chargor grants this Debenture to the Collateral Agent pursuant to the Charger’s Obligations (as defined in the Amended Security Agreement) (herein, the “Secured Liabilities”).
NOW IT IS AGREED AS FOLLOWS:
| 1. | COVENANT TO PAY |
| 1.1 | The Chargor agrees with Collateral Agent that it will pay and/or discharge the Secured Liabilities when the same are due and payable by it. |
| 2. | CHARGING PROVISIONS |
| 2.1 | As continuing security for the payment and/or discharge of the Secured Liabilities, the Chargor with full title guarantee charges to Collateral Agent: |
| 2.1.1 | by way of legal mortgage, the property (if any) described in Schedule 2 |
| 2.1.2 | by way of fixed charge any freehold or leasehold property (excluding any property charged by clause 2.1.1) now and in the future owned by the Chargor or in which the Chargor may have an interest; |
| 2.1.3 | by way of fixed charge, all buildings, fixtures and fittings (including trade fixtures and fittings) from time to time in, on or attached to any of the Charger’s freehold or leasehold property; |
| 2.1.4 | by way of fixed charge all the Chargor’s plant and machinery and other equipment listed in Schedule 3 and all spare parts, replacements, modifications and additions for or to such Equipment and the benefit of all manuals, instructions, warranties and maintenance agreements relating to such Equipment; |
| 2.1.5 | by way of fixed charge, any other plant, machinery, vehicles, computer equipment, furniture, tools and other equipment not disposed of in the ordinary course of the Chargor’s business not listed in Schedule 3 and all spare parts, replacements, modifications and additions for or to such Equipment and the benefit of all manuals, instructions, warranties and maintenance agreements relating to such Equipment; |
| 2.1.6 | by way of fixed charge, all Book Debts; |
| 2.1.7 | by way of fixed charge, all monies from time to time standing to the credit of the Chargor’s accounts with any bank, financial institution or other person; |
| 2.1.8 | by way of fixed charge, all the Chargor’s goodwill and uncalled capital present and future; |
| 2.1.9 | by way of fixed charge, all the Chargor’s Intellectual Property from time to time not disposed of in the ordinary course of the Chargor’s business; |
| 2.1.10 | by way of fixed charge, all Securities from time to time owned by the Chargor or in which it has an interest; |
| 2.1.11 | by way of fixed charge, all loan capital, indebtedness or liabilities on any account or in any manner owing to the Chargor from any Subsidiary of the Chargor or a member of the Chargor’s group; |
| 2.1.12 | by way of fixed charge, all the Chargor’s rights and claims (including to the return of premiums) under all insurance policies in which the Chargor has an interest from time to time; |
| 2.1.13 | by way of floating charge, all the Charger’s property, assets and rights from time to time not subject to a fixed charge under this Debenture (including any property or assets situated in Scotland). |
| 2.2 | The floating charge created by clause 2.1.13 is a qualifying floating charge in accordance with paragraph 14 of Schedule B1 Insolvency Act. |
| 2.3 | The floating charge created by this Debenture will automatically without notice be converted into a fixed charge over those assets concerned: |
| 2.3.1 | if, without Collateral Agent’s prior written consent, the Chargor creates or attempts to create any Security Interest (other than a Permitted Security Interest) over all or any of its assets charged by way of floating charge; or |
| 2.3.2 | if any person levies or attempts to levy any distress, execution or other process against such assets; or |
| 2.3.3 | if any person presents a petition to wind up the Chargor or applies for an administration order; |
| 2.3.4 | upon the enforcement of this Debenture; |
| 2.3.5 | immediately upon the occurrence or the deemed occurrence of a Default. |
| 2.4 | Collateral Agent may by notice to the Chargor at any time convert the floating charge created by clause 2.1.13 into a fixed charge as regards any of the assets specified in the notice. |
| 3. | RESTRICTIONS |
| 3.1 | The Chargor agrees with Collateral Agent that it will not, without Collateral Agent’s prior written consent: |
| 3.1.1 | create or permit to subsist, in favour of any person other than Collateral Agent, any Security Interest on the Charged Assets, except for any Permitted Security Interest; |
| 3.3.1 | Dispose or agree to Dispose of any Charged Assets charged by way of fixed charge; |
| 3.1.1 | Dispose of any Charged Assets charged by way of floating charge other than for market value in the ordinary course of business. |
| 4. | COLLATERAL AGENT |
| 4.1 | The Lenders have appointed Charles S. Brand as Collateral Agent for the Lenders. |
| 4.2 | The Collateral Agent is authorized by the Lenders to take such action and to exercise such powers hereunder as provided herein for and on behalf of the Lenders. |
| 4.3 | In the event of the death or resignation of the Collateral Agent during the term of this Debenture the Lenders shall appoint a successor collateral agent to act under this Debenture where upon the rights of the Collateral Agent under this Debenture shall be assigned to such new collateral agent. If no such successor collateral agent shall have been so appointed by the Lenders and shall have accepted such appointment within thirty (30) days after Collateral Agent’s death or giving of notice of resignation as Collateral Agent, then Collateral Agent shall be deemed to be Thomas P. M. Couse. Upon the acceptance of any appointment as successor collateral agent hereunder by a successor collatera! agent, such successor collateral agent shall thereupon succeed to and become vested with all rights, powers, privileges, duties and obligations of Collateral Agent hereunder and the Chargor and the Collateral Agent shall do such things and execute and register such documents as may be necessary to give effect to such transfer. |
| 5. | SECURITY INTERESTS |
| 5.1 | The security interests granted pursuant to this Debenture are granted pursuant to the Amended Security Agreement. Any rights and remedies set forth herein are without prejudice to, and in addition to, those set forth in the Amended Security Agreement. |
| 6. | GENERAL COVENANTS |
| 6.1 | The Chargor agrees with Collateral Agent that it will: |
CONDUCT OF BUSINESS
| 6.1.1 | immediately it becomes aware thereof, provide Collateral Agent with details of any litigation, arbitration or administrative proceedings in progress, pending or, to the knowledge of the Chargor, threatened against it, which might have a material adverse effect on the Charged Assets or the Charger’s ability to perform its obligations under this Debenture; |
| 6.1.2 | conduct its business so that its centre of main interest is located at all times in England and Wales and not move its centre of main interest to another jurisdiction without Collateral Agent’s prior written consent. |
| 6.1.3 | punctually pay those debts and liabilities which would, on the winding up of the Chargor, have priority over the Security Interests created by this Debenture; |
| 6.1.4 | inform Collateral Agent if it acquires any Property, a subsidiary or any other material asset; |
| 6.1.5 | except pursuant to any Permitted Security Interest, 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 or floating charges created by this Debenture; |
INSURANCE
| 6.1.6 | keep those Charged Assets that are of an insurable nature comprehensively insured against loss (including loss of rent and profits) or damage by fire and other risks usually insured against by prudent businesses or that Collateral Agent reasonably requires to their full replacement: or reinstatement value with insurers approved by Collateral Agent; |
| 6.1.7 | procure that Collateral Agent’s interest is noted on such insurance policies and produce to Collateral Agent the receipts (or other evidence) for each current premium on its request; failing such production Collateral Agent may assume that such insurance has lapsed and exercise its rights under clause 5.3; |
| 6.1.8 | maintain third party and public liability insurance; |
REAL PROPERTY
| 6.1.9 | keep all Property in good and substantial repair; |
| 6.1.10 | comply in all material respects with all statutory and regulatory obligations relating to the Property; |
| 6.1.11 | punctually pay all rent, rates, taxes, charges and any other outgoings payable in respect of the Property and promptly produce the receipts for them to Collateral Agent upon his request; |
| 6.1.12 | in relation to any Property, not, without Collateral Agent’s prior written consent (such consent not to be unreasonably withheld or delayed): |
| 6.1.12.1 | part with or share possession or occupation: |
| 6.1.12.2 | grant any license or permission to any tenant, licensee or other occupier to assign, underlet, part with possession or occupation; |
| 6.1.12.3 | forfeit, determine, accept or agree to accept the surrender of any lease granted to it; |
| 6.1.12.4 | surrender (or agree to surrender), any leasehold interest held by it or allow such interest to be forfeited; |
| 6.1.12.5 | create or permit to arise any interest having overriding effect; |
| 6.1.12.6 | permit any person to become entitled to any right, easement. covenant or other matter which might adversely affect the use, value or marketability of the Property; |
EQUIPMENT
| 6.1.13 | maintain the Equipment in good and substantial repair and serviceable condition and (where applicable) ensure that is it properly and regularly serviced in accordance with any relevant warranties or manuals; |
| 6.1.14 | obtain all necessary certificates, licenses, permits and authorisations from time to time required for the use and/or operation of the Equipment and no! to do or permit to be done any act or omission whereby the Equipment or its use would contravene legislation or regulations for the time being in force; |
| 6.1.15 | notify Collateral Agent of any material loss, theft, damage or destruction ol the Equipment; |
| 6.1.16 | inform Collateral Agent of any change in the location. |
| 6.2 | If the Chargor fails to comply with any of its obligations under this Debenture (including failing to insure or repair any Property or Equipment) the Chargor irrevocably authorises the Collateral Agent (and any agent appointed by him) to make good such failure on its behalf. All costs and expenses incurred by the Collateral Agent pursuant to this authority shall be reimbursed by the Chargor to the Collateral Agent on his demand |
| 7. | ACCOUNTS |
| 7.1 | The Chargor shall from time to time supply to the Collateral Agent such accounts or other information concerning the Charged Assets, liabilities and affairs of the Chargor, its subsidiary or associated companies as the Collateral Agent may reasonably require and without prejudice to the generality of the foregoing shall on demand by the Collateral Agent furnish to the Collateral Agent: |
| 7.1.1 | a copy of audited consolidated and unconsolidated profit and loss accounts and balance sheets of the Chargor and each of its subsidiaries (if any) in respect of each financial year of the Chargor and of such subsidiaries together with the directors’ and auditors’ reports thereon, forthwith upon the same becoming available and in any event not later than the expiration of six months from the end of such financial year; and |
| 7.1.2 | a copy of every document issued by or on behalf of the Chargor or by or on behalf of any of its subsidiaries to its members or debenture holders concurrently with the issue thereof to such members or debenture holders as the case may be. |
| 8. | FURTHER ASSURANCE |
| 8.1 | The Chargor will, subject to the requirements of the holder of any prior Permitted Security Interest, upon the Collateral Agent’s request and at the Chargor’s own expense, grant itthe Collateral Agent such further Security Interests in the Charged Assets in such form and on such terms as Collateral Agent may require and do whatever other acts or things Collateral Agent may require in relation to the Charged Assets in order to secure the Secured Liabilities, to perfect or protect the Security Interests created by this Debenture or to facilitate the realisation of the Charged Assets. |
