<PAGE>
U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended May 31, 1998
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the Transition Period from N/A to N/A
------- -------
Commission File No. 1-7755
Summa Industries
(Name of registrant as specified in its charter)
Delaware 95-1240978
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
21250 Hawthorne Boulevard, Suite 500, Torrance, California 90503
(Address of principal executive offices, including Zip Code)
Registrant's Telephone Number: (310) 792-7024
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 report), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
The number of shares of common stock outstanding as of June 19, 1998 was
4,249,649.
<PAGE>
Summa Industries
INDEX
PART I - FINANCIAL INFORMATION Page
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets -
August 31, 1997 and May 31, 1998 (unaudited)........................ 3
Condensed Consolidated Statements of Income (unaudited) -
three months and nine months ended May 31, 1997 and 1998............ 4
Condensed Consolidated Statements of Cash Flows (unaudited) -
nine months ended May 31, 1997 and 1998............................. 5
Notes to Condensed Consolidated Financial Statements (unaudited).... 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations.................... 8
PART II - OTHER INFORMATION.................................................. 11
Item 1. Legal Proceedings................................................... 11
Item 2. Changes in Securities............................................... 11
Item 5. Other Information................................................... 12
Item 6. Exhibits and Reports on Form 8-K.................................... 12
Signature Page............................................................... 13
2
<PAGE>
Summa Industries
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
August 31, 1997 May 31, 1998
(unaudited)
--------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 3,020,000 $ 19,000
Accounts receivable 6,603,000 14,030,000
Inventories 2,976,000 9,578,000
Prepaid expenses and other 1,598,000 2,483,000
----------- -----------
Total current assets 14,197,000 26,110,000
Property, plant and equipment 19,998,000 26,594,000
Less accumulated depreciation 3,776,000 6,030,000
----------- -----------
Net property, plant and equipment 16,222,000 20,564,000
Other assets 2,331,000 2,074,000
Net assets of discontinued operations 1,273,000 1,499,000
Goodwill and other intangibles, net 1,628,000 18,709,000
----------- -----------
$35,651,000 $68,956,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,819,000 $ 5,037,000
Accrued liabilities 2,496,000 5,921,000
Current maturities of long-term debt 2,673,000 1,956,000
----------- -----------
Total current liabilities 6,988,000 12,914,000
Long-term debt, net of current maturities 5,571,000 24,394,000
Other long-term liabilities 2,127,000 5,096,000
----------- -----------
Total liabilities 14,686,000 42,404,000
Stockholders' equity:
Common stock, par value $.001; 10,000,000 shares
authorized; issued and outstanding:
4,099,004 at August 31, 1997
4,245,999 at May 31, 1998 16,226,000 18,434,000
Retained earnings 4,739,000 8,118,000
----------- -----------
Total stockholders' equity 20,965,000 26,552,000
----------- -----------
$35,651,000 $68,956,000
=========== ===========
</TABLE>
See accompanying notes.
3
<PAGE>
Summa Industries
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
--------------- --------------- --------------- ---------------
May 31, 1997 May 31, 1998 May 31, 1997 May 31, 1998
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net sales $12,023,000 $23,854,000 $26,634,000 $60,698,000
Cost of sales 8,329,000 16,377,000 18,438,000 42,121,000
----------- ----------- ----------- -----------
Gross profit 3,694,000 7,477,000 8,196,000 18,577,000
Selling, general and administrative 2,595,000 4,565,000 6,115,000 11,917,000
----------- ----------- ----------- -----------
Operating income from continuing
operations 1,099,000 2,912,000 2,081,000 6,660,000
Interest expense, net 105,000 506,000 186,000 1,159,000
Other expense 220,000 84,000 235,000 214,000
----------- ----------- ----------- -----------
Income from continuing operations
before provision for taxes 774,000 2,322,000 1,660,000 5,287,000
Provision for income taxes 316,000 988,000 676,000 2,207,000
----------- ----------- ----------- -----------
Income from continuing operations 458,000 1,334,000 984,000 3,080,000
Income from discontinued operations
net of the effect of income tax 162,000 66,000 478,000 299,000
----------- ----------- ----------- -----------
Net Income $ 620,000 $ 1,400,000 $ 1,462,000 $ 3,379,000
=========== =========== =========== ===========
Earnings per common share
Income from continuing operations
basic $.11 $.32 $.30 $.74
diluted .11 .29 .30 .68
Income from discontinued operations
basic $.04 $.01 $.15 $.07
diluted .04 .01 .14 .06
Net Income
basic $.15 $.33 $.45 $.81
diluted .15 .30 .44 .74
Weighted average common shares
outstanding
basic 4,059,000 4,244,000 3,240,000 4,181,000
diluted 4,105,000 4,661,000 3,286,000 4,544,000
</TABLE>
See accompanying notes.
