**EXHIBIT10.1**

 

CREDITAGREEMENT

 

THIS AGREEMENTis entered into as of February 20, 2004 by and between SUMMA INDUSTRIES, aDelaware corporation (“Summa”), KVP FALCON PLASTIC BELTING, INC., a California corporation, PLASTRONINDUSTRIES, INC., a Delaware corporation, LEXALITE INTERNATIONAL CORPORATION, aDelaware corporation, CALNETICS CORPORATION, a California corporation, KVPHOLDINGS, INC., a Delaware corporation, PLASTIC SPECIALTIES, INC., aMississippi corporation, FULLERTON HOLDINGS, INC., a California corporation,AQUARIUS BRANDS, INC., a California corporation, NY-GLASS PLASTICS, INC., aCalifornia corporation, and CENTRAL VALLEY MANUFACTURING, INC., a Californiacorporation (Summa and the foregoing companies may be referred tocollectively as “Borrowers” and individually as a “Borrower”), and WELLS FARGOBANK, NATIONAL ASSOCIATION (“Bank”).

 

RECITALS

 

Borrowers haverequested that Bank extend or continue credit to Borrowers as described below,and Bank has agreed to provide such credit to Borrowers on the terms andconditions contained herein.

 

NOW,THEREFORE, for valuable consideration, the receipt and sufficiency of which arehereby acknowledged, Bank and Borrowers hereby agree as follows:

 

ARTICLE I

CREDIT TERMS

 

SECTION 1.1.                               LINEOF CREDIT.

 

(a)              Line of Credit.  Subject to the terms and conditions of thisAgreement, Bank hereby agrees to make advances to Borrowers from time to timeup to and including February 1, 2007, not to exceed at any time the aggregateprincipal amount of Twenty-five Million Dollars ($25,000,000.00) or suchlimitation as may be imposed by the Borrowing Base set forth below (“Line ofCredit”).  The proceeds of the Line ofCredit shall be used to refinance Borrowers’ debt with Comerica Bank andthereafter for Borrowers’ working capital and general corporate needs.Borrowers’ obligation to repay advances under the Line of Credit shall beevidenced by a promissory note executed by Borrowers, dated as of February 20,2004 (“Line of Credit Note”), all terms of which are incorporated herein bythis reference.

 

(b)             Limitation onBorrowings. If the average daily principal balance of the Line of Credit,including without limitation outstanding advances and outstanding Letters ofCredit (as defined below) for any month hereafter, commencing with the monthending February 29, 2004, exceeds Fifteen Million Dollars ($15,000,000.00),then (1) not later than twenty (20) days after and as of the end of such monthBorrowers shall provide Bank with the certifications, agings and collateralreports set forth in Section 4.3(e) below, and (2) thereafter outstandingborrowings under the Line of Credit, including without limitation outstandingadvances and outstanding Letters of Credit, to a maximum of the principalamount set forth above, shall not at any time exceed the Borrowing Base (asdefined below); provided, however, that if the Borrowing Base isestablished in accordance with the foregoing and at a subsequent month-end

 

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the average daily balance ofthe Line of Credit, including without limitation outstanding advances andoutstanding Letters of Credit for any month thereafter, is less than or equalto Fifteen Million Dollars ($15,000,000.00), then such Borrowing Baserequirement shall be canceled, subject to its reinstatement in accordance withthe foregoing if the average daily balance of the Line of Credit for any  month subsequently exceeds Fifteen MillionDollars ($15,000,000.00) .

 

As usedherein, “Borrowing Base” means an aggregate of eighty percent (80%) ofBorrowers’ eligible accounts receivable, plus fifty-five percent (55%) of thevalue of Borrowers’ eligible inventory (exclusive of work in process, inventorywhich is obsolete, unsaleable or damaged, any inventory located outside of the UnitedStates, or any inventory in which Bank does not have a perfected securityinterest of first priority), with value defined as the lower of cost ormarket.  The Borrowing Base, whenrequired in accordance with the foregoing, shall be determined by Bank uponreceipt and review of all collateral reports required hereunder and such otherdocuments and collateral information as Bank may from time to time require.

 

Borrowersacknowledge that the foregoing advance rates used in the Borrowing Base wereestablished by Bank with the understanding that, among other items, theaggregate of all returns, rebates, discounts, credits and allowances for thethree (3) months preceding any such Borrowing Base determination shall be lessthan five percent (5%) of Borrowers’ gross sales for said period.  If such dilution of Borrowers’ accounts forthe three (3) months preceding any such Borrowing Base determination exceedsfive percent (5%) of Borrowers’ gross sales for said period, or if there at anytime exists any other matters, events, conditions or contingencies which Bankreasonably believes may affect payment of any portion of Borrowers’ accounts,Bank, in its sole discretion, may reduce the foregoing advance rate againsteligible accounts receivable to a percentage appropriate to reflect suchadditional dilution and/or establish additional reserves against Borrowers’eligible accounts receivable.

 

As usedherein, “eligible accounts receivable” shall consist solely of trade accountscreated in the ordinary course of a Borrower’s business, upon which suchBorrower’s right to receive payment is absolute and not contingent upon thefulfillment of any condition whatsoever, and in which Bank has a perfectedsecurity interest of first priority, and shall not include:

 

(i)                                 any account which ismore than ninety (90) days past due;

 

(ii)                              that portion of anyaccount for which there exists any right of setoff, defense or discount (exceptregular discounts allowed in the ordinary course of business to promote promptpayment) or for which any defense or counterclaim has been asserted;

 

(iii)                           any account which representsan obligation of any state or municipal government or of the United Statesgovernment or any political subdivision thereof (except accounts whichrepresent obligations of the United States government and for which theassignment provisions of the Federal Assignment of Claims Act, as amended orrecodified from time to time, have been complied with to Bank’s satisfaction);

 

(iv)                          any account which representsan obligation of an account debtor located in a foreign country, except for (1)an account from an account debtor located in a Canadian province or territory,so long as, in Bank’s determination, such Canadian jurisdiction recognizesBank’s first priority security interest in and right to collect such account asa consequence of any security agreements and UCC filings in favor of Bank, and(2) other foreign accounts owing from account debtors listed on Schedule1.1(b)

 

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attached hereto, so long as (I) the amount owing from any one suchlisted account debtor does not exceed five percent (5%) of the total accountsreceivable of Borrowers, and (II) the amount owing from all of the listedaccount debtors does not exceed the lesser of $2,000,000.00 or ten percent(10%) of the total accounts receivable of Borrowers;

 

(v)                             any account which arisesfrom the sale or lease to or performance of services for, or represents anobligation of, an employee, affiliate, partner, member, parent or subsidiary ofany Borrower;

 

(vi)                          that portion of any account,which represents interim or progress billings or retention rights on the partof the account debtor;

 

(vii)                       any account which represents anobligation of any account debtor when twenty percent (20%) or more ofBorrowers’ accounts from such account debtor are not eligible pursuant to (i)above;

 

(viii)                    that portion of any account from anaccount debtor which represents the amount by which Borrowers’ total accountsfrom said account debtor exceeds twenty-five percent (25%) of Companies’ totalaccounts;

 

(ix)                            any account deemedineligible by Bank when Bank, in its sole discretion, deems thecreditworthiness or financial condition of the account debtor, or the industryin which the account debtor is engaged, to be unsatisfactory.

 

(c)              Letter of CreditSubfeature. As a subfeature under the Line of Credit, Bank agrees from timeto time during the term thereof to issue or cause an affiliate to issue  sight commercial and standby letters ofcredit for the account of Borrowers to finance Borrowers’ and Subsidiaries’general corporate needs (each, a “Letter of Credit” and collectively, “Lettersof Credit”); provided however, that the aggregate undrawn amount of alloutstanding Letters of Credit shall not at any time exceed Ten Million Dollars($10,000,000.00).  The form andsubstance of each Letter of Credit shall be subject to approval by Bank, in itssole discretion.  Each commercial Letterof Credit shall be issued for a term not to exceed one hundred fifty (150)days, as designated by Borrowers, and each standby Letter of Credit shall beissued for a term not to exceed three hundred sixty-five (365) days, asdesignated by Borrowers; provided however, that no Letter of Credit shall havean expiration date beyond the maturity date of the Line of Credit.  The undrawn amount of all Letters of Creditshall be reserved under the Line of Credit and shall not be available forborrowings thereunder.  Each Letter ofCredit shall be subject to the additional terms and conditions of the Letter ofCredit agreements, applications and any related documents required by Bank inconnection with the issuance thereof. Each drawing paid under a Letter of Credit shall be deemed an advanceunder the Line of Credit and shall be repaid by Borrowers in accordance withthe terms and conditions of this Agreement applicable to such advances;provided however, that if advances under the Line of Credit are not available,for any reason, at the time any drawing is paid, then Borrowers shallimmediately pay to Bank the full amount drawn, together with interest thereonfrom the date such drawing is paid to the date such amount is fully repaid byBorrowers, at the rate of interest applicable to advances under the Line ofCredit.