| 9. | POWER OF ATTORNEY |
| 9.1 | The Chargor hereby by way of security and in order more fully to secure the performance of its obligations under this Debenture irrevocably appoints the Collateral Agent and every Receiver or Administrator appointed under this Debenture acting severally to be its attorney and on its behalf and in its name or otherwise to execute and do all such assurances, acts and things which the Chargor is required to do under this Debenture and generally in its name and on its behalf to exercise all or any of the powers, authorities and discretions conferred by or pursuant to this Debenture or by statute on the Collateral Agent or any such Receiver or Administrator and to execute any deed, assurance, agreement, instrument or act which it or he may deem proper in or for the purpose of exercising any of such powers, authorities and discretions. |
| 9.2 | The Chargor hereby ratifies and confirms and agrees to ratify and confirm whatever any such attorney as is mentioned above shall do or purport to do in the exercise or purported exercise of all or any of the powers, authorities and discretions referred to in clause 8.1. |
| 10. | ENFORCEMENT |
| 10.1 | At any time after a Default Collateral Agent may with or without further notice to the Chargor: |
| 10.1.1 | appoint an Administrator of the Chargor in accordance with the Insolvency Act 1986; or |
| 10.1.2 | appoint a Receiver to any of the Charged Assets, provided that they comprise less than the whole or substantially the whole of the Charger’s assets (within the meaning of section 29 Insolvency Act); or |
| 10.1.3 | exercise in respect of all or any of the Charged Assets all or any of the powers and remedies given to mortgagees by the LP A, including the power to take possession of, receive the benefit of, or sell any of the Charged Assets. |
| 10.2 | At any time after a Default, the Collateral Agent may declare by written notice to the Chargor, the Secured Liabilities (or such of them as the Collateral Agent may specify in the relevant notice) immediately due and payable or (if the Collateral Agent so specifies) payable forthwith on demand and the security hereby conferred shall become immediately enforceable and the Collateral Agent’s statutory and other rights shall be immediately exercisable upon and at any time after the occurrence of any such event. |
| 10.3 | After this security has become enforceable the Collateral Agent may in his absolute discretion enforce all or any part of this security in such manner as in his absolute discretion he shall determine. |
| 10.4 | The Chargor hereby covenants that it will immediately notify the Collateral Agent of the occurrence of every event which would constitute a Default and of the occurrence of every event which with the lapse of time will or may constitute a Default. |
| 11. | APPOINTMENT OF A RECEIVER |
| 11.1 | Collateral Agent may either under hand of any manager or by deed appoint any one or more than one person to act as Receiver of those Charged Assets specified in the appointment. |
| 11.2 | Collateral Agent may from time to time fix the remuneration of any Receiver on such basis as it shall determine. This may include a fixed fee or an hourly rate or a commission depending upon the work and responsibilities assumed by the Receiver and the basis of charging applied by his firm. Section 109 LPA shall be varied accordingly. |
| 11.3 | Collateral Agent may remove or replace any Receiver appointed by him. |
| 11.4 | Collateral Agent may extend a Receiver’s appointment to include Charged Assets previously excluded from-his appointment. |
| 11.5 | A Receiver will be the agent of the Chargor and the Chargor will be solely responsible for his acts, omissions, defaults and remuneration. |
| 1.2. | POWERS ON ENFORCEMENT |
| 12.1 | An Administrator will- have all the powers given to him under the Insolvency Act. |
| 12.2 | A Receiver may exercise in respect of the Charged Assets to which he is appointed: |
| 12.2.1 | the same powers to do, or to omit to do, in the name of and on behalf of the Chargor, anything which the Chargor itself could have done or omitted to do with such Charged Assets were they not the subject of this Debenture and the Chargor were not in insolvency proceedings; |
| 12.2.2 | all or any powers given to receivers by the LPA as if such Receiver had been duly appointed thereunder but without any of the restrictions imposed upon the exercise of those powers by the LPA; or |
| 12.2.3 | notwithstanding that he is not an administrative receiver, all or any of the powers specified in Schedule 1 to the Insolvency Act. |
| 12.3 | If more than one person is appointed to act as Receiver, each person may act severally, independent of any other, except to the extent that Collateral Agent states to the contrary in the appointment. References in this Debenture to the Receiver are to each and all of them as appropriate. |
| 12.4 | Except to the extent provided by law, none of the powers described in this Clause 12 will be affected by an insolvency event in relation to the Chargor. |
| 13. | COLLATERAL AGENT’S POWERS AND PROTECTIONS |
| 13.1 | The powers and remedies conferred on Collateral Agent as a mortgagee by the LP A shall not be subject to any of the restrictions imposed by the LP A upon the exercise of those powers and remedies including those imposed by sections 103 and 109 LPA. |
| 13.2 | Collateral Agent may grant or accept surrenders of leases at a premium or otherwise and grant agreements or options for the same on such terms as it shall consider expedient and without the need to observe sections 99 and 100 LPA. |
| 1.3.3 | The restrictions on the right of consolidating mortgages contained in section 93 LPA will not apply to this Debenture. |
| 13.4 | Neither Collateral Agent nor any Receiver nor any Administrator will be liable to account as mortgagee in possession of the Charged Assets or be liable for any loss upon realisation or for any neglect or default of any nature whatsoever for which a mortgagee may be liable. |
| 13.5 | Neither Collateral Agent nor any Receiver is obliged to take any particular action to collect the Chargor’s Book Debts and neither shall be liable to the Chargor for the manner in which it collects or fails to collect an Book Debts. |
| 14. | APPLICATION OF MONIES |
| 14.1 | All money received by Collateral Agent or any Receiver under this Debenture will be applied in the following order: |
| 14.1.1 | first, in or towards payment of liabilities having priority to the Secured Liabilities; |
| 14.1.2 | secondly, in or towards payment of all costs, charges and expenses incurred in or incidental to the exercise or performance (or attempted exercise or performance) by Collateral Agent of any of the powers or authorities conferred by or in any other way connected with this Debenture; |
| 14.1.3 | thirdly, in or towards payment to the Receiver of his remuneration fixed in accordance with this Debenture; |
| 14.1.4 | fourthly, in or towards payment to Collateral Agent on behalf of himself and the Lenders of the Secured Liabilities on a pro rata basis; |
| 14.1.5 | fifthly, in payment to the Chargor of any surplus. |
| 14.2 | Any surplus shall not carry interest. The Receiver or Collateral Agent shall pay any surplus into any of the Chargor’s bank accounts. Collateral Agent shall then have no further liability for such surplus. |
| 14.3 | The application of money pursuant to clause 14.1 shall fully discharge the Chargor’s liability to the Lenders in respect of the Secured Liabilities to the extent of the money so applied and the Collateral Agent shall be solely responsible to ensure that all money that is received by the Collateral Agent or any Receiver that is applied pursuant to clause 14.1 is duly paid to the Lenders. The Chargor shall have no further responsibility to the Lenders in the event that such money is not properly applied by the Collateral Agent or any Receiver. |
| 14.4 | Subject to the rights of the holder of any prior ranking Permitted Security Interest or any landlord, any money received by the Chargor under any insurance of the Charged Assets will be treated as part of the Charged Assets, It will be applied at the discretion of Collateral Agent either in reducing the Secured Liabilities or towards making good the loss or damage for which the money became payable. Any money received by the Chargor under any insurance of the Charged Assets shall be held on trust for Collateral Agent pending such application. |
| 15. | PROTECTION OF THIRD PARTIES |
| 15.1 | Any person dealing with Collateral Agent or a Receiver may assume, unless he has actual knowledge to the contrary that: |
| 15.1.1 | Collateral Agent or such Receiver has the power to do the tilings which they purport to do; and |
| 15.1.2 | they are exercising their powers properly. |
| 15.2 | AH the protections to purchasers by sections 104 and 107 LPA shall apply to any person purchasing from or dealing with any Receiver or Collateral Agent as if the Secured Liabilities had become due and the statutory power of sale and appointing a receiver in relation to the Charged Assets had arisen on the date of this Debenture. |
| 16. | CONTINUING AND ADDITIONAL SECURITY |
| 16.1 | This Debenture is a continuing security. It secures the ultimate balance of the Secured Liabilities despite any interim settlement of account until a final discharge of this Debenture is given by Collateral Agent to the Chargor. |
| 16.2 | Collateral Agent’s rights under this Debenture are in addition to any other rights the Lenders may have against the Chargor (or any other person in respect of the Secured Liabilities) under any other document, the general law or otherwise. They will not merge with or limit those other rights or be limited by mem. |
| 16.3 | Neither Collateral Agent nor the Lenders is obliged to make any claim or demand on the Chargor or any other person or to enforce any guarantee, mortgage or other security now or in future held by it before enforcing this Debenture and no action taken or omitted in connection with any such right or instrument shall discharge, reduce or affect the Chargor’s liability to the Lenders. Neither Collateral Agent nor the Lenders have to account for any money or other asset received pursuant to any such right or instrument. |
| 17. | EXPENSES AND INDEMNITIES |
| 17.1 | The Chargor will on demand pay all professionals’ fees (including VAT) and any other costs, charges or expenses (on a full indemnity basis) incurred by Collateral Agent and any Administrator or Receiver in connection with the actual or attempted perfection, preservation, defence or enforcement of this Debenture or the preservation or disposal of any Charged Assets or the exercise of any power under this Debenture or any amendment, waiver, consent or release of this Debenture. |
| 17.2 | The Chargor will on demand indemnify any Administrator and any Receiver and any of its and their officers and employees and any attorney, agent or other person appointed by Collateral Agent under this Debenture (each an “Indemnified Party”) in respect of all costs, losses, actions, claims, expenses, demands or liabilities whether in contract, tort, or otherwise and whether arising at common law, in equity or by statute which may be incurred by, or made against any of them at any time relating to or arising directly or indirectly out of: |
| 17.2.1 | anything done or omitted to be done in the exercise or purported exercise of the powers contained in this Debenture; or |
| 17.2.2 | a claim of any kind (including one relating to the environment) made or asserted against any Indemnified Party which would not have arisen if this Debenture had not been executed; |
| 17.2.3 | any breach by the Chargor of any of its obligations under this Debenture; unless, in the case of 17.2.1 and J 7.2.2 it was caused by the gross negligence or wilful misconduct of the Indemnified Party. |
| 17.3 | Neither Collateral Agent nor any Receiver nor any officer nor employee of either of them shall in any way be liable or responsible to the Chargor for any loss or liability of any kind arising from any act or omission by him or it of any kind (whether as mortgagee in possession or otherwise) in relation to the Charged Assets, except to the extent caused by his or its own gross negligence or wilful misconduct. |