4
<PAGE>
Summa Industries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Nine months ended
--------------------------------------
May 31, 1997 May 31, 1998
--------------- ---------------
<S> <C> <C>
Operating activities:
Net income $ 1,462,000 $ 3,379,000
--------------- ---------------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,510,000 2,720,000
Loss (gain) on disposition of property, plant and equipment (2,000) 117,000
Net change in assets and liabilities
Accounts receivable 342,000 (1,591,000)
Inventories 89,000 (474,000)
Prepaid expenses and other 115,000 73,000
Accounts payable (839,000) 130,000
Accrued liabilities (587,000) 350,000
--------------- ---------------
Total adjustments 628,000 1,325,000
--------------- ---------------
Net cash provided by operating activities 2,090,000 4,704,000
--------------- ---------------
Investing activities:
Purchase of business (Note 3) --- (22,859,000)
Property, plant & equipment (1,246,000) (2,072,000)
Proceeds from sale of equipment 5,000 6,000
Net decrease in unexpended revenue bond proceeds 204,000 371,000
Proceeds from cash surrender value of life insurance 254,000 ---
--------------- ---------------
Net cash used in investing activities (783,000) (24,554,000)
--------------- ---------------
Financing activities:
Net proceeds from line of credit (275,000) 6,865,000
Proceeds from issuance of long-term debt (612,000) 13,500,000
Payments on long-term debt --- (4,380,000)
Proceeds from exercise of stock options 40,000 864,000
Cash acquired from acquisition of businesses, net of cash paid 318,000 ---
--------------- ---------------
Net cash provided by financing activities (529,000) 16,849,000
--------------- ---------------
Net decrease in cash 778,000 (3,001,000)
Cash at beginning of period 567,000 3,020,000
--------------- ---------------
Cash at end of period $ 1,345,000 $ 19,000
=============== ===============
Supplemental cash flow information:
Cash paid during the period for:
Interest $ 302,000 $ 1,196,000
=============== ===============
Income tax $ 857,000 $ 2,052,000
=============== ===============
Non-cash investing and financing activities
Common stock issued and value assigned to stock options
for acquisitions (Note 3) $ 9,842,000 $ 1,345,000
=============== ===============
Details of acquisitions (Note 3):
Fair value of assets acquired $ 24,064,000 $ 37,317,000
Liabilities assumed or incurred 14,027,000 11,707,000
Common stock issued and value assigned to stock options 9,842,000 1,345,000
--------------- ---------------
Cash paid 195,000 24,265,000
Less cash acquired (513,000) (1,406,000)
--------------- ---------------
Net cash (acquired) used in acquisitions $ (318,000) $ 22,859,000
--------------- ---------------
</TABLE>
See accompanying notes.
5
<PAGE>
Summa Industries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of presentation
The accompanying condensed consolidated financial statements of Summa
Industries (the "Company"), some of which are unaudited, have been
condensed in certain respects and should, therefor, be read in conjunction
with the audited financial statements and notes related thereto contained
in the Company's Annual Report on Form 10-K for the year ended August 31,
1997. In the opinion of the Company, the accompanying unaudited interim
consolidated financial statements contain all adjustments necessary for a
fair presentation for the interim period. (See Notes 3 and 4 below.) The
results of operations for the three months and nine months ended May 31,
1998 are not necessarily indicative of the results to be expected for the
full year ending August 31, 1998.
2. Inventories
Inventories of the continuing businesses at August 31, 1997 and May 31,
1998 were as follows:
<TABLE>
<CAPTION>
August 31, 1997 May 31, 1998
(unaudited)
--------------- ------------
<S> <C> <C>
Finished goods $ 885,000 $3,703,000
Work in process 13,000 70,000
Material and parts 2,078,000 5,805,000
---------- ----------
$2,976,000 $9,578,000
========== ==========
</TABLE>
3. Acquisitions
On May 1, 1998, the Company completed the acquisition of Falcon Belting,
Inc. ("Falcon") of Oklahoma City, Oklahoma, a manufacturer of modular
plastic conveyor belting used in food processing industries. The operations
of Falcon have been consolidated with the Company's KVP Falcon Plastic
Belting, Inc. subsidiary (formerly KVP Systems, Inc.). The total
acquisition cost was $5,625,000, consisting of $2,639,000 in cash and the
present value of obligations to make future payments to the former owner of
Falcon and liabilities assumed or incurred of $2,986,000. The acquisition
has been accounted for using the purchase method of accounting and,
accordingly, the purchase price has been allocated to identifiable tangible
and intangible assets purchased and liabilities assumed or incurred based
upon their fair value at the date of acquisition. The excess of the
purchase price over the fair value of the net assets acquired amounted to
$2,295,000 and has been recorded as goodwill which is being amortized on a
straight-line basis over 30 years.