 

(d)             Borrowing andRepayment.  Borrowers may from timeto time during the term of the Line of Credit borrow, partially or wholly repaytheir outstanding borrowings, and reborrow, subject to all of the limitations,terms and conditions contained herein or in the Line of Credit

 

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Note; provided however, thatthe total outstanding borrowings under the Line of Credit shall not at any timeexceed the maximum principal amount of the Line of Credit or such otherlimitation as may be set forth above.

 

SECTION 1.2.                               TERMLOAN.

 

(a)              Term Loan.  Subject to the terms and conditions of thisAgreement, Bank hereby agrees to make a loan to Borrowers in the principalamount of Five Million Dollars ($5,000,000.00) or such lesser amount as may berequired to comply with the limitation set forth below (“Term Loan”).  The proceeds of the Term Loan shall be usedto refinance Borrowers’ existing non-real estate term debt with Comerica Bank.  Borrowers’ obligation to repay the Term Loanshall be evidenced by a promissory note executed by Borrowers, dated as ofFebruary 20, 2004 (“Term Note”), all terms of which are incorporated herein bythis reference.  The Term Loan shall befunded concurrently with the initial advance under the Line of Credit.

 

(b)             Repayment.  Principal and interest on the Term Loanshall be repaid in accordance with the provisions of the Term Note.

 

(c)              Prepayment.  Borrowers may prepay principal on the TermLoan solely in accordance with the provisions of the Term Note.

 

(d)             Limitation onBorrowing.  The principal amount ofthe Term Loan shall not exceed eighty percent (80%) of the orderly liquidationvalue of the equipment of Borrowers in existence as of the date of thisAgreement, as determined by Bank on the basis of such appraisal as Bank mayrequire.

 

SECTION 1.3.                               INTEREST/FEES.

 

(a)              Interest.                                Theoutstanding principal balances of the Line of Credit and the Term Loan shallbear interest at the rate of interest set forth in each promissory note orother instrument or document executed in connection therewith. The amount ofeach drawing paid under any Letter of Credit shall bear interest from the datesuch drawing is paid to the date such amount is fully repaid by Borrowers inaccordance with Section1.1(c) above.

 

(b)             Computation andPayment.  Interest shall be computedon the basis of a 360-day year, actual days elapsed.  Interest shall be payable at the times and place set forth ineach promissory note or other instrument or document required hereby.

 

(c)              Unused CommitmentFee.  Borrowers shall pay to Bank afee equal to one quarter percent (0.25%) per annum (computed on the basis of a360-day year, actual days elapsed) on the average daily unused amount of theLine of Credit, which fee shall be calculated on a quarterly basis by Bank andshall be due and payable by Borrower in arrears on the last day of eachquarter.

 

(d)             Commercial Letterof Credit Fees.  Borrowers shall payto Bank fees upon the issuance of each commercial Letter of Credit, upon thepayment or negotiation of each drawing under any commercial Letter of Creditand upon the occurrence of any other activity with respect to any commercialLetter of Credit (including without limitation, the transfer, amendment orcancellation of any commercial Letter of Credit) determined in accordance withBank’s standard fees and charges then in effect for such activity.

 

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(e)              Standby Letter ofCredit Fees. Borrowers shall pay to Bank the following fees (i) feesfor the issuance of each Standby Letter of Credit equal to a percentage perannum (computed on the basis of a 360-day year, actual days elapsed) of theface amount thereof, which issuance fees shall be payable in arrears on aquarterly basis on the last day of each quarter, and (ii) fees upon thepayment or negotiation of each draft under any Standby Letter of Credit andfees upon the occurrence of any other activity with respect to any StandbyLetter of Credit (including without limitation, the transfer, amendment or cancellationof any Standby Letter of Credit) determined in accordance with Bank’s standardfees and charges then in effect for such activity.  The aforesaid percentage for calculating the issuance fee for astandby Letter of Credit shall be equal to the LIBOR margin applicable toadvances under the Line of Credit at the time such Standby Letter of Credit isissued.

 

SECTION 1.4.                               COLLECTIONOF PAYMENTS.  Borrowers authorize Bankto collect all principal, interest and fees due under each credit subjecthereto by charging the deposit account number 4100059377 maintained by Summawith Bank, or any other deposit account maintained by Summa or any otherBorrower with Bank, for the full amount thereof.  Should there be insufficient funds in any such deposit account thatis so debited by Bank to pay all such sums when due, the full amount of suchdeficiency shall be immediately due and payable by Borrowers.

 

SECTION 1.5.                               COLLATERAL.

 

As securityfor all indebtedness of Borrowers to Bank, each Borrower shall grant to Banksecurity interests in its personal property, now owned or hereafter acquired,including without limitation each Borrower’s accounts receivable, rights topayment, general intangibles, deposit accounts, documents, instruments, chattelpaper, inventory and equipment; provided, however, that such collateral shallnot include the Preferred Stock Sinking Fund Account (as defined below).

 

The foregoingsecurity interests shall be of first priority, subject to such purchase moneysecurity interests in favor of other creditors in specific items of equipment(i) as may be in existence as of the date of this Agreement and disclosed byBorrowers to Bank in writing prior to the date hereof, or (ii) as may arisehereafter and be permitted under Section 5.7 below.

 

As usedherein, “Preferred Stock Sinking Fund Account” means that certain investmentaccount to be opened by Summa, which will be funded by not more than$7,868,000.00, to be used by Summa for the redemption of its preferred stock.

 

All of theforegoing security interests shall be evidenced by and subject to the terms ofsuch security agreements, financing statements and other documents as Bankshall reasonably require, all in form and substance satisfactory to Bank.  Borrowers shall reimburse Bank immediatelyupon demand for all costs and expenses incurred by Bank in connection with anyof the foregoing security, including without limitation, filing and recordingfees and costs of appraisals and audits.

 

ARTICLE II

REPRESENTATIONS AND WARRANTIES

 

Each Borrowermakes the following representations and warranties to Bank, whichrepresentations and warranties shall survive the execution of this Agreementand shall continue

 

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in full force and effect untilthe full and final payment, and satisfaction and discharge, of all obligationsof Borrowers to Bank subject to this Agreement.

 

SECTION 2.1.                               LEGALSTATUS.  Each Borrower is a corporation,duly organized and existing and in good standing under the laws of the State ofits incorporation, and is qualified or licensed to do business (and is in goodstanding as a foreign corporation, if applicable) in all jurisdictions in whichsuch qualification or licensing is required or in which the failure to soqualify or to be so licensed could have a material adverse effect on it.

 

As used herein, “Subsidiary”shall mean any corporation or other entity of which at least a majority of thesecurities or other ownership interests having ordinary voting power for theelection of directors or other persons performing similar functions are owneddirectly or indirectly by any Borrower and/or by one or more of any Borrower’sSubsidiaries.  As used herein,“Subsidiaries” shall mean each Subsidiary.

 

As usedherein, “Foreign Subsidiary” shall mean any Subsidiary which is organized underthe laws of a jurisdiction outside of the United States of America.

 

Attachedhereto as Schedule 2.1 is a complete and accurate list of all Subsidiaries asof the date of this Agreement, showing each Subsidiary’s name, nature, status(active or inactive), jurisdiction of incorporation and ownership.  As set forth therein, as of the date of thisAgreement, Summa owns one hundred percent (100%) of the stock of each other Borrowerand each Subsidiary other than Plastron Industries, Inc., which is ninetypercent (90%) owned by Summa.

 

Each Subsidiary is acorporation, duly organized and existing and in good standing under the laws ofthe jurisdiction of its incorporation or formation, as the case may be, and isqualified or licensed to do business (and is in good standing as a foreigncorporation, if applicable) in all jurisdictions in which such qualification orlicensing is required or in which the failure to so qualify or to be solicensed could have a material adverse effect on it.

 

SECTION 2.2.                               AUTHORIZATIONAND VALIDITY.  This Agreement and eachpromissory note, contract, instrument and other document required hereby or atany time hereafter delivered to Bank in connection herewith (collectively, the“Loan Documents”) have been duly authorized, and upon their execution anddelivery in accordance with the provisions hereof will constitute legal, validand binding agreements and obligations of Borrowers and Subsidiaries or theparty which executes the same, enforceable in accordance with their respectiveterms, except as enforceability may be limited by applicable bankruptcy,insolvency or similar laws affecting the enforcement of creditors’ rightsgenerally and or by equitable principles relating to enforceability.

 

SECTION 2.3.                               NOVIOLATION.  The execution, delivery andperformance by each Borrower and each Subsidiary of each of the Loan Documentsto which any of them is a party do not violate any provision of any law orregulation, or contravene any provision of the Articles of Incorporation orBy-Laws of any Borrower or any Subsidiary, or result in any breach of ordefault under any contract, obligation, indenture or other instrument to whichany Borrower or any Subsidiary is a party or by which any Borrower or anySubsidiary may be bound.