| 18. | PAYMENTS |
| 18.1 | Collateral Agent or any Receiver may convert any money received, recovered or realised under this Debenture (including the proceeds of any previous conversion) into such currency as Collateral Agent or such Receiver may think fit in order to discharge the Secured Liabilities. Any such conversion shall be effected at the then prevailing spot selling rate of exchange of Collateral Agent’s bankers for such other currency against the existing currency. |
| 18.22 | If the amount of the currency so converted is less than the amount of the Secured Liability concerned, the Chargor will indemnify Collateral Agent in respect of that shortfall. |
| 18.3 | Any certificate signed by Collateral Agent as to any amount payable under this Debenture at the date of such certificate shall, in the absence of manifest error, be conclusive evidence of such amount and be binding on the Chargor. |
| 184 | All amounts payable by the Chargor under this Debenture will be paid in full without set off or other deduction. |
| 18.5 | Collateral Agent may at any time witliout notice set off against any Secured Liabilities any amount owed by it to the Chargor. Collateral Agent may effect such set off by transferring all or any part of any balance standing to the credit of any of the Ghargor’s accounts with it to any other account or by combining or consolidating such accounts. |
| 19. | DISCHARGE |
| 19.1 | Upon the Secured Liabilities being irrevocably and unconditionally paid or discharged in full, Collateral Agent will, at the request of the Chargor, release this Debenture. Collateral Agent will also transfer to the Chargor any Charged Assets which have been assigned or transferred to Collateral Agent. |
| 19.2 | If any payment by the Chargor or any other person or any release given by Collateral Agent is avoided or adjusted pursuant to the Insolvency Act: |
| 19.2.1 | the Chargor’s liability for the Secured Liabilities will continue as if the payment, release, avoidance or adjustment had not occurred; and |
| 19.2.2 | Collateral Agent will be entitled to recover the value or amount of that payment or security from the Chargor as if the payment, release, avoidance or adjustment had not occurred. |
| 20. | TRANSFERS AND DISCLOSURES |
| 20.1 | Collateral Agent may not novate or assign this Debenture or sub-contract or delegate his obligations or duties under it save as expressly provided in this Debenture. |
| 20.2 | The Chargor may not assign, transfer, delegate or make any declaration of trust of any of its rights or obligations under this Debenture. |
| 21. | MISCELLANEOUS |
| 21.1 | No delay or failure by Collateral Agent to exercise any right or remedy under this Debenture shall impair or operate as a waiver of that right or remedy. Any single, partial or defective exercise of any such power, right or remedy shall not prevent the further exercise of that or any other right or remedy. |
| 21.2 | Any waiver, consent or approval given by Collateral Agent of or under this Debenture will only be effective if given in writing. Such waiver, consent or approval shall then only apply for the purpose stated and be subject to any written terms and conditions imposed by Collateral Agent. |
| 21.3 | If at any time any one or more of the provisions of this Debenture is or becomes illegal, invalid or unenforceable in any respect under the law of any jurisdiction then neither the legality, validity or enforceability of the remaining provisions of this Debenture 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. |
| 21.4 | Each Indemnified Party may enforce the terms of this Debenture in accordance with the Contracts (Rights of Third Parties) Act 1999. Apart from the Indemnified Parties and the parties to this Debenture, no other person may enforce its terms. |
| 21.5 | Coilateral Agent may grant releases of or waivers under this Debenture and he and the Chargor may agree variations to its terms without either notifying the Indemnified Parties or obtaining their consent. |
| 22. | SERVICE OF NOTICES AND PROCESS |
| 22.1 | Any notice, request, demand, consent, approval, notification, instruction, proceedings or other communication from Collateral Agent to the Chargor under this Debenture shall be in writing and may be sent by post or courier. Any such communication shall be addressed to the Chargor at its address given in this Debenture, its registered office or the address last known to Collateral Agent at which it carried on business and shall be treated as served: |
| 22.1.1 | if delivered by courier or personally: at the time of delivery; |
| 22.1.2 | if posted: 48 hours after posting or upon receipt (whichever is earlier). |
| 22.2 | Any notice, request or other communication under this Debenture from the Chargor to Collateral Agent must be in writing and sent by first class post to Collateral Agent’s registered office or such other address as Collateral Agent advises the Chargor in writing for this purpose and will be treated as served. |
| 22.2.1 | if it is received during business hours on a Working Day; on receipt; or |
| 22.2.2 | if it is received outside business hours or on a day which is not a Working Day: on the first Working Day after receipt. |
| 23. | JURISDICTION |
| 23.1 | This Debenture shall be governed by and construed in accordance with the iaws of England. The Chargor accepts the non-exclusive jurisdiction of the English Courts in connection with any matter arising under this Debenture. |
| 24. | DEFINITIONS AND INTERPRETATION |
| 24.1 | Any word whose meaning is defined in the Receivables Finance Agreement has the same meaning in this Debenture. |
| 24.2 | In this Debenture the following words have the meanings set out opposite them: |
| “Administrator” | any person appointed under the Insolvency Act 1986 to manage the Charger’s business and assets. |
| “Book Debts” | all present and future book and other debts and monetary claims due or owing to the Chargor, and the benefit of all security, guarantees and other rights of any nature enjoyed or held by the Chargor in relation to any of them; |
| “Charged Assets” | the subject matter of the mortgages and charges created by this Debenture and set out at clause 2. |
| “Default” | Any of the following: |
| (i) any event or circumstance which would constitute an “Event of Default” (as defined in any of the Subordinated Contingent Notes.) under any such Subordinated Contingent Note; | |
| (ii) the Chargor requesting the Collateral Agent to appoint an Administrator or Receiver or to take possession; | |
| (iii) the Chargor breaching (or being found to have breached) any of the covenants or warranties given by it to the Collateral Agent in this Debenture. | |
| “Dispose” or “Disposal” | includes sale, transfer, lease, licence, or parting with possession or granting any interest in. |
| “Equipment” | any plant, machinery and/or other equipment charged to Collateral Agent by this Debenture. |
| “Expenses” | those fees, cost, charges and expenses covenanted to be paid by the Chargor in clause 17.1. |
| “Indemnified Events” | those matters and events in respect of which the Chargor is liable to indemnify or reimburse Collateral Agent, including those referred to in clauses 5.2 and 16. |
| “Insolvency Act” | Insolvency Act 1986 and any secondary legislation made under it. |
| “Intellectual Property” | all patents (including applications, improvements, prolongations, extensions and right to apply therefor), design rights., trade marks and service marks (whether registered or unregistered) and applications for the same, copyright, trade, brand, domain and business names, know-how, confidential information, trade secrets, databases and computer software programs and systems and all other intellectual or intangible property (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 of the world. |
| “Lenders” | means the persons listed in Schedule 5 (each, a “Lender”) |
| “LPA” | Law of Property Act 1925. |
| “Permitted Security Interest” | any Security Interest specified in Schedule 4 and any lien arising by operation of law in the ordinary course of trading over property other than land. |
| “Property” | any freehold or leasehold property owned or occupied by the Chargor. |
| “Receiver” | any receiver or receiver and manager who is not an administrative receiver (within the meaning of section 29(2) Insolvency Act) appointed under this Debenture. |
| “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. |
| “Security Interest” | any mortgage, charge, pledge, trust, preferential right, assignment by way of security, hypothecation, lien, or any other arrangement for the purpose of or having a similar effect to creating security or any title retention rights or any set off rights created by agreement. |
| “Securities”. | all stocks, shares, bonds and securities of any kind whatsoever (including warrants and options to acquire or subscribe for any of the same) and whether marketable or not, held by the Chargor now or at any time in the future including all allotments, rights and benefits at any time accruing, offered or arising in respect of or incidental to the same and all money or property accruing or offered at any time by way of dividend, distribution, conversion, redemption, bonus, preference, option, interest or otherwise in respect thereof. |
| 21.3 | in this Debenture: |
| 21.3.1 | unless the context requires otherwise, the singular includes the plural and vice versa and any reference to a gender includes any other gender; |
| 21.3.2 | headings to clauses are for reference only and shall not affect the interpretation of this Debenture; |
| 21.3.3 | references to clauses and to Schedules are to the clauses of and schedules to this Debenture; |
| 21.3.4 | references to a “person”, include individuals, firms, partnerships, corporations, unincorporated bodies and government entities; |
| 21.3.5 | references to any Act of Parliament include that Act as amended, modified or re-enacted from time to time and all rules, regulations, orders and subordinate legislation made pursuant to it; any provision of this Debenture which refers to an Act which is amended, may itself be amended in such manner as Collateral Agent may determine to preserve the intended effect of this Debenture; |
| 21.3.6 | references to this “Debenture” or any other document are to this Debenture or that document as from time to time amended, supplemented, restated, novated or replaced, however fundamentally; |
| 21.3.7 | references to the “Charged Assets” are to the whole or any part of such property or assets, as the context requires; |
| 21.3.8 | whenever the Chargor is obliged to do something if required or requested by Collateral Agent, it shall do that thing promptly; |
| 21.3.9 | the meaning of general words introduced by the word “other” or (followed by the word “including”) shall not be limited by reference to any preceding (or following) word or enumeration indicating a particular class of acts, matters or things. |
| 21.4 | It is intended that this Debenture takes effect as a deed even though Collateral Agent may only execute it under hand. |
| 21.5 | This Debenture may be executed in counterparts. |
| 21.6 | Any term or phrase defined in the Companies Act 1985 and 2006 (whether capitalised or not) bears the same meaning in this Debenture. |
SCHEDULE 1
Amended and Restated Security Agreement
THIS
SECURITY AGREEMENT IS OR WILL BE SUBJECT TO SUBORDINATION
AGREEMENTS BETWEEN COLLATERAL AGENT AND THE HOLDERS OF THE
SENIOR INDEBTEDNESS
AMENDED AND RESTATED SECURITY AGREEMENT
THIS AMENDED AND RESTATED SECURITY AGREEMENT (the “Security Agreement”), is made as of August 31, 2010, by and among EMRISE Electronics Corporation, a New Jersey corporation (“Borrower”), EMRISE Corporation, a Delaware corporation (“Parent”), the Subsidiaries (as listed on Exhibit A), Charles S. Brand, an individual (“Collateral Agent”), and the persons and entities listed on the Schedule of Lenders attached hereto as Exhibit A (each, a “Lender” and collectively, the “Lenders”).