On October 28, 1997, the Company completed the acquisition of Calnetics
Corporation ("Calnetics"). The total acquisition cost was $31,692,000,
consisting of cash due to former Calnetics shareholders of $22,335,000,
acquisition costs of $50,000, liabilities assumed or incurred of
$7,962,000 and an estimated fair value of $1,345,000 for options issued in
conjunction with the transaction, primarily replacement options issued to
Calnetics employees who continued with the Company. The acquisition has
been accounted for using the purchase method of accounting and,
accordingly, the purchase price has been allocated to identifiable tangible
and intangible assets purchased and liabilities assumed or incurred based
upon their fair value at the date of acquisition. The excess of the
purchase price over the fair value of the net assets acquired amounted to
$14,081,000 and has been recorded as goodwill which is being amortized on a
straight-line basis over 30 years.
6
<PAGE>
As a consequence of the foregoing acquisitions, the consolidated balance
sheet of the Company at May 31, 1998 includes the balance sheets of
Calnetics and Falcon along with preliminary purchase accounting
adjustments. The results of operations of Calnetics and Falcon have been
included in the consolidated results of operations and the consolidated
statements of cash flows of the Company since October 28, 1997 and May 1,
1998, the respective dates of the acquisitions. The results of operations
of LexaLite International Corporation ("LexaLite") have been included in
the consolidated results of operations and the consolidated statements of
cash flow since November 22, 1996, the date of the acquisition of LexaLite.
The following proforma financial information presents the results of
operations of the continuing businesses of the Company with LexaLite and
Calnetics as though both acquisitions had been made as of September 1,
1996. Proforma adjustments have been made to give the effect to the
amortization of goodwill and other intangibles, adjustments in depreciation
and inventory value, a reduction in redundant operating expense, interest
expense related to acquisition debt, the related tax effects and the effect
upon basic and diluted earnings per share of the additional shares of stock
given in exchange for LexaLite stock and of stock options issued in
conjunction with the acquisitions. The following proforma financial
information does not include adjustments to give effect to the Falcon
acquisition as such adjustments would not be material.
<TABLE>
<CAPTION>
Three months ended Nine months ended
--------------------------- ---------------------------
May 31, 1997 May 31, 1998 May 31, 1997 May 31, 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $21,284,000 $23,854,000 $61,534,000 $66,416,000
Income from
continuing operations 785,000 1,334,000 1,512,000 3,188,000
=========== =========== =========== ===========
Net income from continuing
operations per common share
basic $.19 $.32 $.39 $.76
diluted $.18 $.29 $.37 $.68
</TABLE>
Such proforma results are not necessarily indicative of what the actual
consolidated results of operations might have been if the acquisitions had
been effective at the beginning of the periods presented or the results
which may be achieved in the future.
4. Divestiture
On June 26, 1998, the Company completed the previously-announced
divestiture of GST Industries, Inc. ("GST"), a manufacturer of industrial
firefighting and defense aerospace equipment located in Santa Ana,
California. Accordingly, the business of GST is being accounted for as a
discontinued operation and results of operations are segregated in the
accompanying consolidated statements of income. The assets and liabilities
of discontinued operations have been classified in the consolidated balance
sheets as "Net assets of discontinued operations." Discontinued operations
have not been segregated in the consolidated statements of cash flows.