 

SECTION 2.4.                               LITIGATION.  There are no pending, or to the best ofBorrowers’ knowledge threatened, actions, claims, investigations, suits orproceedings by or before any governmental authority, arbitrator, court oradministrative agency which are reasonably likely to

 

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have a material adverse effecton the financial condition or operation of any Borrower or any Subsidiary otherthan those disclosed by Borrowers to Bank in writing prior to the date hereof.

 

SECTION 2.5.                               CORRECTNESSOF FINANCIAL STATEMENT.  The financialstatement of Borrowers and Subsidiaries dated November 30, 2003, a true copy ofwhich has been delivered by Borrowers to Bank prior to the date hereof,(a) is complete and correct and presents fairly the financial condition ofBorrowers and Subsidiaries as of said date, (b) discloses all liabilitiesof Borrowers and Subsidiaries as of said date that are required to be reflectedor reserved against under generally accepted accounting principles, whetherliquidated or unliquidated, fixed or contingent, and (c) has been preparedin accordance with generally accepted accounting principles consistentlyapplied, except as noted therein.  Sincethe date of such financial statement there has been no material adverse changein the financial condition of any Borrower or any Subsidiary, nor has anyBorrower or any Subsidiary mortgaged, pledged, granted a security interest inor otherwise encumbered any of its assets or properties except in favor of Bankor as otherwise permitted by Bank under this Agreement or in another writing.

 

SECTION 2.6.                               INCOMETAX RETURNS.  Borrowers have noknowledge of any pending assessments or adjustments of any Borrower’s or anySubsidiary’s income tax payable with respect to any year, except as heretoforedisclosed by Borrower to Bank in writing.

 

SECTION 2.7.                               NOSUBORDINATION.  There is no agreement,indenture, contract or instrument to which any Borrower or any Subsidiary is aparty or by which any Borrower or Subsidiary may be bound that requires any oftheir indebtedness to Bank in connection with this Agreement or any of theother Loan Documents to be subordinated in right to payment to any indebtednessof any Borrower or any Subsidiary to any other person or entity.

 

SECTION 2.8.                               PERMITS,FRANCHISES.  Each Borrower and eachSubsidiary possess, and will hereafter possess, all permits, consents,approvals, franchises and licenses required and rights to all trademarks, tradenames, patents, and fictitious names, if any, necessary to enable each of themto conduct the business in which it is now engaged in compliance withapplicable law.

 

SECTION 2.9.                               ERISA.  Each Borrower and each Subsidiary are incompliance in all material respects with all applicable provisions of theEmployee Retirement Income Security Act of 1974, as amended or recodified fromtime to time (“ERISA”); no Borrower or Subsidiary has violated any provision ofany defined employee pension benefit plan (as defined in ERISA) maintained orcontributed to by any Borrower or any Subsidiary (each, a “Plan”); noReportable Event as defined in ERISA has occurred and is continuing withrespect to any Plan initiated by any Borrower or any Subsidiary; each Borrowerand each Subsidiary have met their minimum funding requirements under ERISAwith respect to each Plan; and each Plan will be able to fulfill its benefitobligations as they come due in accordance with the Plan documents and undergenerally accepted accounting principles.

 

SECTION 2.10.                         OTHEROBLIGATIONS.  No Borrower or Subsidiaryis in default on any obligation for borrowed money, any purchase moneyobligation or any other material lease, commitment, contract, instrument orobligation.

 

SECTION 2.11.                         ENVIRONMENTALMATTERS.  Except as disclosed byBorrowers to Bank in writing prior to the date hereof, Borrowers andSubsidiaries are in compliance in all material respects with all applicablefederal or state environmental, hazardous waste, health and safety statutes,and any rules or regulations adopted pursuant thereto, which govern or

 

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affect any of their operationsand/or properties, including without limitation, the ComprehensiveEnvironmental Response, Compensation and Liability Act of 1980, the SuperfundAmendments and Reauthorization Act of 1986, the Federal Resource Conservationand Recovery Act of 1976, and the Federal Toxic Substances Control Act, as anyof the same may be amended, modified or supplemented from time to time.  None of the operations of any Borrower orany Subsidiary is the subject of any federal or state investigation evaluatingwhether any remedial action involving a material expenditure is needed torespond to a release of any toxic or hazardous waste or substance into theenvironment.  To the best of eachBorrower’s knowledge, no Borrower or Subsidiary has any material contingentliability in connection with any release of any toxic or hazardous waste orsubstance into the environment.

 

ARTICLE III

CONDITIONS

 

SECTION 3.1.                               CONDITIONSOF INITIAL EXTENSION OF CREDIT.  Theobligation of Bank to extend any credit contemplated by this Agreement issubject to the fulfillment to Bank’s satisfaction of all of the followingconditions:

 

(a)              Approval of BankCounsel.  All legal mattersincidental to the extension of credit by Bank shall be satisfactory to Bank’scounsel.

 

(b)             Documentation.  Bank shall have received, in form andsubstance satisfactory to Bank, each of the following, duly executed:

 

(i)                              ThisAgreement and each promissory note or other instrument or document requiredhereby.

(ii)                           Corporateborrowing resolution and third party collateral resolution for each Borrower.

(iii)                        Securityagreement from each Borrower.

(iv)                       Letter ofCredit Agreements as required hereunder.

(v)                          Copiesof the formation documents of each Borrower and Subsidiary, as Bank mayrequire.

(vi)                       Such otherdocuments as Bank may require under any other Section of this Agreement,including without limitation such documents as Bank may require to perfect itssecurity interests in accordance with this Agreement.

 

(c)              FinancialCondition.  There shall have been nomaterial adverse change, as determined by Bank, in the financial condition orbusiness of any Borrower or any Subsidiary, nor any material decline, asdetermined by Bank, in the market value of any collateral required hereunder ora substantial or material portion of the assets of any Borrower or anySubsidiary.

 

(d)             Insurance.  Borrowers shall have delivered to Bankevidence of insurance coverage on all property of each Borrower and eachSubsidiary, in form, substance, amounts, covering risks and issued by companiessatisfactory to Bank, and where required by Bank, with loss payableendorsements in favor of Bank.

 

(e)              Appraisals.  Bank shall have obtained, at Borrowers’cost, an appraisal of the equipment supporting the Term Loan, issued by anappraiser acceptable to Bank and in form, substance and reflecting valuessatisfactory to Bank.

 

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(f)                Projections.  Borrowers shall have delivered to Bank theirconsolidated projections (for Borrowers and any Subsidiary) for the next fiscalyear.

 

SECTION 3.2.                               CONDITIONSOF EACH EXTENSION OF CREDIT.  Theobligation of Bank to make each extension of credit requested by Borrowershereunder shall be subject to the fulfillment to Bank’s satisfaction of each ofthe following conditions:

 

(a)              Compliance.  The representations and warranties containedherein and in each of the other Loan Documents shall be true on and as of thedate of the signing of this Agreement and on the date of each extension ofcredit by Bank pursuant hereto, with the same effect as though suchrepresentations and warranties had been made on and as of each such date, andon each such date, no Event of Default as defined herein, and no condition,event or act which with the giving of notice or the passage of time or bothwould constitute such an Event of Default, shall have occurred and becontinuing or shall exist.

 

(b)             Documentation.  Bank shall have received all additionaldocuments which may reasonably be required in connection with such extension ofcredit.

 

ARTICLE IV

AFFIRMATIVE COVENANTS

 

Each Borrowercovenants that so long as Bank remains committed to extend credit to Borrowerspursuant hereto, or any liabilities (whether direct or contingent, liquidatedor unliquidated) of Borrowers to Bank under any of the Loan Documents remainoutstanding, and until payment in full of all obligations of Borrowers subjecthereto, unless Bank otherwise consents in writing:

 

SECTION 4.1.                               PUNCTUALPAYMENTS.  Each Borrower shallpunctually pay all principal, interest, fees or other liabilities due under anyof the Loan Documents at the times and place and in the manner specifiedtherein, and immediately upon demand by Bank, the amount by which theoutstanding principal balance of any credit subject hereto at any time exceedsany limitation on borrowings applicable thereto.

 

SECTION 4.2.                               ACCOUNTINGRECORDS.  Each Borrower shall, and shallcause each Subsidiary to, maintain adequate books and records in accordancewith generally accepted accounting principles consistently applied, and permitany representative of Bank, at any reasonable time, to inspect, audit andexamine such books and records, to make copies of the same, and to inspect theproperties of each Borrower and each Subsidiary.