RECITALS
A. Borrower and the Lenders are parties to that certain Stock Purchase Agreement dated as of May 23, 2008 (the “Stock Purchase Agreement”) relating to the purchase by Borrower of all of the issued and outstanding shares of capital stock (collectively, the “Shares”) of (i) Advanced Control Components, Inc., a New Jersey corporation (“ACC”) owned by Thomas P. M. Couse, Joanne Couse and Michael Gaffney and (ii) Custom Components, Inc. owned by Charles S, Brand. As a result of the consummation of the Stock Purchase Agreement, Borrower beneficially owned all of the capital stock of ACC.
B. Pursuant to the terms of the Stock Purchase Agreement, Borrower issued certain subordinated secured contingent promissory notes (as amended, are referred to herein as the “Subordinated Contingent Notes”) to the Lenders to satisfy a portion of the aggregate consideration to be paid by Borrower for the purchase of the Shares. The Subordinated Contingent Notes were amended in November 2009 to add additional payment amounts, and to modify the payment date and terms. The Subordinated Contingent Notes have been amended by Amendment No. 2 of even date herewith.
C. Parent, the ultimate parent of Borrower, delivered a Continuing Guaranty dated August 20, 2008 (the “Guaranty”) in favor of the Lenders pursuant to which the obligations of Borrower to the Lenders under the Subordinated Contingent Notes were guaranteed by Parent.
D. The Lenders subordinated the indebtedness owed to them under the Subordinated Contingent Notes to the holder of the Senior Indebtedness pursuant to that certain Subordination Agreement between the Collateral Agent and GVEC Resource IV Inc. dated as of August 20, 2008 (the “GVEC Subordination Agreement”).
E. On June 7, 2010, Borrower entered into an agreement to sell its direct and indirect interests in the Shares (the “Sale Transaction”). In connection with the Sale Transaction, the Borrower, Parent and the Lenders entered into a Master Agreement, pursuant to which the Lenders agreed to release their lien on all of the assets or property of ACC (the “Original Collateral”).
F. The parties desire to enter into this Amended and Restated Security Agreement to grant the Collateral Agent, for the benefit of himself and the Lenders, a security interest in the collateral described below as substitute collateral for the Original Collateral.
G. To perfect their grant of a security interest hereunder, each of XCEL Power Systems, Ltd. and Pascall Electronies Limited will enter into an AH Assets Debenture dated as of the date hereof in favor of the Collateral Agent (each, a “UK Debenture”).
H. The Collateral Agent will enter into that certain Deed of Priorities dated as of the date hereof between Lloyds TSB Commercial Finance Limited, GVEC Resource IV, Inc., Collateral Agent and XCEL Power Systems, Ltd. (the “XCEL Deed”) and that certain Deed of Priorities dated as of the date hereof between Lloyds TSB Commercial Finance Limited, GVEC Resource IV, Inc., Collateral Agent and Pascall Electronics Limited (the “Pascall Deed” and collectively with the GVEC Subordination Agreement and the XCEL Deed, the “Subordination Agreements”).
I. The Subordinated Contingent Note held by Michael Gaffney has been paid in full and he is no longer a “Lender” hereunder.
NOW, THEREFORE, in consideration of the foregoing premises and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows:
1. Definitions and Interpretation. Unless otherwise defined herein, all other capitalized terms used herein and defined in the Subordinated Contingent Notes shall have the respective meanings given to those terms in the Subordinated Contingent Notes, and all terms defined in the New Jersey Uniform Commercial Code (the “UCC”) shall have the respective meanings given to those terms in the UCC.
2. Grant of Security Interest.
2.1 To secure the Obligations as defined in Section 3 hereof, each of the Subsidiaries hereby grants to Collateral Agent a continuing security interest and lien in and to all of the assets and properties of the Subsidiaries, whether now owned or existing or hereafter acquired or arising and regardless of where located and all additions and accessions thereto, substitutions and replacements therefor, and all proceeds thereof (the “Collateral”), including, without limitation, the following property: all tangible and intangible assets of the Subsidiaries, including, but not limited to, all existing and future inventory, accounts, deposit accounts, accounts receivable, furniture, fixtures, equipment, general intangibles, books and records, patents, patent applications, trademarks, copyrights, trade secrets, and any other property interest or proprietary right, as well as any document, instrument or drawings embodying the same.
2.2 Borrower, Parent and each of the Subsidiaries hereby jointly and severally warrant and represent to and covenant and agree with the Collateral Agent and the Lenders that the continuing security interest and lien granted pursuant to this Security Agreement is and shall at ail times be a priority security interest in the assets of each Subsidiary, subordinate only to Senior Indebtedness.
3. Security for Obligations. The obligations secured by this Security Agreement (the “Obligations”) shall mean and include all obligations of Borrower as provided in (i) the Subordinated Contingent Notes, (ii) the Stock Purchase Agreement, and (iii) all of the other Related Agreements (as such term is defined in the Stock Purchase Agreement).
4. Possession and Location of Collateral. Unless and until any default occurs hereunder as set forth in Section 11 hereof, each of the Subsidiaries shall have possession of its Collateral for its use and enjoyment in any lawful manner not inconsistent with this Security Agreement or the Subordinated Contingent Notes, The Collateral will be kept at any of Parent’s place of business or the place of business of any of the Subsidiaries (or such other places as any of Parent or the Subsidiaries customarily keeps the Collateral) with respect to such Collateral and will not be moved therefrom without the prior written consent of Collateral Agent, except that Parent and the Subsidiaries may make sales of inventory items in the ordinary course of business. No Subsidiary shall replace or make material alterations in the Collateral without the prior written consent of Collateral Agent. The consent of Collateral Agent required hereby shall not be unreasonably withheld.
5. Financing Statements. Concurrently with the execution of this Security Agreement, each of the Subsidiaries shall execute and deliver to Collateral Agent (a) the UCC-1 financing statement, or its foreign equivalent, provided by Collateral Agent evidencing the Collateral Agent’s interest in the Collateral and (b) a UCC-3 financing statement provided by Collateral Agent evidencing Collateral Agent’s release of its lien on the Original Collateral. Collateral Agent hereby authorizes and directs each of Borrower and Parent to file or cause to be filed the UCC-3 financing statement.
6. Transfer, Taxes, Liens and Encumbrances. Each of the Subsidiaries represents and warrants that it has title to its respective Collateral free and clear of any lien, security interest or encumbrance, except for the security interests of the holders of the Senior Indebtedness and the security interest created by this Security Agreement, and if such Subsidiary is party to a UK Debenture, the applicable UK Debenture. Title to the Collateral will remain in and continue to be vested in each respective Subsidiary. Each of the Subsidiaries will defend its Collateral and will not sell, offer to sell or otherwise transfer the Collateral, any portion thereof, or any interest therein, without the prior written consent of Collateral Agent, except that Parent and Subsidiaries may make sales of inventory items in the ordinary course of business. The consent of Collateral Agent required hereby shall not be unreasonably withheld. As applicable, Parent, Borrower or the Subsidiaries shall pay ail taxes, assessments and other charges made against the Collateral.
7. Risk of Loss and Inspection of Collateral. As applicable, Parent or the Subsidiaries shall have all risk of loss of the Collateral, and each Subsidiary will keep its Collateral in good order and repair. Collateral Agent shall have the right, at any reasonable time, to enter upon the premises where the Collateral is located to examine and inspect the Collateral in person or by agent. Any refusal to permit such entry shall be a breach of this Security Agreement.
8. Insurance. As applicable, Parent or the Subsidiaries shall keep the Collateral insured, at its own expense, in an amount not less than its full insurable value, against loss by fire, theft, vandalism and malicious mischief, storm, earthquake and extended coverage, and shall cause the Lenders to be named as additional insured parties and loss payees in such insurance, and furnish to Collateral Agent written evidence thereof.