7
<PAGE>
Statements of Income of the Company, restated for the last three completed
fiscal years to reflect the divestiture, are:
<TABLE>
<CAPTION>
Fiscal year ended
---------------------------------------------------
August 31, 1995 August 31, 1996 August 31, 1997
--------------- --------------- ---------------
<S> <C> <C> <C>
Net sales $6,567,000 $8,124,000 $39,093,000
Cost of sales 3,474,000 4,339,000 27,097,000
--------------- --------------- ---------------
Gross profit 3,093,000 3,785,000 11,996,000
Selling, general and administrative expenses 2,487,000 3,144,000 8,767,000
--------------- --------------- ---------------
Income from operations 606,000 641,000 3,229,000
Interest (income) - (27,000) (200,000)
Interest expense - 12,000 475,000
Other expense - 30,000 254,000
--------------- --------------- ---------------
Income from continuing operations before
provision for taxes 606,000 626,000 2,700,000
Provision for income taxes 217,000 253,000 1,088,000
--------------- --------------- ---------------
Income from continuing operations 389,000 373,000 1,612,000
Income from discontinued operations, net of the effect
of income tax of $253,000 in 1995, $102,000 in 1996
and $426,000 in 1997 259,000 195,000 640,000
--------------- --------------- ---------------
Net income $648,000 $568,000 $2,252,000
Income per common share:
Income from continuing operations
basic $.25 $.24 $.47
diluted $.25 $.23 $.46
Income from discontinued operations
basic $.17 $.12 $.18
diluted $.17 $.12 $.18
Net income
basic $.42 $.36 $.65
diluted $.42 $.35 $.64
Weighted average common shares outstanding
basic 1,539,000 1,565,000 3,450,000
diluted 1,553,000 1,603,000 3,521,000
</TABLE>
The sales from the discontinued operations of GST Industries, Inc. were
$3,670,000 for fiscal 1995, $4,618,000 for fiscal 1996, $4,144,000 for
fiscal 1997, and $2,607,000 for the nine months ended May 31, 1998.
5. Recent Accounting Pronouncement
The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings Per Share", issued by the Financial Accounting
Standards Board ("FASB"), and accordingly has restated prior period
earnings per share.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Statements contained in this Quarterly Report on Form 10-Q that are not purely
historical are forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934, including but not limited to statements regarding Summa's expectations,
hopes, beliefs, intentions or strategies regarding the future. Actual results
could differ materially from those projected in any forward-looking statements
as a result of a number of factors, including those detailed in this
"Management's Discussion and Analysis" section (including the potential material
adverse consequences to the Company of the Year 2000 issue) and elsewhere herein
and in the Company's Annual Report on
8
<PAGE>
Form 10-K for the fiscal year ended August 31, 1997. The forward-looking
statements are made as of the date hereof, and the Company assumes no obligation
to update the forward-looking statements, or to update the reasons why actual
results could differ materially from those projected in the forward-looking
statements.
Recent Events
- -------------
Divestiture of GST Industries, Inc. Subsidiary
On June 26, 1998, the Company completed the previously-announced divestiture
of GST Industries, Inc. ("GST"), a manufacturer of industrial firefighting and
defense aerospace equipment located in Santa Ana, California. The businesses
operated by GST do not fit the Company's focus on plastic products.
Additionally, while GST is profitable, it is not expected to grow significantly
in the near term. The total purchase price paid by the buyers was $2,700,000,
consisting of $1,200,000 in cash and a $1,500,000 seven-year subordinated,
convertible, secured promissory note bearing interest at 10% per annum. In
addition, the Company may receive a maximum of $2,000,000 in royalty payments
over the next five years based upon a percentage of future sales in excess of a
base amount. It is expected that the royalties actually received, if any, will
be substantially less than $2,000,000 and the value of the conversion rights of
the note is highly speculative.
Acquisition of Falcon Belting, Inc.
On May 1, 1998, the Company completed the acquisition of Falcon Belting, Inc.
("Falcon") of Oklahoma City, Oklahoma, a manufacturer of modular plastic
conveyor belting used in food processing industries. The operations of Falcon
have been consolidated with the Company's subsidiary KVP Falcon Plastic Belting,
Inc. (formerly KVP Systems, Inc.). The combined company will continue to
operate in California and Oklahoma. For the year ended January 31, 1998, Falcon
recorded sales of $4.8 million. For additional information, see Note 3
"Acquisitions" to the condensed consolidated financial statements of the Company
set forth above.
Reincorporation in Delaware
Effective April 1, 1998, the Company was reincorporated from the State of
California to the State of Delaware (the "Reincorporation"). The
Reincorporation was previously approved by the requisite vote of the Company's
shareholders at the Annual Meeting of Shareholders held in Torrance, California
on January 26, 1998. The definitive proxy statement describing the
Reincorporation was filed with the Securities and Exchange Commission on
December 10, 1997.
Results of Operations
- ---------------------
The following table sets forth certain income information for the Company's
continuing operations as a percent of sales for the quarters and nine months
ended May 31, 1997 and 1998.