 

SECTION 4.3.                               FINANCIALSTATEMENTS.  Each Borrower shall provideto Bank all of the following, in form and detail satisfactory to Bank:

 

(a)              not later than 90days after and as of the end of each fiscal year, an audited consolidatedfinancial statement of Summa (and the other Borrowers and each Subsidiary),prepared by a certified public accountant reasonably acceptable to Bank, toinclude balance sheet, income statement and statement of cash flows, togetherwith its 10-K report;

 

(b)             not later than 45days after and as of the end of each first, second and third fiscal quarter,and not later than 60 days after and as of the end of each fourth fiscalquarter, a consolidated financial statement of Summa (and the other Borrowersand each Subsidiary),

 

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prepared by Borrowers, toinclude balance sheet, income statement, statement of cash flows and ifapplicable, its 10-Q report;

 

(c)              not later thanAugust 31 of each year, consolidated projections of Summa (and the otherBorrowers and each Subsidiary) for the following fiscal year, to includeprojected balance sheet and income statement;

 

(d)             not later than 45days after and as of the end of each first, second and third fiscal quarter,and not later than 60 days after and as of the end of each fourth fiscalquarter, an inventory collateral report, an aged listing of accounts receivableand accounts payable, and a reconciliation of accounts, with the foregoingprepared on a consolidated basis for Borrowers;

 

(e)              not later than 20days after and as of the end of each month when Borrowers are required tomaintain the Borrowing Base, a borrowing base certificate, an inventorycollateral report, an aged listing of accounts receivable and accounts payable,and a reconciliation of accounts, with the foregoing prepared on a consolidatedbasis for Borrowers;

 

(f)                from time to timesuch other information as Bank may reasonably request, including withoutlimitation a list of the names and addresses of all account debtors of eachBorrower.

 

SECTION 4.4.                               COMPLIANCE.  Each Borrower shall, and shall cause eachSubsidiary to, preserve and maintain all licenses, permits, governmentalapprovals, rights, privileges and franchises necessary for the conduct of eachof their businesses; and comply with the provisions of all documents pursuantto which each of them  is organizedand/or which govern the continued existence of each of them and with therequirements of all laws, rules, regulations and orders of any governmentalauthority applicable to any of them and/or any of their businesses.

 

SECTION 4.5.                               INSURANCE.  Each Borrower shall, and shall cause eachSubsidiary to, maintain and keep in force insurance of the types and in amountscustomarily carried in similar lines of business, including but not limited tofire, extended coverage, public liability, flood, property damage and workers’compensation, with all such insurance carried with companies and in amounts satisfactoryto Bank, and deliver to Bank from time to time at Bank’s request schedulessetting forth all insurance then in effect.

 

SECTION 4.6.                               FACILITIES.  Each Borrower shall, and shall cause eachSubsidiary to, keep all properties useful or necessary to each of theirbusinesses in good repair and condition, and from time to time make necessaryrepairs, renewals and replacements thereto so that such properties shall bereasonably preserved and maintained.

 

SECTION 4.7.                               TAXESAND OTHER LIABILITIES.  Each Borrowershall, and shall cause each Subsidiary to, pay and discharge when due any andall indebtedness, obligations, assessments and taxes, both real or personal,including without limitation federal and state income taxes and state and localproperty taxes and assessments, except such (a) as any of them may in goodfaith contest or as to which a bona fide dispute may arise, and (b) for whichthey have made provision, to Bank’s reasonable satisfaction, for eventualpayment thereof in the event any Borrower or any Subsidiary is obligated tomake such payment.

 

SECTION 4.8.                               LITIGATION.  Each Borrower shall, and shall cause eachSubsidiary to, promptly give notice in writing to Bank of any litigationpending or threatened against any Borrower or any Subsidiary with a specifiedclaim in excess of $500,000.00.

 

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SECTION 4.9.                               FINANCIALCONDITION.  Each Borrower shall maintainits financial condition on a consolidated basis with the other Borrowers andeach Subsidiary as follows using generally accepted accounting principlesconsistently applied and used consistently with prior practices (except to theextent modified by the definitions herein):

 

(a)              Adjusted CurrentRatio not less than 0.90 to 1.0 at any time from and including February 29,2004 up to but not including August 31, 2007, and not less than 1.00 to 1.0 atany time on or after August 31, 2007, with “Adjusted Current Ratio” defined astotal current assets minus cash and marketable securities deposited in thePreferred Stock Sinking Fund (as defined in Section 1.5 above) divided by totalcurrent liabilities.  For the purpose ofthe foregoing, outstanding advances under the Line of Credit (but not theundrawn amount of outstanding Letters of Credit) shall be included as currentliabilities (whether or not such advances would be classified as a currentliability per GAAP).

 

(b)             Tangible Net Worthnot less than the Minimum Amount at any time on or after February 29, 2004,with “Tangible Net Worth” defined as the aggregate of total stockholders’equity (plus Preferred Stock of Summa if it is not included in calculating suchequity under GAAP) plus subordinated debt less any intangible assets, and withthe “Minimum Amount” defined as follows: from and including February 29, 2004, up to but not including the August31, fiscal year end, the Minimum Amount is $23,500,000.00.  Commencing with the August 31, 2004 fiscalyear end, the Minimum amount shall be adjusted upward on a cumulative basis asfollows:  commencing as of the August31, 2004 fiscal year end and continuing on each fiscal year end thereafter, theMinimum Amount shall be increased by fifty percent (50%) of Borrowers’ andSubsidiaries’ consolidated net profit after taxes for the fiscal year ending onsuch date (with no reduction in the event of a loss for any such fiscal year),minus the amount of Preferred Stock redemptions during such fiscal year (withno reduction if the amount of such Preferred Stock redemptions for such fiscalyear exceeds fifty percent (50%) of Borrower’s and Subsidiaries consolidatednet profit after taxes for such fiscal year).

 

(c)              Total Liabilitiesdivided by Adjusted Tangible Net Worth not greater than 2.00 to 1.0 at any timefrom and including February 29, 2004, up to and including August 30, 2004, notgreater than 2.25 to 1.0 at any time from and including August 31, 2004 up toand including August 30, 2006, not greater than 2.50 to 1.00 at any time fromand including August 31, 2006 up to and including August 30, 2007, not greaterthan 2.25 to 1.0 at any time from and including August 31, 2007 up to andincluding August 30, 2008, and not greater than 2.00 to 1.0 at any time on orafter August 31, 2008, with “Total Liabilities” defined as the aggregate ofcurrent liabilities and non-current liabilities less subordinated debt, andwith “Adjusted Tangible Net Worth” defined as the aggregate of totalstockholders’ equity (plus Preferred Stock of Summa if it is not included incalculating such equity under GAAP) plus subordinated debt, less any intangibleassets.

 

(d)             Net income aftertaxes not less than $1.00 on a quarterly basis as of each fiscal quarter end,commencing with the February 29, 2004 fiscal quarter end.

 

(e)              EBITDA CoverageRatio determined on a rolling four fiscal quarter basis as of the each fiscalquarter end, not less than 1.50 to 1.00 from and including the four fiscalquarter period ending February 29, 2004 up to but not including the four fiscalquarter period ending August 31, 2005, and not less than 2.00 to 1.00 at anyfiscal quarter end on or after August 31, 2005, with “EBITDA” defined as netprofit before tax plus interest expense (net of capitalized interest expense),depreciation expense and amortization expense, and with “EBITDA

 

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Coverage Ratio” defined asEBITDA divided by the aggregate of total interest expense plus the currentmaturity of long-term debt for such four fiscal quarter period.

 

SECTION 4.10.                         NOTICE TOBANK. Each Borrower shall promptly (but in no event more than five (5) daysafter the occurrence of each such event or matter) give written notice to Bankin reasonable detail of:  (a) theoccurrence of any Event of Default, or any condition, event or act which withthe giving of notice or the passage of time or both would constitute an Eventof Default; (b) any change in the name or the organizational structure ofany Borrower or any Subsidiary; (c) the occurrence and nature of anyReportable Event or Prohibited Transaction, each as defined in ERISA, or anyfunding deficiency with respect to any Plan; (d) any termination orcancellation of any insurance policy which any Borrower or any Subsidiary isrequired to maintain, or any uninsured or partially uninsured loss throughliability or property damage, or through fire, theft or any other causeaffecting any Borrower’s or any Subsidiary’s property in excess of an aggregateof $500,000.00; or (e) the commencement of a borrowing relationship between aForeign Subsidiary and a lender (other than Bank) which is permitted underSection 5.2(e) below.

 

 

ARTICLE V

NEGATIVE COVENANTS

 

Each Borrowerfurther covenants that so long as Bank remains committed to extend credit toBorrowers pursuant hereto, or any liabilities (whether direct or contingent,liquidated or unliquidated) of Borrowers to Bank under any of the LoanDocuments remain outstanding, and until payment in full of all obligations ofBorrowers subject hereto, without Bank’s prior written consent:

 

SECTION 5.1.                               USEOF FUNDS.  Each Borrower will not useany of the proceeds of any credit extended hereunder except for the purposesstated in Article I hereof.