9. Representations and Warranties. Borrower, Parent and each of the Subsidiaries hereby jointly and severally represent and warrant to Collateral Agent and the Lenders that: (i) each of Borrower, Parent and the Subsidiaries has full power and authority to enter into this Security Agreement (and, if party to a UK Debenture, such UK Debenture) and to grant the security interest and lien in and to the Collateral and has taken all proper and necessary actions to authorize the execution, delivery and performance of this Security Agreement (and, if party to a UK Debenture, such UK Debenture); (ii) that the Parent owns one hundred percent (100%) of the issued and outstanding capital stock, directly or indirectly, of the Borrower and each of the Subsidiaries; (Hi) this Agreement is valid and binding upon and enforceable against Borrower, Parent and Subsidiaries, except as such enforceability may be limited by applicable insolvency, bankruptcy, reorganization, moratorium or other similar laws affecting creditors’ rights generally and genera! principles of equity; and (iv) the making and performance of this Security Agreement (and if a party to a UK Debenture, such UK Debenture) by Borrower, Parent and the Subsidiaries will not conflict with their respective certificates of incorporation, bylaws, or other organizational documents, breach or violate any law, statute, rule or regulation of, or any judgment, order, decree, writ, injunction or award issued by any governmental authority or violate or result in a default (immediately or with the passage of time or notice or both) under any contract, indenture, agreement or instrument to which Borrower, Parent or the Subsidiaries, as applicable, is a party, or by which any of Borrower, Parent or the Subsidiaries is bound.
10. Covenants. Borrower, Parent and each of the Subsidiaries hereby agree as follows:
10.1 (Liens on Collateral) not to create, incur, assume or suffer to exist any lien or security interest of any kind upon the Collateral other than in favor of the holders of any Senior Indebtedness; provided that no additional liens or security interest will be granted in favor of MeDermott and Yost as defined in the Note;
10.2 (Further Assurances) that at any time and from time to time, at Parent’s expense, Parent, Borrower and the Subsidiaries will promptly execute and deliver all further instruments and documents and take all further action, that may be necessary or desirable, or that Collateral Agent may reasonably request, in order to perfect and protect any security interest granted or purported to be granted hereby or to enable Collateral Agent to exercise and enforce Collateral Agent’s rights and remedies hereunder with respect to any Collateral;
10.3 (Parent Financial Statements) from and after the date hereof until the Notes are paid in full, on a quarterly basis within five (5) business days after the scheduled filing date (including any extensions pursuant to Rule 12b-25 of the Securities Exchange Act of 1934) for Parent’s Form 10-Q or Form 10-K, as applicable, with the Securities and Exchange Commission, Parent will provide Collateral Agent with copies of Parent’s quarterly and annual financial statements and any related notes;
10.4 (Parent, Borrower and Subsidiary Financial Statements) from and after the date hereof until the Notes are paid in full, on a quarterly basis within forty-five (45) days after the end of each fiscal quarter, and within sixty (60) days after the end of each fiscal year, Parent Borrower and each Subsidiary will provide Collateral Agent with copies of separate company quarterly and annual financial statements and any related notes for each of Parent (only to the extent such separate company financial statements may no be longer required to be filed with the Securities and Exchange Commission), Borrower and each Subsidiary;
10.5 (Sale of Parent, Borrower or Subsidiaries), in the event that Parent, Borrower or any of the Subsidiaries or any assets of the Subsidiaries (other than assets of the Subsidiaries sold in the ordinary course of business) is proposed to be sold, including by way of stock sale, merger or otherwise, the Parent shall provide notice to the Collateral Agent of such proposed sale promptly and to the extent possible at least thirty (30) days prior to the consummation thereof and in no event less than fourteen (14) days prior to the consummation thereof; and
10.6 (Senior Indebtedness), on an aggregate basis, not to incur Senior Indebtedness in an amount outstanding exceeding Fifteen Million Dollars ($15,000,000) without the prior written approval of the Lenders (which shall not be unreasonably withheld) and, in no event, in an amount outstanding exceeding Twenty Million Dollars ($20,000,000).
11. Events of Default; Remedies.
11.1 Event of Default. An Event of Default shall be deemed to have occurred under this Security Agreement upon the occurrence and during the continuance of an Event of Default (as defined in the Subordinated Contingent Notes).
11.2 Rights Under the UCC. In addition to all other rights granted hereby and by the UK Debentures, and otherwise by law, subject to the Subordination Agreements, Collateral Agent shall have, with respect to the Collateral, the rights and obligations of a secured party under the UCC.
11.3 Notice, Etc. In any case where notice of sale is required, ten (10) days notice shall be deemed reasonable notice. Subject to the Subordination Agreements, Collateral Agent may have resort to the Collateral or any portion thereof with no requirement on the part of Collateral Agent to proceed first against any other Person (as defined in the Subordinated Contingent Notes) or property.
11.4 Other Remedies. Upon the occurrence and during the continuance of an Event of Default, subject to the Subordination Agreements, at the request of Collateral Agent, Parent, Borrower and each Subsidiary, as applicable, shall assemble and make available to Collateral Agent all of the Collateral at a place or places reasonably convenient to each of Borrower, Parent and the Subsididaries, as applicable, and Collateral Agent; provided, however, that none of Parent, Borrower or any Subsidiary shall be obligated under this Agreement to ship any Collateral internationally.
11.5 Application of Collateral Proceeds. Subject to the Subordination Agreements, the proceeds and/or avails of the Collateral, or any part thereof, and the proceeds and the avails of any remedy hereunder (as well as any other amounts of any kind held by Collateral Agent at the time of, or received by Collateral Agent after, the occurrence of an Event of Default) shall be paid to and applied as follows:
(a) first, to the payment of reasonable costs and expenses, including all amounts expended to preserve the value of the Collateral, of foreclosure or suit, if any, and of such sale and the exercise of any other rights or remedies, and of all proper fees, expenses, liability and advances, including reasonable legal expenses and attorneys’ fees, incurred or made hereunder by Collateral Agent;
(b) second, to the payment to each Lender of the amount then owing or unpaid on such Lender’s Subordinated Contingent Note, and in case such proceeds shall be insufficient to pay in full the whole amount so due, owing or unpaid upon such Subordinated Contingent Note, then its Pro Rata Share of the amount remaining to be distributed (to be applied first to accrued interest and second to outstanding principal); and
(c) third, to the payment of the surplus, if any, to Borrower, its successors and assigns, or to whomsoever may be lawfully entitled to receive the same.
For purposes of this Security Agreement the term “Pro Rata Share” shall mean, when calculating a Lender’s portion of any distribution or amount, that distribution or amount (expressed as a percentage) equal to a fraction (i) the numerator of which is the outstanding principal amount of such Lender’s Subordinated Contingent Note as set forth on Exhibit A hereto, and (ii) the denominator of which is the aggregate outstanding principal amount of all Subordinated Contingent Notes issued under the Stock Purchase Agreement as set forth on Exhibit A hereto. In the event that a Lender receives payments or distributions in excess of its Pro Rata Share, then such Lender shall hold in trust all such excess payments or distributions for the benefit of the other Lenders and shall pay such amounts held in trust to such other Lenders upon demand by such Lenders.
12. Authorized Action by Collateral Agent.
(a) Borrower, Parent and each of the Subsidiaries each hereby appoint Collateral Agent as attorney-in-fact for each of Borrower, Parent and each Subsidiary, respectively, with full authority in the place and stead of Borrower, Parent and each Subsidiary, respectively, and in the name of Borrower, Parent and each Subsidiary, as applicable, or otherwise, from time to time in Collateral Agent’s discretion and to the full extent permitted by law to take any action and to execute any instrument which Collateral Agent may deem reasonably necessary or advisable to accomplish the purposes of this Security Agreement in accordance with the terms and provisions hereof, including without limitation, to receive, endorse and collect all instruments made payable to Borrower, Parent or any Subsidiary representing any dividend, interest payment or other distribution in respect of the Collateral or any part thereof and to give full discharge for the same.
(b) This power of attorney is a power coupled with an interest and shall be irrevocable. The powers conferred on Collateral Agent hereunder are solely to protect the Collateral Agent and Lenders’ interests in the Collateral and shall not impose any duty upon Collateral Agent to exercise any such powers. Collateral Agent shall be accountable only for amounts that he actually receives as a result of the exercise of such powers and in no event shall Collateral Agent or any of his employees or agents be responsible to Borrower, Parent or any Subsidiary for any act or failure to act, except for gross negligence or willful misconduct.
13. Collateral Agent.
13.1 Appointment. The Lenders hereby appoint Charles S. Brand as Collateral Agent for the Lenders under this Security Agreement (in such capacity, the “Collateral Agent”) to serve from the date hereof until the termination of this Security Agreement.
13.2 Powers and Duties of Collateral Agent Indemnity by Lenders.
(a) Each Lender hereby irrevocably authorizes the Collateral Agent to take such action and to exercise such powers hereunder as provided herein, together with such powers as are reasonably incidental thereto. Collateral Agent may execute any of his duties hereunder by or through agents or employees at his discretion.
(b) Upon the death or resignation of the Collateral Agent, the Lenders shall appoint a successor collateral agent to act under the Subordinated Contingent Notes and this Security Agreement. If no such successor collateral agent shall have been so appointed by the Lenders and shall have accepted such appointment within thirty (30) days after Collateral Agent’s death or giving of notice of resignation as Collateral Agent, then Collateral Agent shall be deemed to be Thomas P. M. Couse or his successor-in-interest to his Subordinated Contingent Note. Upon the acceptance of any appointment as successor collateral agent hereunder by a successor collateral agent, such successor collateral agent shall thereupon succeed to and become vested with all rights, powers, privileges, duties and obligations of Collateral Agent hereunder, and the Collateral Agent shall be discharged from his duties and obligations. After Collateral Agent’s death or resignation hereunder as the Collateral Agent, the provisions of this Section 13 shall continue in effect for his benefit in respect of any actions taken or omitted to be taken by him while he was acting as such Collateral Agent.
14. Miscellaneous.
14.1 Notices. Any notice, request or other communication required or permitted hereunder shall be in writing and shall be deemed to have been duly given if personally delivered or mailed by registered or certified mail, postage prepaid, or by recognized overnight courier or persona! delivery at the respective addresses of the parties as set forth on Exhibit A hereto or on the register maintained by the Parent. Any party hereto may by notice so given change its address for future notice hereunder. Notice shall conclusively be deemed to have been given when received.