<TABLE>
<CAPTION>
Three months ended Nine months ended
--------------------------------- ---------------------------------
May 31,1997 May 31,1998 May 31,1997 May 31,1998
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 69.3% 68.7% 69.2% 69.4%
--------------- -------------- --------------- ---------------
Gross profit 30.7% 31.3% 30.8% 30.6%
S, G & A 21.6% 19.1% 23.0% 19.6%
--------------- -------------- --------------- ---------------
Operating income from continuing 9.1% 12.2% 7.8% 11.0%
operations
Interest expense, net .9% 2.1% .7% 1.9%
Other expense 1.8% .4% .9% .4%
--------------- -------------- --------------- ---------------
Income from continuing operations
before provision for taxes 6.4% 9.7% 6.2% 8.7%
Provision for income taxes 2.6% 4.1% 2.5% 3.6%
--------------- -------------- --------------- ---------------
Income from continuing operations 3.8% 5.6% 3.7% 5.1%
=============== ============== =============== ===============
Effective tax rate 40.8% 42.5% 40.7% 41.7%
</TABLE>
9
<PAGE>
Sales for the third quarter, ended May 31, 1998, increased $11,831,000, or 98%
compared to the same period in the prior year, due primarily to the inclusion of
the sales of recently acquired Calnetics for the quarter, not included in the
prior year third quarter, increases in the sales of the previously owned
businesses and inclusion of one month of sales of newly acquired Falcon.
Sales for the nine months ended May 31, 1998 increased $34,064,000, or 128%
compared to the same period in the prior fiscal year, due primarily to the
inclusion of the sales of recently acquired Calnetics for seven months,
inclusion of sales of LexaLite for the full nine months in the current year
results compared to six months in the prior year nine month period, increases in
the sales of the previously owned businesses and, to a lesser extent, inclusion
of the sales of recently acquired Falcon for one month.
Consolidated gross profit for the third quarter increased $3,783,000, or 102%
primarily due to inclusion of the results of recently acquired Calnetics,
growth in the previously owned businesses and, to a lesser extent, inclusion of
Falcon for one month. The gross profit percentage increased from 30.7% to 31.3%
as a result of blending newly acquired operations with previously owned
operations, management initiatives to reduce costs and the benefit of increased
volumes.
Consolidated gross profit for the nine months ended May 31, 1998 increased
$10,381,000, or 127% due to inclusion of seven month's results of Calnetics,
inclusion of the results of LexaLite for the full nine months in this year's
results compared to six months in the lasts year's nine months, growth in the
previously owned businesses and, to a lesser extent, inclusion of one month's
results of Falcon.
Operating expenses for the third quarter increased $1,970,000, or 76% from the
comparable prior year quarter, but as a percentage of sales, decreased from
21.6% to 19.1% primarily because of the inclusion of sales and operating
expenses of the newly acquired businesses. Operating margin increased from 9.1%
to 12.2% as a result of the changes in gross margin and operating expense
discussed above. The increase in net interest expense incurred in the current
periods related to interest expense on debt acquired with the acquisition of
LexaLite and interest on debt incurred in connection with the acquisitions of
Calnetics and Falcon (see "Liquidity and Capital Resources" below).
Operating expenses for the nine months ended May 31, 1998 increased $5,802,000,
or 95% from the prior year nine month period primarily because of the inclusion
of the operating expenses of Calnetics for seven months, inclusion of the
operating expenses of LexaLite for the full nine months in the current year
compared to six months of the prior year nine month period and inclusion of
Falcon for one month. Operating margins increased from 7.8% to 11.0% as a
result of the changes in gross margin and operating expense discussed above.
The increase in the effective tax rate in the current three and nine month
periods is primarily associated with the non-deductible amortization of goodwill
related to the recent acquisitions offset by a lower effective combined state
income tax rate.
The Company's backlog of the continuing businesses, believed to be firm,
increased from $6,530,000 at February 28, 1997 to $7,050,000, at May 31, 1998,
primarily as a result of the backlog acquired in the Falcon acquisition. The
Company's order backlog is not a significant indicator of future sales volumes.
Liquidity and Capital Resources
- -------------------------------
The Company's working capital at May 31, 1998 was $13,196,000 compared to
$7,209,000 at August 31, 1997. The primary reason for the increase was the
inclusion of the balance sheet of newly acquired Calnetics and, to a lesser
extent, Falcon.