 

SECTION 5.2.                               OTHERINDEBTEDNESS.  Each Borrower will not,and will not permit any Subsidiary to, create, incur, assume or permit to existany indebtedness or liabilities resulting from borrowings, loans or advances,whether secured or unsecured, matured or unmatured, liquidated or unliquidated,joint or several, except (a) the liabilities of Borrowers and Subsidiaries toBank, (b) any other liabilities of Borrowers and Subsidiaries existing asof, and disclosed to Bank in writing prior to, the date hereof, (c) purchase money indebtedness incurredhereafter by a Borrower or a Subsidiary in connection with the acquisition bysuch company in the ordinary course of business of equipment and real property,(d) borrowings hereafter by a Borrower or a Subsidiary from another Borrower orSubsidiary in the ordinary course of business, and (e) borrowings hereafter bya Foreign Subsidiary in the ordinary course of business from a lender (otherthan Bank) in the jurisdiction where such Foreign Subsidiary is organized.   The parties acknowledge that this Section5.2(c) does not apply to trade debt and accounts payable incurred in theordinary course of business.  Notwithstandinganything to the contrary in this Section 5.2, all obligations ofBorrowers and Subsidiaries to Comerica Bank shall be repaid in full andterminated concurrently with the initial extension of credit hereunder, exceptfor such existing real-estate secured term loans from Comerica Bank as areheretofore approved by Bank.

 

SECTION 5.3.                               MERGER,CONSOLIDATION, TRANSFER OF ASSETS.  EachBorrower will not, and will not permit any Subsidiary to, merge into orconsolidate with any other entity, except for (a) the merger of any Borrowerinto Summa (with Summa as the survivor), (b)

 

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the merger of any Borrowerother than Summa into any other Borrower which is a wholly-owned Subsidiary ofSumma (with such other Borrower as the survivor), (c) the merger of anySubsidiary of any Borrower into such Borrower (with such Borrower as thesurvivor), and (d) the merger of any corporation into any Borrower or anywholly-owned Subsidiary of any Borrower (with such Borrower or wholly-ownedSubsidiary as the survivor) as part of a Permitted Acquisition (as definedbelow); make any substantial change in the nature of any Borrower’s or anySubsidiary’s business as conducted as of the date hereof; acquire all orsubstantially all of the assets of any other entity, except for mergers whichare permitted hereunder and Permitted Acquisitions; nor sell, lease, transferor otherwise dispose of all or a substantial or material portion of anyBorrower’s or any Subsidiary’s assets except in the ordinary course ofbusiness.

 

As usedherein, “Permitted Acquisitions” means any acquisition by any Borrower or anywholly-owned Subsidiary of any Borrower of (a) all or substantially all of theoperating assets of any person or entity, or (b) all or substantially all ofthe stock of any corporation (so that such corporation becomes a wholly-ownedSubsidiary); provided, however, that all of the following conditions aresatisfied:

 

(i)                 The assets,entity or line of business which is acquired is in a substantially similar lineof business as that of Borrowers and Subsidiaries as their businesses areconducted on the date of this Agreement.

 

(ii)              The acquisition isconsummated in compliance with applicable law.

 

(iii)           There is no Event ofDefault, nor any act, condition or event which with the giving of notice or thepassage of time or both would constitute an Event of Default, and no such Eventof Default or potential Event of Default would result after giving effect tothe acquisition.

 

(iv)          Borrowers give Bank atleast thirty (30) days prior notice of the acquisition;

 

(v)             Borrowers furnishBank with copies of such documents and with such information pertaining to theacquisition as Bank may require, including without limitation copies of any acquisitionagreement and formation documents of any acquired company.

 

(vi)          The aggregateconsideration (valuing any non-cash consideration at its fair market value, andincluding without limitation the amount of all liabilities assumed or acquired)does not exceed Ten Million Dollars ($10,000,000.00) for all such acquisitionsin the aggregate during any fiscal year.

 

(vii)       In the case of theacquisition of a U.S. corporation, such corporation shall become one of theBorrowers under this Agreement and such corporation and the other Borrowersshall execute and/or deliver to Bank such documents as Bank may reasonablyrequire to evidence such relationship. In connection therewith, such corporation shall grant Bank a securityinterest in its personal property assets on the same terms as specified hereinfor Borrowers.

 

SECTION 5.4.                               GUARANTIES.  Each Borrower will not, and will not permitany Subsidiary to, guarantee or become liable in any way as surety, endorser(other than as endorser of negotiable instruments for deposit or collection inthe ordinary course of business), accommodation endorser or otherwise for, norpledge or hypothecate any assets as security for, any liabilities orobligations of any other person or entity, except (a) any of the foregoing in favorof Bank, and (b) any of the foregoing existing as of, and disclosed byBorrowers to Bank in writing, prior to the date hereof.  Notwithstanding anything to the contrary in this Section 5.4,

 

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any of the foregoingguaranties, third party pledges and third party security interests in favor ofComerica Bank shall be terminated concurrently with the initial extension ofcredit hereunder.

 

SECTION 5.5.                               LOANS,ADVANCES, INVESTMENTS.  Each Borrowerwill not, and will not permit any Subsidiary to, make any loans or advances toor investments in any person or entity, except (a) any of the foregoingexisting as of, and disclosed to Bank in writing prior to, the date hereof,(b)  loans made hereafter by a Borrower or a Subsidiary to another Borrower or Subsidiaryin the ordinary course of business, and (c) Permitted Acquisitions.

 

SECTION 5.6.                               DIVIDENDS,DISTRIBUTIONS.  Each Borrower will not,and will not permit any Subsidiary to, declare or pay any dividend or distributioneither in cash, stock or any other property on any Borrower’s or anySubsidiary’s stock now or hereafter outstanding, nor redeem, retire, repurchaseor otherwise acquire any shares of any class of any Borrower’s or anySubsidiary’s stock now or hereafter outstanding; provided however,that (1) any Subsidiary of Summa may pay cash dividends to Summa, (2) Summa maypay lawful cash dividends to its shareholders on its common stock and makelawful repurchases its common stock so long as all such payments andrepurchases during any fiscal year to not exceed, in the aggregate, the lesserof Two Million Dollars ($2,000,000.00) or the consolidated net profit aftertaxes of Summa for such fiscal year (determined in accordance with GAAP), and(3) Summa may make lawful redemptions of its preferred stock; provided,however, that no payment or redemption under the preceding subdivisions (2)or (3) of this paragraph shall be made if there exists any Event of Default, orany act, condition or event which with the giving of notice or the passage oftime or both would constitute such an Event of Default, or if any such Event ofDefault would result after giving effect to such transaction

 

SECTION 5.7.                               PLEDGEOF ASSETS.  Each Borrower will not, andwill not permit any Subsidiary to, mortgage, pledge, grant or permit to exist asecurity interest in, or lien upon, all or any portion of any Borrower’s or anySubsidiary’s assets now owned or hereafter acquired, except (a) any of theforegoing in favor of Bank, (b) any of the foregoing which is existing as of,and disclosed to Bank in writing prior to, the date hereof, (c) purchase moneysecurity interests hereafter granted by a Borrower or a Subsidiary to acreditor to secure purchase money indebtedness permitted under Section 5.2(c)above, and (d) security interests hereafter granted by a Foreign Subsidiary inits assets to a lender (other than Bank) to secure borrowings by such ForeignSubsidiary from such lender which are permitted under Section 5.2(e) above.

 

ARTICLE VI

EVENTS OF DEFAULT

 

SECTION 6.1.                               Theoccurrence of any of the following shall constitute an “Event of Default” underthis Agreement:

 

(a)              Any Borrower shallfail to pay within five (5) days of the date when due any principal, interest,fees or other amounts payable under any of the Loan Documents.

 

(b)             Any financialstatement or certificate furnished to Bank in connection with, or anyrepresentation or warranty made by any Borrower or any other party under thisAgreement or any other Loan Document shall prove to be incorrect, false ormisleading in any material respect when furnished or made.

 

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(c)              Any default in theperformance of or compliance with any obligation, agreement or other provisioncontained herein or in any other Loan Document (other than those referred to insubsections (a) and (b) above), and with respect to any such default which byits nature can be cured, such default shall continue for a period of twenty(20) days from its occurrence; provided, however, that in the case of adefault which by its nature can be cured under the following covenants of thisAgreement, such default shall continue for a period of twenty (20) days fromBorrowers receipt of written notice thereof from Bank:  Section 4.2 as it relates to the maintenanceof adequate books and records in accordance with GAAP; Section 4.3 as itrelates to Bank’s satisfaction with the form and detail of the reportingthereunder; section 4.4; Section 4.5; Section 4.6; and Section 4.7 as itrelates to making provision to Bank’s reasonable satisfaction for payment ofthe amount referenced therein.

 

(d)             Any default in thepayment or performance of any obligation, or any defined event of default,under the terms of any contract or instrument (other than any of the LoanDocuments) pursuant to which any Borrower or any Subsidiary has incurred anydebt or other liability to any person or entity, including Bank; provided,however, that any cure period applicable thereto has expired and in thecase of a default or defined event of default under the terms of indebtednessto a person or entity other than Bank such indebtedness is in excess of$500,000.00, individually or in the aggregate for all such defaults by all ofsuch companies combined.