14.2 Nonwaiver. No failure or delay on Borrower, Parent, a Subsidiary, Collateral Agent or Lenders’ part in exercising any right hereunder shall operate as a waiver thereof or of any other right nor shall any single or partial exercise of any such right preclude any other further exercise thereof or of any other right.
1.4.3 Amendments and Waivers. This Security Agreement may not be amended or modified, nor may any of its terms be waived, except by written instruments signed by Borrower, Parent, each Subsidiary and Collateral Agent. Each waiver or consent under any provision hereof shall be effective only in the specific instances for the purpose for which given.
14.4 Assignments. This Security Agreement shall be binding upon and inure to the benefit of Lenders, Collateral Agent, Parent, Borrower and each Subsidiary and their respective successors, assigns, heirs, beneficiaries and legal representatives; provided, however, that none of Borrower, Parent and any Subsidiary may assign their respective rights and duties hereunder without the prior written consent of Collateral Agent.
14.5 Cumulative Rights, etc. The rights, powers and remedies of Lenders and Collateral Agent under this Security Agreement shall be in addition to all rights, powers and remedies given to Lenders and Collateral Agent by virtue of any applicable law, rule or regulation of any governmental authority, the Stock Purchase Agreement, the Subordinated Contingent Notes, the Guaranty, the UK Debentures, the XCEL Deeed, the Pascal! Deed or any other agreement, all of which rights, powers, and remedies shall be cumulative and may be exercised successively or concurrently without impairing Collateral Agent’s rights hereunder. Each of Borrower, Parent and each Subsidiary waive any right to require Collateral Agent or Lenders to proceed against any Person or to exhaust any collateral or to pursue any remedy in Collateral Agent or Lenders’ power.
14.6 Partial Invalidity. If at any time any provision of this Security Agreement is or becomes illegal, invalid or unenforceable in any respect under the law or any jurisdiction, neither the legality, validity or enforceability of the remaining provisions of this Security Agreement nor the legality, validity or enforceability of such provision under the law of any other jurisdiction shall in any way be affected or impaired thereby.
14.7 Expenses. Parent, Borrower and each Subsidiary, jointly and severally. agree to pay on demand all reasonable fees and expenses, including reasonable attorneys’ fees and expenses, incurred by Collateral Agent with respect to any amendments or waivers hereof requested by Parent, Borrower or a Subsidiary or in the enforcement or attempted enforcement of any of the Obligations or in preserving any of Collateral Agent’s or Lenders’ rights and remedies (including, without limitation, all such fees and expenses incurred in connection with any “workout” or restructuring affecting this Security Agreement, the Subordinated Contingent Notes, the Guaranty, the UK Debentures, the XCEL Deeed, the Paseall Deed or the Obligations or any bankruptcy or similar proceeding involving Parent, Borrower or any Subsidiary).
14.8 Governing Law; Jurisdiction. This Security Agreement shall be governed by and construed in accordance with the laws of the State of New Jersey without reference to conflicts of law rules (except to the extent governed by the UCC). Any action or proceeding seeking to enforce any provision of, or based on any right arising out of, this Security Agreement, may be brought against any party to this Security Agreement in the courts of the State of New Jersey, Monmouth County, or, if it has or can acquire jurisdiction, the United States
District Court for the District of New Jersey, and each of the parties hereto consents to the jurisdiction of such courts (and of the appropriate appellate courts) in any such action or proceeding and waives any objection to venue laid therein. Process in any action or proceeding referred to in the preceding sentence may be served on any party anywhere in the world.
14.9 Jury Trial. BORROWER, PARENT, EACH SUBSIDIARY, LENDERS AND COLLATERAL AGENT, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, HEREBY IRREVOCABLY WAIVE ALL RIGHT TO TRIAL BY JURY AS TO ANY ISSUE RELATING HERETO IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS SECURITY AGREEMENT.
[Signature page follows.]
IN WITNESS WHEREOF, the parties have caused this Security Agreement to be executed as of the day and year first above written.
| EMRISE ELECTRONICS CORPORATION, | ||
| a New Jersey corporation | ||
| By: | ||
| Name: | ||
| Its: | ||
| EMRISE CORPORATION, | ||
| a Delaware corporation | ||
| By: | ||
| Name: | ||
| Its: | ||
| CXR LARUS CORPORATION, | ||
| a Delaware corporation | ||
| By: | ||
| Name: | ||
| Its: | ||
| PASCALL ELECTRONICS LIMITED, | ||
| a United Kingdom corporation | ||
| By: | ||
| Name: | ||
| Its: | ||
| XCEL POWER SYSTEMS, LTD., | ||
| a United Kingdom corporation | ||
| By: | ||
| Name: | ||
| Its: | ||
| Charles S. Brand, as Collateral Agent | ||
| See Schedule of Lenders on Exhibit A for signatures of Lenders. | ||
Amended and Restated Security Agreement
EXHIBIT A
Schedule of Subsidiaries
| ● | CXR Larus Corporation, a Delaware corporation | |
| ● | Pascall Electronics Limited, a United Kingdom company | |
| ● | XCEL Power Systems, Ltd., a United Kingdom company |
Schedule of Lenders
| Lender’s Name and Address | Principal
Amount of Note outstanding on August 31, 2010 | Lender’s Signature | ||||
| Charles
S. Brand 175 Boundary Road | ||||||
| Colts
Neck, NJ 07722 | $ | 2,211,766.43 | Charles S. Brand | |||
| Thomas P. M. Couse | ||||||
| 1
Waltham Way Jackson, NJ 08527 | $ | 332,720.81 | Charles S. Brand, as attorney in feet for Thomas P.M. Couse | |||
| Joanne Couse 1 | ||||||
| Waltham
Way Jackson, NJ 08527 | $ | 332,720.81 | Charles S. Brand, as attorney in fact for Joanne Couse | |||
| Aggregate Principal Amount: | $ | 2,877,208.05 | ||||
Amended and Restated Security Agreement
SCHEDULE 2
Registered Land
Description
All freehold property known as Cothey Way, Ryde, Isle of Wight, P033 1QT
We LLOYDS TSB BANK PLC (the “Bank”) of” 2nd Floor, 25 Gresham Street, London EC2V 7HN offer you EMRISE ELECTRONICS LIMITED (company registered number 01969006) of Cobbswood Industrial Estate, Brunswick Road, Ashford, Kent TN23 I EH a loan on the following terms and conditions.
SPECIFIC TERMS AND CONDITIONS
THE LOAN
The maximum amount of the loan shall be £750.000. This amount is to be used for the refinancing of your existing indebtedness with the Bank. The loan shall be borrowed in one amount on or before 31st August 2011 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. 309716 00450767.
Interest is to be payable at a fixed rate and, because of this, if for any reason the loan is not borrowed on the date agreed, including non-satisfaction of the PRECONDITIONS set out below, you shall pay to the Bank the administration fee and any Break Cost as provided in clause 2.3 of the GENERAL TERMS AND CONDITIONS.
Unless the Rank 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 to 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 security at any time given in connection with this agreement and in connection with the revaluation of any such security from time to lime. These costs and expenses may arise whether or not the loan is made available to you. Except in the case of the costs detailed below, the Bank will provide you with an estimate of the amount of any such costs and expenses before they are payable. The following charges shall be paid by you on demand by the Bank.
Security Costs £250 (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 £11,250 is also payable. This fee shall be paid to the Bank by you on the date the loan is borrowed.
As mentioned in EARLY REPAYMENT FEES AND COSTS below and in clauses 2, 3, 5 & 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 a fixed rate equal to the aggregate of an interest margin of 4.75% per annum and the rate (inclusive of regulatory costs - see clause 3.2 of the GENERAL TERMS AND CONDITIONS) quoted by the Bank’s Wholesale Markets division at or about the time of borrowing for the term of the loan.
Interest shall be paid by you 1 month after the date the loan is borrowed, 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 60 consecutive monthly instalments in respect of principal only, commencing on the date which is 1 month after the date the loan is borrowed. The amount of these instalments will vary so that the total principal and interest to be paid by you each month is more or less equal.
EARLY REPAYMENT FEES AND COSTS
The loan may be repaid early in accordance with clause 2 of the GENERAL TERMS AND CONDITIONS. You shall, at the time an early repayment is made, pay to the Bank the administration fee and any Break Cost as provided in clause 2.3 of the GENERAL TERMS AND CONDITIONS.
| Continuation of a LOAN AGREEMENT between LLOYDS TSB BANK PlC and EMRISE ELECTRONICS LIMITED | 2 |
FINANCIAL COVENANTS
For as long as any moneys arc owing to the Bank under this agreement or the Bank is under any obligation under this agreement you shall comply with the financial covenant set out below.
Net Worth is at all times from and after 31st December 2011 to be maintained at not less than £4,200,000 and shall increase annually by not less than £200,000.
This covenant will be tested against each financial statement.
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 15th August 2011 for such later date as the Bank may agree).