In connection with the acquisition of Calnetics, the Company entered into a new
$34 million credit agreement with a bank. At May 31, 1998, total borrowings
under the credit agreement were $19,865,000, and the Company had additional debt
of $6,485,000. The weighted average interest rate for all of the Company's
debt at May 31, 1998 was 7.6%, and unused bank credit totaled $13,135,000. All
of the Company's assets are pledged to secure the debt described above.
The Company believes that cash flows from operations and available lines of
credit will be sufficient to fund working capital
10
<PAGE>
requirements, planned capital expenditures and debt service for the next twelve
months. Although the effects on liquidity of the divestiture of GST are not yet
known, the Company does not expect the divestiture to materially effect
liquidity in an adverse manner.
The Company has a strategy of growth by acquisition. In the event an
acquisition plan is adopted which requires funds exceeding the availability
described above, an alternate source of funds to accomplish the acquisition
would have to be developed. The Company has 10,000,000 shares of common stock
authorized, of which 4,245,999 shares were outstanding at May 31, 1998 and
5,000,000 shares of "blank check" preferred stock authorized of which none is
outstanding. The Company could issue additional shares of common or preferred
stock to raise funds.
Year 2000 Compliance
- --------------------
The Company is continuing to analyze operations to determine and implement the
procedures necessary to ensure timely Year 2000 compliance. The Company is also
in the process of identifying and contacting key customers, vendors and
suppliers to request confirmation of timely external Year 2000 compliance.
Each of the Company's facilities utilizes and is dependent upon data processing
systems and software to conduct business. The Company has received confirmation
from vendors of the principal business software used by the Company that such
software is designed to be Year 2000 compliant. Further, for reasons generally
unrelated to the Year 2000 issue, the Company is in the process of purchasing
and installing new systems for certain operations. The Company currently
anticipates that all internally used software will be Year 2000 compliant in a
timely manner. Additionally, various machines and other types of personal
property at each facility have computer controls and/or contain integrated
circuits that may be affected, and the Company is in the process of identifying
and analyzing such property to determine Year 2000 compliance.
Although, the Company currently believes that becoming internally Year 2000
compliant will not have a significant impact on the financial condition or
results of future operations of the Company, the Company remains concerned that
the failure to comply by a relatively small number of large customers and/or
vendors, including banking institutions and transportation companies, could
significantly disrupt operations at one or more of the Company's facilities.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
- --------------------------
The Company encounters lawsuits from time to time in the ordinary course of
business and, at May 31, 1998, the Company or its affiliates were parties to
several civil lawsuits, one of which is described below. Any losses that the
Company may suffer from current or future lawsuits, and the effect such
litigation may have upon the reputation and marketability of the Company's
products, could have a material adverse impact on the future results of
operations, the financial condition and prospects of the Company.
Laitram, et. al. v. KVP Systems, Inc., et. al. was filed in the U.S. District
- ----------------------------------------------
Court in Eastern Louisiana in September 1993. The plaintiffs claim KVP has
infringed upon two patents. The venue was changed to the Federal District Court
in Sacramento, California. KVP contended the claims were invalid and filed
certain counterclaims. On April 24, 1997, the District Court ruled that KVP's
products do not infringe plaintiff's patents and also dismissed the
counterclaims. The parties appealed, and on May 5, 1998, the Court of Appeals
affirmed the District Court's ruling in its entirety. Both sides have a limited
amount of time remaining to petition for review by the U.S. Supreme Court.
Although the Company believes it has a reasonable expectation of prevailing on
petition, if any, in the absence of applicable insurance, the consequences of an
adverse determination would be borne by the Company.
Item 2. Changes in Securities
- ------------------------------
In connection with the shareholder-approved Reincorporation, the Company adopted
a new Certificate of Incorporation and Bylaws and became subject to Delaware
state law. As a result, the rights of the holders of outstanding shares of the
11
<PAGE>
Company's common stock were materially modified. For a detailed description of
each material modification, see the "Changes in Summa's Charter to be Effected
by Reincorporation" and "Certain Differences in State Corporation Laws" sections
set forth in the Company's definitive proxy statement describing the
Reincorporation filed with the Securities and Exchange Commission on December
10, 1997. Such sections to the definitive proxy statement and Appendices II and
III thereto (the Certificate of Incorporation and Bylaws) are incorporated
herein by this reference and made a part hereof.
Item 3. Default upon Senior Securities
- ---------------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
None.