 

(e)              The filing of anotice of judgment lien against any Borrower or any Subsidiary; or therecording of any abstract of judgment against any Borrower or any Subsidiary inany county in which such Borrower or such Subsidiary has an interest in realproperty; or the service of a notice of levy and/or of a writ of attachment orexecution, or other like process, against the assets of any Borrower or anySubsidiary; or the entry of a judgment against any Borrower or any Subsidiaryprovided, however, that such judgments, liens, levies, writs, executionsand other process involve debts of or claims against any or all of suchcompanies in excess of $500,000.00, individually or in the aggregate for allsuch items against all of said companies combined,  and within thirty (30) days after the creation thereof, or atleast five (5) days prior to the date on which any assets could be lawfullysold in satisfaction thereof, such debt or claim is not satisfied or stayedpending appeal and insured against in a manner satisfactory to Bank.

 

(f)                Any Borrower orany Subsidiary shall become insolvent, or shall suffer or consent to or applyfor the appointment of a receiver, trustee, custodian or liquidator of itselfor any of its property, or shall generally fail to pay its debts as they becomedue, or shall make a general assignment for the benefit of creditors; anyBorrower or any Subsidiary shall file a voluntary petition in bankruptcy, orseeking reorganization, in order to effect a plan or other arrangement withcreditors or any other relief under the Bankruptcy Reform Act, Title 11 of theUnited States Code, as amended or recodified from time to time (“BankruptcyCode”), or under any state or federal law granting relief to debtors, whethernow or hereafter in effect; or any involuntary petition or proceeding pursuantto the Bankruptcy Code or any other applicable state or federal law relating tobankruptcy, reorganization or other relief for debtors is filed or commencedagainst any Borrower or any Subsidiary and such involuntary petition orproceeding is unopposed by such Borrower or Subsidiary or is not dismissedwithin sixty (60) days of its commencement, or any Borrower or any Subsidiaryshall file an answer admitting the jurisdiction of the court and the materialallegations of any involuntary petition; or any Borrower or any Subsidiaryshall be adjudicated a bankrupt, or an order for relief shall be enteredagainst any Borrower or any Subsidiary by any court of competent jurisdictionunder the Bankruptcy Code or any other applicable state or federal law relatingto bankruptcy, reorganization or other relief for debtors.

 

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(g)             There shall exist oroccur any event or condition which Bank in good faith believes impairs theprospect of payment or performance by any Borrower or any Subsidiary of itsobligations under any of the Loan Documents.

 

(h)             The dissolution orliquidation of any Borrower or any Subsidiary; or any Borrower or anySubsidiary, or any of their directors, stockholders or members, shall takeaction seeking to effect the dissolution or liquidation of any such Borrower orSubsidiary.

 

(i)                 Summa at any timeceases to own one hundred percent (100%) of each Subsidiary other than PlastronIndustries, Inc.; or Summa at any time ceases to own at least ninety percent(90%) of Plastron Industries, Inc.

 

SECTION 6.2.                               REMEDIES.  Upon the occurrence of any Event ofDefault:  (a) all indebtedness ofBorrowers under each of the Loan Documents, any term thereof to the contrarynotwithstanding, shall at Bank’s option and without notice become immediatelydue and payable without presentment, demand, protest or notice of dishonor, allof which are hereby expressly waived by each Borrower; (b) the obligation,if any, of Bank to extend any further credit under any of the Loan Documentsshall immediately cease and terminate; and (c) Bank shall have all rights,powers and remedies available under each of the Loan Documents, or accorded bylaw, including without limitation the right to resort to any or all securityfor any credit subject hereto and to exercise any or all of the rights of abeneficiary or secured party pursuant to applicable law.  All rights, powers and remedies of Bank maybe exercised at any time by Bank and from time to time after the occurrence ofan Event of Default, are cumulative and not exclusive, and shall be in additionto any other rights, powers or remedies provided by law or equity.

 

ARTICLE VII

MISCELLANEOUS

 

SECTION 7.1.                             NOWAIVER.  No delay, failure ordiscontinuance of Bank in exercising any right, power or remedy under any ofthe Loan Documents shall affect or operate as a waiver of such right, power orremedy; nor shall any single or partial exercise of any such right, power orremedy preclude, waive or otherwise affect any other or further exercisethereof or the exercise of any other right, power or remedy.  Any waiver, permit, consent or approval ofany kind by Bank of any breach of or default under any of the Loan Documentsmust be in writing and shall be effective only to the extent set forth in suchwriting.

 

SECTION 7.2.                               NOTICES.  All notices, requests and demands which anyparty is required or may desire to give to any other party under any provisionof this Agreement must be in writing delivered to each party at the followingaddress:

 
| BORROWERS: |   | Summa Industries                             |
|------------|--------|----------------------------------------------|
|       |   | 21250 Hawthorne Blvd., Suite 500             |
|       |   | Torrance, California 90503                   |
|       |   |                                         |
| BANK:      |   | WELLS FARGO BANK, NATIONAL ASSOCIATION       |
|       |   | South Bay Regional Commercial Banking Office |
|       |   | 111 West Ocean Blvd.                         |
|       |   | 3rd Floor                                    |
|       |   | Long Beach, California 90802                 |

 

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or to such other address as any party may designate by written noticeto all other parties.  Each such notice,request and demand shall be deemed given or made as follows:  (a) if sent by hand delivery, upondelivery; (b) if sent by mail, upon the earlier of the date of receipt orthree (3) days after deposit in the U.S. mail, first class and postage prepaid;and (c) if sent by telecopy, upon receipt.

 

SECTION 7.3.                               COSTS,EXPENSES AND ATTORNEYS’ FEES.  Subjectto the last sentence regarding the right of the prevailing party in an actionhereunder to recover its fees and costs from the non-prevailing party,Borrowers shall pay to Bank immediately upon demand the full amount of allpayments, advances, charges, costs and expenses, including reasonableattorneys’ fees (to include outside counsel fees and all allocated costs ofBank’s in-house counsel), expended or incurred by Bank in connection with(a) the negotiation and preparation of this Agreement and the other LoanDocuments, Bank’s continued administration hereof and thereof, and thepreparation of any amendments and waivers hereto and thereto, (b) theenforcement of Bank’s rights and/or the collection of any amounts which becomedue to Bank under any of the Loan Documents, and (c) the prosecution ordefense of any action in any way related to any of the Loan Documents,including without limitation, any action for declaratory relief, whetherincurred at the trial or appellate level, in an arbitration proceeding orotherwise, and including any of the foregoing incurred in connection with anybankruptcy proceeding (including without limitation, any adversary proceeding,contested matter or motion brought by Bank or any other person) relating to anyBorrower or any other person or entity. Notwithstanding the foregoing or any similar provision in any other LoanDocument, the prevailing party in any action to enforce this Agreement or anyof the other Loan Documents shall be entitled to recover its reasonableattorneys’ fees and costs incurred in connection with such action from thenon-prevailing party.

 

SECTION 7.4.                               SUCCESSORS,ASSIGNMENT.  This Agreement shall bebinding upon and inure to the benefit of the heirs, executors, administrators,legal representatives, successors and assigns of the parties; provided however,that Borrowers may not assign or transfer any interest hereunder without Bank’sprior written consent.  Bank reservesthe right to sell, assign, transfer, negotiate or grant participations in allor any part of, or any interest in, Bank’s rights and benefits under each ofthe Loan Documents.  In connectiontherewith, Bank may disclose all documents and information which Bank now hasor may hereafter acquire relating to any credit subject hereto, any Borrower orits business, any Subsidiary or the business of such Subsidiary, or anycollateral required hereunder.

 

SECTION 7.5.                               ENTIREAGREEMENT; AMENDMENT.  This Agreementand the other Loan Documents constitute the entire agreement between Borrowersand Bank with respect to each credit subject hereto and supersede all priornegotiations, communications, discussions and correspondence concerning thesubject matter hereof.  This Agreementmay be amended or modified only in writing signed by each party hereto.

 

SECTION 7.6.                               NOTHIRD PARTY BENEFICIARIES.  ThisAgreement is made and entered into for the sole protection and benefit of theparties hereto and their respective permitted successors and assigns, and noother person or entity shall be a third party beneficiary of, or have anydirect or indirect cause of action or claim in connection with, this Agreementor any other of the Loan Documents to which it is not a party.

 

SECTION 7.7.                               TIME.  Time is of the essence of each and everyprovision of this Agreement and each other of the Loan Documents.

 

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SECTION 7.8.                               SEVERABILITYOF PROVISIONS.  If any provision of thisAgreement shall be prohibited by or invalid under applicable law, suchprovision shall be ineffective only to the extent of such prohibition orinvalidity without invalidating the remainder of such provision or anyremaining provisions of this Agreement.