GENERAL TERMS AND CONDITIONS
Use of 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. |
If you fail to make any repayment in full and by the time the Bank calculates the next repayment instalment amount, the Bank may (at its discretion and without prejudice to the Bank’s rights expressed in clause 6.1 below):
| (a) | increase the amount of that next instalment and each of your remaining regular instalments proportionately to ensure that the full balance of the loan is repaid within the agreed term of the loan; | |
| (b) | extend the term of the loan; or | |
| (c) | increase the amount of the final repayment instalment. |
The Bank will apply any payments it receives from you against any interest before any other amounts on your account, including the outstanding principal balance of the loan. This will not apply to payments made specifically for fees and/or charges or where the Bank collects the interest and principal that make up your repayment from separate accounts.
| 2.2 | You may at any time after giving at least 5 business days’ notice to the Bank make early repayment of all of the loan together with interest accrued to the date of payment and any amount that may be payable pursuant to clause 2.3 below. The loan may not be borrowed again once it has been repaid. You may not make an early repayment of part of the loan unless the Bank agrees to the request by you to make such an early repayment. If the Bank agrees to allow an early repayment of part of the loan, such early repayment shall be made together with interest accrued to the date of payment and any amount that may be payable pursuant to clause 2.3 below. Each early repayment of part of the loan must be of at least £10.000 (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 the then latest scheduled repayment instalments so as to reduce the term of the loan. |
| 2.3 | The fixed rate of interest will protect you against the risk of an increase in interest rates during the time the fixed rate applies. The Bank, however, also needs to be protected if you repay the loan early or for any reason you do not borrow the loan in full within the period or, as the case may be, on the date agreed, and owing to a fall in interest rates the Bank is not able to re-lend at the same interest rate as for the loan. |
| You. therefore, agree that, if interest on the loan is to be payable at a fixed rate of interest during any part of its term and (a) for any reason you do not borrow the loan in full within the period or, as the case may be, on the date agreed, or (b) on any day during any fixed rate period you repay the loan early in whole or in part or are required (pursuant to the terms of this agreement) to repay the loan early (the date referred to in (a) or, as the case may be, (b) above being hereinafter referred to as the “Break Date”) you will pay to the Bank on the Break Date the Break Cost and an administration fee of £250. |
For the purposes of this agreement, the “Break Cost” is the amount by which:
| (i) | the gross interest which the Bank would have been entitled to receive on the amount not borrowed or. as the case may be. on the amount repaid early (had the loan been drawn in full and repaid in accordance with the originally agreed repayment structure) for the period from the Break Date to the last day of the fixed rate period less any amount payable in respect of the interest margin chargeable by the Bank, | |
| Exceeds | ||
| (ii) | the interest which the Bank would be able to obtain by placing an amount equal to the amount not borrowed or, as the case may be, the amount repaid early on deposit with a leading bank in the London interbank market for the period from the Break Date to the last day of the fixed rate period and with the same repayment structure as agreed for the loan |
.
The Bank will certify (such certificate to be conclusive in the absence of fraud or manifest error) lo you the Break Cost.
| Continuation of a LOAN AGREEMENT between LLOYDS TSB BANK PlC and EMRISE ELECTRONICS LIMITED | 3 |
LLYDS TSB BANK PLC and EMRISE ELECTRONICS LIMITED
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 or in the interpretation or application of any existing ones, such cost is increased, the Bank may increase the rate of interest charged on the loan to compensate for that extra cost. The Bank will advise you in writing within 30 days of such increase taking effect |
| 3.2 | The fixed rate of interest specified in the SPECIFIC TERMS AND CONDITIONS includes regulatory costs. These arc the costs to the Bank at the time the Bank signed this agreement in funding, agreeing to make and making the loan available that result from complying with the liquidity, monetary control, prudential requirements and supervisory charge requirements of the Bank of England, the Financial Services Authority and any other regulatory authority. Regulatory costs may vary from time to time and any such variation may result in the Bank changing the fixed rate of interest payable on the loan. The Bank will determine the regulatory costs on each date interest on the loan is due to be paid and, if in the Bank’s opinion there is then a material difference (either up or down) in regulatory costs it will advise you in writing within 30 days of the new rate of interest then to apply to the loan. |
| 3.3 | (a) | If the currency in which the loan is denominated is due to be or has been converted into the euro or into any other currency as a result of a change in law. the Bank can amend any term of this agreement. Such an amendment will be only to the extent the Bank thinks necessary to comply with any generally accepted conventions and market practice in the London interbank market and otherwise to reflect the change in currency and to put the Bank in the same position, so far as possible, that it would have been in if no change in currency had occurred. | |
| (b) | The Bank can also change any term of this agreement at any time (even if” an Event of Default has not occurred): | ||
| (i) | to reflect the introduction of or any other change in law or in any code of practice which applies to the Bank or the way the Bank is regulated; | ||
| (ii) | to reflect any changes the Bank makes to its systems or processes: or | ||
| (iii) | if the change is to your advantage. | ||
| (c) | If the Bank makes a change pursuant to this clause 3.3 which is to your disadvantage, the Bank will give you 30 days’ prior notice. This notice may be by letter, email, text, statement inserts or messages or in any other way which is sent to you. The Bank can make any other changes straight away by telling you personally or by putting notices in a selection of national newspapers, in its branches or on its website within the next 30 days. | ||
| (d) | At any time within 60 days of receipt of the Bank’s 30 days’ notice (as referred to in paragraph (c) above) you may make early repayment of all (but not part) of the loan. Such repayment shall be in accordance with clause 2 above (including the payment to the Bank of the administration fee and any Break Cost as provided in clause 2.3 above). |
Representations
| 4.1 | You represent that: |
| (a) | all action required or necessary to authorise the execution of this agreement and the security documents (if any) required from you by this agreement and the performance of your obligations under and in connection with this agreement and such security documents has been taken, | |
| (b) | neither the execution of this agreement nor the performance of your obligations under and in connection with this agreement, including the giving of any security, will constitute or result in any breach of any agreement, law, requirement or regulation (including, for the avoidance of doubt, your constitutive documents), | |
| (c) | no material litigation, administrative or judicial proceedings are presently pending or threatened against you, any of your subsidiaries or any of your or any such subsidiary’s directors, | |
| (d) | 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 | |
| (e) | 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:
5.1 neither you nor any of your subsidiaries shall without the Bank’s consent:
| (a) | 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 debts, |
| Continuation of a LOAN AGREEMENT between LLOYDS TSB BANK PlC and EMRISE ELECTRONICS LIMITED | 4 |
| (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 of 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 to 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) | |
| (c) | change the nature of your or their business as it is now conducted, | |
| (d) | agree or enter into any substantial property transaction as set out in Sections 190 to 196 of the Companies Act 2006, or | |
| (e) | make any loan, give any guarantee or provide any other security as set out in Sections 197 to 214 of the Companies Act 2006 or allow any such loan, guarantee or other security to continue, |
| 5.2 | you shall provide to the Bank: |
| (a) | copies of your financial statement within 270 days of the end of each financial year, and | |
| (b) | copies of your monthly management accounts 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 property held by the Bank as security at the date of the accounts, and/or a breakdown of stock in trade, and | |
| (c) | copies of any financial information or information regarding any security that the Bank may from time to time reasonably request promptly on request and within any timescale reasonably required by the Bank, |
| 5.3 | you and each of your subsidiaries shall maintain with reputable underwriters or insurance companies adequate insurance on and over your respective business and assets. Such insurance is 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 is, if so requested by the Bank at any time, to include appropriate terrorism cover. 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 Bank, 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, | |
| (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 to apply that benefit in repayment of the loan when due, and | |
| (c) | not to agree to any arrangement that would reduce the commutation amount of the pension policy nor arrange far any transfer to be made from the pension policy. |
| 5.5 | if the purpose of the loan (as slated in the SPECIFIC TERMS AND CONDITIONS) involves building works or works enabling building works affecting any property, you agree that promptly upon request by the Bank 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, including the payment to the Bank of the administration fee and any Break Cost as provided in clause 2.3 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 of the loan. |
Default and Termination
| 6.1 | The events listed in (a) to (k) 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 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 (including the payment to the Bank of the administration fee and any Break Cost as provided in clause 2.3 above) 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. |
| Continuation of a LOAN AGREEMENT between LLOYDS TSB BANK PlC and EMRISE ELECTRONICS LIMITED | 5 |
Events of Default
| (a) | you fail to pay when due any indebtedness owed by you to the Bank. | |
| (b) | you fail to comply with any other obligation or undertaking to the Bank or with the terms of any other agreement with the Bank or an event of default arises in connection with any other agreement with the Bank. | |
| (c) any representation or statement made by you to the Bank, whether or not in connection with this agreement, proves to have been incorrect or inaccurate when made or deemed made, | ||
| (d) | 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 as a result of your failure to comply with obligations in connection with that indebtedness, | |
| (e) | 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, | |
| (f) | 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, | ||
| (g) | 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, | |
| (h) | the persons who now control you cease to have such control, | |
| (i) | 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, | |
| (j) | 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 because of any lack of mental capacity, 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 parties, or | ||
| (k) you fail or have foiled 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 happening or any failure by you to pay any amount demanded by the Bank as a result of an 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. |
Assignment and Securitisation
| 7.1 | This agreement is for the benefit of the contracting parties, their respective successors and permitted assigns. The agreement does not and will not confer any benefit on or be enforceable by any third party (other than by any such successor or permitted assign). |
| 7.2 | The Bank may at any time and without any further consent agree or enter into a Transfer, although, without prejudice to any other type of transfer, no Transfer of the Bank’s obligations shall be effective until such time as the Transferee shall have confirmed that it is bound by the terms of this agreement: Following such confirmation you shall look only to the Transferee in respect of that portion of the Bank’s obligations transferred to the Transferee. You will not assign any of your rights or transfer any of your obligations under this agreement without the prior written consent of the Bank. |
| Continuation of a LOAN AGREEMENT between LLOYDS TSB BANK PlC and EMRISE ELECTRONICS LIMITED | 6 |
| 7.3 | The Bank may disclose any information about you or any of your subsidiaries to their auditors for the time being, to any Transferee or potential Transferee, to any rating agency or listing authority, to any advisers of any such party or of the Bank and to any other person to whom the Bank believes it is reasonable to disclose such information in connection with any proposed Transfer. This may include information about your finances or the finances of any subsidiary, the loan and any security document relating to. or other document relied on by the Bank in connection with, this agreement. |
| 7.4 | You will co-operate with and assist the Bank to complete any proposed Transfer. In particular, you will assist the Bank in transferring the benefit of any security document given in connection with this agreement, whether that Transfer is to the Transferee or to a security trustee appointed by the Bank and/or the Transferee. The Bank will reimburse you for all legal and other out of pocket costs and expenses including any registration (or similar) fees incurred with the prior written agreement of the Bank in connection with requests made by the Bank pursuant to this clause 7.4. |
Other
| 8.1 | This agreement and any non-contractual obligations arising from or connected with this agreement shall be governed by- 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. | |
| 8.2 | 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. |
| 8.3 | 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. All payments from you are to be made without any set-off, deduction or withholding of any nature. |
| 8.4 | The Bank may use any credit balance there may be on any of your accounts towards payment of 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. |
| 8.5 | 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 to 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. |
| 8.6 | 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 Bank. |
| 8.7 | 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 lime 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 the loan and any change to this agreement shall be in English. |
| 8.8 | The Bank will not be liable for any loss, damage, interruption, delay or non-performance in connection with this agreement caused in whole or in part by events which are beyond the Bank’s reasonable control. This may include, for example, explosion, terrorism, war. riot or other civil disturbance or failure or interruption of any electronic communications system. |
| 8.9 | Any change to this agreement that is not permitted in this agreement must be made in writing and be signed by the contracting parties. |
| 8.10 | The SPECIFIC TERMS AND CONDITIONS and GENERAL TERMS AND CONDITIONS shall be read and construed as one agreement. |
| 8.11 | References in this agreement to: |
an Act or any other statutory provision shall be deemed to mean and to include a reference to any amendment to or restatement of that Act or other provision for the time being in force.
the Bank includes its successors and assigns.