Item 5. Other Information
- --------------------------
Prior to October 1986, a previously owned business unit of one of the Company's
subsidiaries operated a facility on property within an area subsequently
designated as a federal Superfund site. The Company learned that hazardous
substances have been identified in the subsurface of the property and that the
current owner has been requested by a state agency to undertake additional
investigation at the property. The Company is also aware that the property has
been subject to a general notice letter issued by the United States
Environmental Protection Agency under the federal Superfund law. The Company, as
the successor to one of several prior operators of the property, may be held
responsible for the contamination at the site regardless of whether its
subsidiary caused the contamination. The Company does not believe it is
responsible for any contamination at the property, and has not been notified or
contacted by any governmental authority in that regard, nor named in any
proceeding relating to the property. However, if the Company were held liable
under federal Superfund law, or other environmental law, or had to defend itself
against such a claim, the consequences could be material to future results of
operations of the Company, but would not be expected to have a material effect
on its financial condition.
The Internal Revenue Service ("IRS") previously completed an examination
regarding the tax exempt status of one of the Company's industrial revenue bonds
and informed the Company that its findings indicated that the bond is not tax
exempt. During the quarter ended May 31, 1998, the Company and the IRS
tentatively agreed to a settlement of this matter which will include leaving the
tax exempt bond in place. The consequences of such settlement, if and when
finalized, will not be material to future results of operations or to the
financial condition of the Company.
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits.
10.1 Stock Purchase Agreement and Amendment No. 1 thereto dated
April 8, 1998 and April 24, 1998, respectively, by and among Mr. William G.
Faulkner, KVP Systems, Inc. and the Company relating to the acquisition by the
Company of Falcon Belting, Inc.
10.2 Stock Purchase Agreement dated June 12, 1998 by and between
P&L Growth Industries, Inc., a California corporation, and the Company relating
to the divestiture by the Company of GST Industries, Inc.
10.3 Subordinated Convertible Promissory Note, Security
Agreement and Guaranty dated June 26, 1998 by and among P&L Growth Industries,
Inc., GST Industries, Inc. and the Company relating to the divestiture by the
Company of GST Industries, Inc.
27.1 Financial Data Schedule
In addition, each of the exhibits previously filed with the
Commission in connection with (i) the
12
<PAGE>
Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1997
(File No. 1-7755), (ii) the Company's Registration Statement on Form S-4 (File
No. 333-11571), and (iii) the Calnetics' Annual Report on Form 10-K for the
fiscal year ended June 30, 1997 (File No. 0-08767), as well as Appendix I to the
Calnetics' definitive Proxy Statement on Schedule 14A (File No. 0-08767) for the
Special Meeting of Shareholders held October 28, 1997, and Appendices I, II and
III to the Company's definitive Proxy Statement on Schedule 14A for the Annual
Meeting of Shareholders held on January 26, 1998, are incorporated herein.
(b) Current Reports on Form 8-K.
---------------------------
Current Report on Form 8-K filed with the Securities and Exchange
Commission on April 16, 1998 relating to the Reincorporation.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized on July 1, 1998.
Summa Industries
/s/ James R. Swartwout /s/ Trygve M. Thoresen
- ---------------------- ----------------------------
James R. Swartwout Trygve M. Thoresen
President and Chief Financial Officer Vice President and Secretary
13
<PAGE>
EXHIBIT 10.1
STOCK PURCHASE AGREEMENT
This Stock Purchase Agreement (this "Agreement") is made and entered into
as of April 8, 1998 by and among Mr. William G. Faulkner, as an individual and a
resident of the State of Florida ("Faulkner") and as Trustee of the William G.
Faulkner 1994 Revocable Trust under Agreement dated August 8, 1994
("Shareholder"), KVP Systems, Inc., a California corporation (the "Company"),
and Summa Industries, a Delaware corporation and parent of the Company
("Summa").
WHEREAS, Shareholder is the sole owner of all of the issued and outstanding
shares of capital stock of Falcon Belting, Inc., an Oklahoma corporation
("Falcon"); and
WHEREAS, Shareholder desires to sell to the Company, and the Company
desires to purchase from Shareholder, all of the issued and outstanding shares
of capital stock of Falcon (the "Shares") upon the terms, subject to the
conditions and for the consideration hereinafter set forth.
NOW, THEREFORE, in consideration of the foregoing recitals and the mutual
covenants herein contained, the parties hereto hereby agree as follows:
ARTICLE I
THE PURCHASE
1.1 Purchase and Sale of the Shares. On the terms and subject to the
-------------------------------
conditions set forth in this Agreement, Shareholder will sell, assign, transfer
and deliver to the Company, and the Company will purchase from Shareholder, all
of his right, title and interest in and to the Shares, consisting of seventy
thousand (70,000) shares of Falcon common stock, $.50 par value.