 

SECTION 7.9.                               COUNTERPARTS.  This Agreement may be executed in any numberof counterparts, each of which when executed and delivered shall be deemed tobe an original, and all of which when taken together shall constitute one andthe same Agreement.

 

SECTION 7.10.                         GOVERNINGLAW.  This Agreement shall be governedby and construed in accordance with the laws of the State of California.

 

SECTION7.11.  JOINT AND SEVERAL LIABILITY.

 

(a)              Borrowers havedetermined and represent to Bank that it is in the best interests of Borrowersand Subsidiaries and in pursuance of their legitimate business purposes toinduce Bank to extend credit pursuant to this Agreement.  Borrowers acknowledge and represent that thebusinesses conducted by each Borrower and each Subsidiary are related, theavailability of the commitments provided for herein benefits Borrowers andSubsidiaries, and advances and other credit extensions made hereunder willinure to the benefit of Borrowers and Subsidiaries, individually and as agroup.

 

(b)             Borrowers havedetermined and represent to Bank that each of Borrowers and of Subsidiarieshas, and after giving effect to the transactions contemplated by this Agreementwill have, assets having a fair saleable value in excess of its debts, aftergiving effect to any rights of contribution or subrogation which may beavailable to each such company, and each of Borrowers and of Subsidiaries has,and will have, access to adequate capital for the conduct of its business andthe ability to pay its debts as such debts mature.

 

(c)              Each Borrower agreesthat it is jointly and severally liable to Bank for, and each Borrower agreesto pay to Bank when due the full amount of, all indebtedness now existing orhereafter arising to Bank under or in connection with the Line of Credit andall modifications, extensions and renewals thereof, including withoutlimitation all advances requested by or disbursed to any Borrower under theLine of Credit, all interest which accrues thereon, all payments due to Bank inconnection with any Letter of Credit issued by Bank or any affiliate of Bank atthe request of or for the account of any Borrower under the Line of Credit,including but not limited to the obligation of any Borrower to reimburse Bankfor the amount of any draft paid under any such Letter of Credit and allinterest which accrues thereon, and all fees, costs and expenses chargeable toBorrowers or any of them in connection with the Line of Credit.

 

(d)             The liability of eachBorrower for the Line of Credit shall be reinstated and revived and the rightsof Bank shall continue if and to the extent that for any reason any amount atany time paid on account of the Line of Credit is rescinded or must otherwisebe restored by Bank, whether as a result of any proceedings in bankruptcy orreorganization or otherwise, all as though such amount had not been paid.

 

(e)              Each Borrowerauthorizes Bank, without notice to or demand on such Borrower, and withoutaffecting such Borrower’s liability for the Line of Credit, from time to timeto:  (i) alter, compromise, extend,accelerate or otherwise change the time for payment of, or otherwise change theterms of, the liabilities and obligations of any other Borrower or any otherperson or entity to Bank on account of the Line of Credit; (ii) take andhold security from any other Borrower or any other person or entity for thepayment of the Line of Credit, and exchange,

 

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enforce, waive, subordinate orrelease any such security; (iii) apply such security and direct the orderor manner of sale thereof, including without limitation, a non-judicial salepermitted by the terms of the controlling security agreement or deed of trust,as Bank in its discretion may determine; (iv) release or substitute anyone or more of the endorsers or any guarantors of the Line of Credit, or anyother party obligated thereon; and (v) apply payments received by Bankfrom any other Borrower to indebtedness of such other Borrower to Bank otherthan the Line of Credit.

 

(f)                Each Borrowerrepresents and warrants to Bank that it has established adequate means ofobtaining from each other Borrower and Subsidiaries on a continuing basisfinancial and other information pertaining to each such company’s financialcondition, and each Borrower agrees to keep adequately informed from such meansof any facts, events or circumstances which might in any way affect its riskshereunder.  Each Borrower further agreesthat Bank shall have no obligation to disclose to it any information ormaterial about any other Borrower or any Subsidiary which is acquired by Bankin any manner.

 

(g)             Each Borrower waivesany right to require Bank to: (i) proceed against any other Borrower orany other person or entity; (ii) marshal assets or proceed against or exhaustany security held from any other Borrower or any other person or entity;(iii) pursue any other remedy in Bank’s power; (iv) apply paymentsreceived by Bank from any other Borrower to the Line of Credit; or(v) make any presentments or demands for performance, or give any noticesof nonperformance, protests, notices of protest or notices of dishonor inconnection with the Line of Credit.

 

(h)             Each Borrower waivesany defense to its liability for the Line of Credit based upon or arising byreason of: (i) any disability or other defense of any other Borrower orany other person or entity ; (ii) the cessation or limitation from anycause whatsoever, other than payment in full, of the liability of any otherBorrower or any other person or entity for the Line of Credit; (iii) anylack of authority of any officer, director, partner, agent or other personacting or purporting to act on behalf of any other Borrower or any other partyor any defect in the formation of any other Borrower or any other party;(iv) the application by any other Borrower of the proceeds of the Line ofCredit for purposes other than the purposes intended or understood by Bank orany Borrower; (v) any act or omission by Bank which directly or indirectlyresults in or aids the discharge of any other Borrower or any other party byoperation of law or otherwise, or which in any way impairs or suspends anyrights or remedies of Bank against any other Borrower or any other party; (vi)any impairment of the value of any interest in any security for the Line ofCredit, including without limitation, the failure to obtain or maintainperfection or recordation of any interest in any such security, the release ofany such security without substitution, and/or the failure to preserve thevalue of, or to comply with applicable law in disposing of, any such security;or (vii) any modification of the obligations or liabilities of any otherBorrower or any other party for the Line of Credit, including withoutlimitation the renewal, extension, acceleration or other change in time forpayment of, or other change in the terms of, the indebtedness of any otherBorrower for the Line of Credit, including increase or decrease of the rate ofinterest thereon.  Until the Line ofCredit and all indebtedness of each Borrower to Bank arising under or inconnection with this Agreement shall have been paid in full, no Borrower shallhave any right of subrogation.  EachBorrower waives all rights and defenses it may have arising out of (A) anyelection of remedies by Bank, even though that election of remedies, such as anon-judicial foreclosure with respect to any security for the Line Credit,destroys its rights of subrogation or its rights to proceed against any otherBorrower or any other person or entity for reimbursement, or (B) any lossof rights it may suffer by reason of any rights, powers or remedies of anyother Borrower in connection with any anti-deficiency laws or any other lawslimiting, qualifying or discharging any Borrower’s indebtedness for the Line ofCredit, whether by operation of law or otherwise.  Until the Line of Credit and all indebtedness of each

 

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Borrower to Bank arising underor in connection with this Agreement shall have been paid in full, eachBorrower waives any right to enforce any remedy which Bank now has or mayhereafter have against any other Borrower or any other person or entity, andwaives any benefit of, or any right to participate in, any security now orhereafter held by Bank.

 

(i)                 If any of thewaivers herein is determined to be contrary to any applicable law or publicpolicy, such waiver shall be effective only to the extent permitted by law.

 

(j)                 It is theposition of the Borrowers that each Borrower and each Subsidiary benefit fromthe Line of Credit that has been made available by Bank under this Agreementand from each extension of credit thereunder, regardless of whether such creditis disbursed to a joint account of Borrowers or to or for the account of anyBorrower.

 

SECTION 7.12.                         ARBITRATION.

 

(a)              Arbitration.  The parties hereto agree, upon demand by anyparty, to submit to binding arbitration all claims, disputes and controversiesbetween or among them (and their respective employees, officers, directors,attorneys, and other agents), whether in tort, contract or otherwise arisingout of or relating to in any way (i) the credit facilities and related LoanDocuments which are the subject of this Agreement and its negotiation,execution, collateralization, administration, repayment, modification,extension, substitution, formation, inducement, enforcement, default ortermination; or (ii) requests for additional credit.

 

(b)             Governing Rules.  Any arbitration proceeding will (i) proceedin a location in California selected by the American Arbitration Association(“AAA”); (ii) be governed by the Federal Arbitration Act (Title 9 of the UnitedStates Code), notwithstanding any conflicting choice of law provision in any ofthe documents between the parties; and (iii) be conducted by the AAA, or suchother administrator as the parties shall mutually agree upon, in accordancewith the AAA’s commercial dispute resolution procedures, unless the claim orcounterclaim is at least $1,000,000.00 exclusive of claimed interest,arbitration fees and costs in which case the arbitration shall be conducted inaccordance with the AAA’s optional procedures for large, complex commercialdisputes (the commercial dispute resolution procedures or the optionalprocedures for large, complex commercial disputes to be referred to, asapplicable, as the “Rules”).  If thereis any inconsistency between the terms hereof and the Rules, the terms andprocedures set forth herein shall control. Any party who fails or refuses to submit to arbitration following ademand by any other party shall bear all costs and expenses incurred by suchother party in compelling arbitration of any dispute.  Nothing contained herein shall be deemed to be a waiver by anyparty that is a bank of the protections afforded to it under 12 U.S.C. §91 orany similar applicable state law.