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 995 of the Income Tax Act 2007.
financial statement means at any particular time the latest consolidated annual 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 same 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 be borrowed by you under this agreement or, if 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 loan account in accordance with this agreement.
| Continuation of a LOAN AGREEMENT between LLOYDS TSB BANK PlC and EMRISE ELECTRONICS LIMITED | 7 |
month means a calendar month.
parent and subsidiary shall have respectively the meaning given to parent undertaking and subsidiary undertaking in Section 1162 of the Companies Act 2006. 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.
Transfer means any assignment, transfer, securitisation or other disposal by the Bank of all or any of its rights or obligations under this agreement to any other person, the sale of any participation in any such rights or obligations to any other person, and any other transaction of any nature which has the effect of transferring the economic or credit risks or rewards of the Bank under or in connection with this agreement to any other person.
Transferee means any person to whom a Transfer is made or with whom a Transfer is entered into.
| 8.12 | For the purposes of the financial covenants: |
Net Worth shall mean at any particular time the aggregate of the amount paid up on your issued share capital and the consolidated distributable and non-distributable reserves of you and your subsidiaries but (a) after deducting the total of any debit balance on profit and loss account and the book value of goodwill and any other intangible assets, and (b) excluding any minority interests in subsidiaries and any increase in the valuation of assets subsequent to the date of the financial statement.
Use of Personal Information and Credit, Fraud and Identification Checks
When you apply to open an account, the Bank will check its own records for information on individuals who are Key Account Parties. “Key Account Parties’” are individuals who are sole traders, proprietors, partners, directors, members, beneficial owners, trustees or other controlling officials of the business or organisation including signatories to the account. The Bank may also carry out a search through credit reference agencies on these individuals. The credit reference agencies will keep a record of this search and this record may be used by other organisations to verify their identities. The Bank may also check or share information with fraud prevention agencies to prevent fraud and money laundering.
When you apply for credit and credit related or other facilities, the Bank may carry out a search through credit reference agencies on you and/or Key Account Parties. The credit reference agencies will keep a record of this search whether or not the application proceeds. A record of the search on personal files will not be made available to other organisations. A record of the search on the business file will be made available to other organisations. The Bank may also check or share information with fraud prevention agencies to prevent fraud and money laundering.
When you have an account with the Bank, the Bank may disclose how you have run your account(s) to credit reference agencies. If you borrow and do not repay in full and on time, the Bank may tell the credit reference agencies. The Bank may make periodic searches of the Lloyds Banking Group records and credit reference agencies to manage your account(s) including to make decisions whether to continue or extend existing credit. The “Lloyds Banking Group” includes the Bank and a number of other companies using brands including Lloyds TSB. Halifax and Bank of Scotland, and their associated companies. More information on the Lloyds Banking Croup can be found at www.lloydsbankinggroup.com. For these purposes “associated companies” includes Lloyds Banking Group plc and any subsidiary, affiliate or other firm directly or indirectly controlled from time to time by either Lloyds Banking Group plc or by the Bank.
The Bank may also check and share information with fraud prevention agencies to prevent fraud and money laundering.
If false or inaccurate information is provided or fraud is suspected, details may be passed to fraud prevention agencies and other relevant agencies.
If you or Key Account Parties ask, the Bank will tell you or them which credit reference and fraud prevention agencies it has used so you or they can get a copy of your or their details from these agencies.
This is a condensed guide to the use of your personal and business information by the Bank and at credit reference and fraud prevention agencies. If you would like to read full details of how data may be used, please visit the website at www.lloydstsb.com/commercial/customcrdata or contact your relationship manager.
Preconditions Schedule
No preconditions required.
Security Schedule
| (1) | an unlimited debenture from Emrise Electronics Limited, and |
| (2) | an omnibus guarantee and set off agreement dated 3rd June 2008 among the Bank. Emrise Electronics Limited, Xcel Power Systems Limited and Pascall Electronics Limited |
| Continuation of a LOAN AGREEMENT between LLOYDS TSB BANK PlC and EMRISE ELECTRONICS LIMITED | 8 |
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 Emrise Electronics Limited by
 |
(signature) |  |
(signature) | |
| *Director/Authorised Signatory/ | *Director/Authorised Signatory/ | |||
 |
(name) |  |
(name) |
| Pursuant to a Resolution of the Board dated | 2 nd August 2011# |
19/7/2011
| Date |
Important note:
This agreement creates legal obligations. Before signing you may wish to take independent advice.
Please note that if you do not make any borrowing on the date agreed or, for any reason, you repay early, or are required to repay early, the loan or any part of the loan, you will have to compensate the Bank for its costs and losses.
www.lloydstsb.com
Please contact your relationship manager if you would like this agreement in Braille, large print or on audio tape. The Bank accepts calls made though RNID Typetalk.
Calls may be monitored or recorded in case the Bank needs to check it has carried out your instructions correctly and to help improve its quality of service.
1 ..loyds TSB Bank plc Registered Office: 25 Gresham Street, London EC2V 7 HN. Registered in England Number 2065.
Authorised and regulated by the Financial Services Authority.
Version 27042011
Exhibit 21.1
SUBSIDIARIES OF THE REGISTRANT
| Subsidiary Name | Jurisdiction |
| EMRISE Electronics Corporation | New Jersey, USA |
| CXR Larus Corporation | Delaware, USA |
| EMRISE Power Supplies Incorporated | California, USA |
| EMRISE Electronics Ltd. | United Kingdom |
| XCEL Power Systems, Ltd. | United Kingdom |
| CXR Anderson Jacobson SAS | France |
| Belix Power Conversions Ltd | United Kingdom |
| Belix Wound Components Ltd | United Kingdom |
| The Belix Company Ltd | United Kingdom |
| Pascall Electronics (Holdings) Limited | United Kingdom |
| Pascall Electronics Limited | United Kingdom |
| CXR Anderson Jacobson Ltd | United Kingdom |
| Abbot Electronics Ltd. | United Kingdom |
| Digitran Ltd. | United Kingdom |
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
EMRISE Corporation
Durham, North Carolina
We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 333-152282, 333-74281, 333-71035, 333-69571, 333-12567 and 333-65525) of EMRISE Corporation of our report dated April 15, 2014, relating to the consolidated financial statements, which is incorporated by reference in this Annual Report on Form 10-K.
BDO LLP
London, United Kingdom
April 15, 2014
Exhibit 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE
OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, Carmine T. Oliva, certify that:
| 1. | I have reviewed this Form 10-K 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13-a-15(f) and 15d-15(f)) 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) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| 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: April 15, 2014 | By: | /s/ Carmine T. Oliva |
| Carmine T. Oliva | ||
| Principal Executive Officer | ||
| EMRISE Corporation |
Exhibit 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL
OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, Timothy J. Blades, certify that:
| 1. | I have reviewed this Form 10-K 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13-a-15(f) and 15d-15(f)) 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) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| 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: April 15, 2014 | By: | /s/ Timothy J. Blades |
| Timothy J. Blades | ||
| Principal Financial Officer | ||
| EMRISE Corporation |
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF
THE SARBANES-OXLEY ACT OF 2002
In connection with this Annual Report of EMRISE Corporation (the “Company”), on Form 10-K for the fiscal year ended December 31, 2013, as filed with the U.S. Securities and Exchange Commission on the date hereof, I, Carmine T. Oliva, Principal Executive Officer of the Company, certify to the best of my knowledge, pursuant to 18 U.S.C. Sec. 1350, as adopted pursuant to Sec. 906 of the Sarbanes-Oxley Act of 2002, that:
| (1) | Such Annual Report on Form 10-K for the fiscal year ended December 31, 2013, fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
| (2) | The information contained in such Annual Report on Form 10-K for the fiscal year ended December 31, 2013, fairly presents, in all material respects, the financial condition and results of operations of the Company. |
| Date: April 15, 2014 | By: | /s/ Carmine T. Oliva |
| Carmine T. Oliva | ||
| Principal Executive Officer | ||
| EMRISE Corporation |
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF
THE SARBANES-OXLEY ACT OF 2002
In connection with this Annual Report of EMRISE Corporation (the “Company”), on Form 10-K for the fiscal year ended December 31, 2013, as filed with the U.S. Securities and Exchange Commission on the date hereof, I, Timothy J. Blades, Principal Financial Officer of the Company, certify to the best of my knowledge, pursuant to 18 U.S.C. Sec. 1350, as adopted pursuant to Sec. 906 of the Sarbanes-Oxley Act of 2002, that:
| (1) | Such Annual Report on Form 10-K for the fiscal year ended December 31, 2013, fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
| (2) | The information contained in such Annual Report on Form 10-K for the fiscal year ended December 31, 2013, fairly presents, in all material respects, the financial condition and results of operations of the Company. |
| Date: April 15, 2014 | By: | /s/ Timothy J. Blades |
| Timothy J. Blades | ||
| Principal Financial Officer | ||
| EMRISE Corporation |