 

(c)              No Waiver ofProvisional Remedies, Self-Help and Foreclosure.  The arbitration requirement does not limit the right of any partyto (i) foreclose against real or personal property collateral; (ii) exerciseself-help remedies relating to collateral or proceeds of collateral such assetoff or repossession; or (iii) obtain provisional or ancillary remedies suchas replevin, injunctive relief, attachment or the appointment of a receiver,before during or after the pendency of any arbitration proceeding.  This exclusion does not constitute a waiverof the right or obligation of any party to submit any dispute to arbitration orreference hereunder, including those arising from the exercise of the actionsdetailed in sections (i), (ii) and (iii) of this paragraph.

 

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(d)             ArbitratorQualifications and Powers.  Anyarbitration proceeding in which the amount in controversy is $5,000,000.00 orless will be decided by a single arbitrator selected according to the Rules,and who shall not render an award of greater than $5,000,000.00.  Any dispute in which the amount incontroversy exceeds $5,000,000.00 shall be decided by majority vote of a panelof three arbitrators; provided however, that all three arbitrators mustactively participate in all hearings and deliberations.  The arbitrator will be a neutral attorneylicensed in the State of California or a neutral retired judge of the state orfederal judiciary of California, in either case with a minimum of ten years experiencein the substantive law applicable to the subject matter of the dispute to bearbitrated.  The arbitrator willdetermine whether or not an issue is arbitratable and will give effect to thestatutes of limitation in determining any claim.  In any arbitration proceeding the arbitrator will decide (bydocuments only or with a hearing at the arbitrator’s discretion) anypre-hearing motions which are similar to motions to dismiss for failure tostate a claim or motions for summary adjudication.  The arbitrator shall resolve all disputes in accordance with thesubstantive law of California and may grant any remedy or relief that a courtof such state could order or grant within the scope hereof and such ancillaryrelief as is necessary to make effective any award.  The arbitrator shall also have the power to award recovery of allcosts and fees, to impose sanctions and to take such other action as thearbitrator deems necessary to the same extent a judge could pursuant to theFederal Rules of Civil Procedure, the California Rules of Civil Procedure orother applicable law.  Judgment upon theaward rendered by the arbitrator may be entered in any court havingjurisdiction.  The institution andmaintenance of an action for judicial relief or pursuit of a provisional orancillary remedy shall not constitute a waiver of the right of any party,including the plaintiff, to submit the controversy or claim to arbitration ifany other party contests such action for judicial relief.

 

(e)              Discovery.  In any arbitration proceeding discovery willbe permitted in accordance with the Rules. All discovery shall be expressly limited to matters directly relevant tothe dispute being arbitrated and must be completed no later than 20 days beforethe hearing date and within 180 days of the filing of the dispute with theAAA.  Any requests for an extension ofthe discovery periods, or any discovery disputes, will be subject to finaldetermination by the arbitrator upon a showing that the request for discoveryis essential for the party’s presentation and that no alternative means forobtaining information is available.

 

(f)                ClassProceedings and Consolidations.  Theresolution of any dispute arising pursuant to the terms of this Agreement shallbe determined by a separate arbitration proceeding and such dispute shall notbe consolidated with other disputes or included in any class proceeding.

 

(g)             Payment OfArbitration Costs And Fees**.** The arbitrator shall award all costs and expenses of the arbitrationproceeding.

 

(h)             Real PropertyCollateral; Judicial Reference. Notwithstanding anything herein to the contrary, no dispute shall besubmitted to arbitration if the dispute concerns indebtedness secured directlyor indirectly, in whole or in part, by any real property unless (i) the holderof the mortgage, lien or security interest specifically elects in writing toproceed with the arbitration, or (ii) all parties to the arbitration waive anyrights or benefits that might accrue to them by virtue of the single actionrule statute of California, thereby agreeing that all indebtedness andobligations of the parties, and all mortgages, liens and security interestssecuring such indebtedness and obligations, shall remain fully valid andenforceable.  If any such dispute is notsubmitted to arbitration, the dispute shall be referred to a referee inaccordance with California Code of Civil Procedure Section 638 et seq., andthis general reference agreement is intended to be specifically enforceable inaccordance with said Section 638.  A refereewith the

 

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qualifications required hereinfor arbitrators shall be selected pursuant to the AAA’s selectionprocedures.  Judgment upon the decisionrendered by a referee shall be entered in the court in which such proceedingwas commenced in accordance with California Code of Civil Procedure Sections644 and 645.

 

(i)                 Miscellaneous.  To the maximum extent practicable, the AAA,the arbitrators and the parties shall take all action required to conclude anyarbitration proceeding within 180 days of the filing of the dispute with theAAA.  No arbitrator or other party to anarbitration proceeding may disclose the existence, content or results thereof,except for disclosures of information by a party required in the ordinarycourse of its business or by applicable law or regulation.  If more than one agreement for arbitrationby or between the parties potentially applies to a dispute, the arbitrationprovision most directly related to the Loan Documents or the subject matter ofthe dispute shall control.  Thisarbitration provision shall survive termination, amendment or expiration of anyof the Loan Documents or any relationship between the parties.

 

SECTION 7.13.                         CONFLICTINGPROVISIONS.  In the event of an expressconflict between any provision of this Agreement and any provision in anotherLoan Document, the provision in this Agreement shall prevail.  In this regard, the broader or moreinclusive  description of collateral inany security agreement that is part of the Loan Documents shall not beconsidered in conflict with the narrower or less inclusive description ofcollateral in this Agreement.

 

IN WITNESSWHEREOF, the parties hereto have caused this Agreement to be executed as of theday and year first written above.

 
| WELLS FARGO BANK, NATIONAL ASSOCIATION |
|----------------------------------------|
|                                   |
| By:                                    |   | /s/ Tom Sigurdson |   |
|                                   |   |
| Title:                                 |   | Vice President |   |
|                                   |   |
|                                   |   |
| SUMMA INDUSTRIES                       |   |
|                                   |   |
| By:                                    |   | /s/ Trygve M. Thoresen |   |
|                                   |   |
| Title:                                 |   | Vice President |   |
|                                   |   |
|                                   |   |
| KVP FALCON PLASTIC BELTING,  INC.      |   |
|                                   |   |
| By:                                    |   | /s/ Trygve M. Thoresen |   |
|                                   |   |
| Title:                                 |   | Vice President |   |
|                                        |  |  |  |  |  |  |  |  |  |

 

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| PLASTRON INDUSTRIES, INC.           |   |
|-------------------------------------|--------|
|                                |   |
| By:                                 |   | /s/ Trygve M. Thoresen |   |
|                                |   |
| Title:                              |   | Vice President |   |
|                                |   |
|                                |   |
| LEXALITE INTERNATIONAL  CORPORATION |   |
|                                |   |
| By:                                 |   | /s/ Trygve M. Thoresen |   |
|                                |   |
| Title:                              |   | Vice President |   |
|                                |   |
|                                |   |
| CALNETICS CORPORATION               |   |
|                                |   |
| By:                                 |   | /s/ Trygve M. Thoresen |   |
|                                |   |
| Title:                              |   | Vice President |   |
|                                |   |
|                                |   |
| KVP HOLDINGS, INC.                  |   |
|                                |   |
| By:                                 |   | /s/ Trygve M. Thoresen |   |
|                                |   |
| Title:                              |   | Vice President |   |
|                                |
|                                |
| PLASTIC SPECIALTIES, INC.           |   |
|                                |   |
| By:                                 |   | /s/ Trygve M. Thoresen |   |
|                                |   |
| Title:                              |   | Vice President |   |
|                                |   |
|                                |   |
| FULLERTON HOLDINGS, INC.            |   |
|                                |   |
| By:                                 |   | /s/ Trygve M. Thoresen |   |
|                                |   |
| Title:                              |   | Vice President |   |
|                                |   |
|                                |   |
| AQUARIUS BRANDS, INC.               |   |
|                                |   |
| By:                                 |   | /s/ Trygve M. Thoresen |   |
|                                |   |
| Title:                              |   | Vice President |   |
|                                     |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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| NY-GLASS PLASTICS, INC.             |   |
|-------------------------------------|--------|
|                                |   |
| By:                                 |   | /s/ Trygve M. Thoresen |   |
|                                |   |
| Title:                              |   | Vice President |   |
|                                |   |
|                                |   |
| CENTRAL VALLEY MANUFACTURING,  INC. |   |
|                                |   |
| By:                                 |   | /s/ Trygve M. Thoresen |   |
|                                |
| Title:                              |   | Vice President |   |
|                                     |        |  |  |  |  |  |  |  |  |  |

 

 

Certain Schedules andExhibits to this Agreement have been omitted from this filing, and the issueragrees to furnish supplementally a copy of any omitted schedule or exhibit tothe Securities and Exchange Commission upon request.

 

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