ARTICLE II
THE PURCHASE PRICE; OTHER PAYMENTS
2.1 Purchase Price. At the Closing (as defined in Section 3.1 below), the
-------------- -----------
Company shall cause to be paid and delivered to Shareholder cash and debt for
the Shares (the "Purchase Price") as follows:
(a) Cash. Two Million Three Hundred and Nine Thousand Five Hundred
----
Twenty Five and No/100 Dollars ($2,309,525.00), which includes the first
$12,500.00 quarterly payment for the Covenant Not to Compete due under Section
-------
10.2 hereof, less all amounts previously paid or paid after the date hereof and
- ----
prior to the Closing as a deposit under Section 8.3 hereof.
-----------
(b) Promissory Note. A subordinated promissory note from Summa in
---------------
substantially the form attached hereto as Exhibit A (the "Note") in the
---------
principle amount equal to the outstanding balance due on Falcon's line of credit
at the Bank of Oklahoma, N.A. on the Closing Date (as defined in Section 3.1
-----------
below), not to exceed Three Hundred Thousand Dollars ($300,000.00), due in
eighteen (18) months from the Closing
<PAGE>
Date and bearing interest at the prime rate (as reported in The Wall Street
Journal) less one (1) percent per annum, with interest payable quarterly.
2.2 Other Amounts Due and Payable. On the Closing Date (as defined in
-----------------------------
Section 3.1 below), the Company shall cause Falcon to pay the following: (i)
- -----------
Three Hundred Fifty Four Thousand Nine Hundred Seventy Five and No/100 Dollars
($354,975.00) to Faulkner representing the total amount due for accrued but
unpaid royalties under that certain Second Amended and Restated License
Agreement dated January 14, 1995 and related promissory note, and (ii) One
Hundred Ninety Eight Thousand Dollars ($198,000.00) to certain employees of
Falcon for previously declared but unpaid bonuses, in the individual amounts and
to the persons set forth in the books and records of Falcon and as shown on
Schedule 2.2 hereto.
- ------------
ARTICLE III
THE CLOSING
3.1 Closing. The purchase and sale described in this Agreement shall be
-------
consummated at a closing (the "Closing") to be held at 10:00 a.m. Eastern Time
on May 1, 1998, or on such earlier or later date and time as may be mutually
agreed by the parties (the "Closing Date") at a mutually agreeable location in
Orlando, Florida.
3.2 Deliveries to or Between the Parties. At the Closing, the Company
------------------------------------
shall deliver to Shareholder the cash portion of the Purchase Price and the
Note. At the Closing, Shareholder shall deliver to the Company certificates
representing the Shares, duly endorsed in blank or accompanied by stock powers
duly endorsed in blank in proper form for transfer, with appropriate transfer
stamps, if any, affixed thereto. In addition, at the Closing the Company and
Shareholder shall deliver to and receive from each other all documents required
to be delivered and received pursuant to Article IX hereof (Conditions Precedent
to Closing).
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF SHAREHOLDER AND FAULKNER
Shareholder and Faulkner jointly and severally hereby represent and warrant
to the Company as of the date hereof and as of the Closing Date as follows:
4.1 Ownership of Shares. Except as set forth in Schedule 4.1 hereto,
------------------- ------------
Shareholder owns, beneficially and of record, the Shares, free and clear of all
liens, pledges, charges, claims, equities, restrictions or encumbrances, and
Shareholder has and will have the full right, power and authority to sell,
transfer and deliver the Shares to the Company at the Closing. Upon delivery of
the Shares to the Company at the Closing and upon receipt by Shareholder of the
Purchase Price, good and valid title to the Shares will pass to the Company free
and clear of all liens, pledges, charges, claims, equities, restrictions and
encumbrances. The sale by Shareholder of the Shares does not constitute a
breach or violation of, or default under, any will, deed, trust, agreement or
other instrument, whether written or oral, by which Shareholder or Faulkner is
bound.
4.2 Organization of Falcon. Falcon is a corporation duly organized,
----------------------
validly existing and in good standing under the laws of the State of Oklahoma,
and has its
<PAGE>
principal place of business at 8338 S.W. 15th Street, Oklahoma City, Oklahoma
73128. A true and complete copy of the Articles of Incorporation of Falcon and
all amendments thereto certified by the Secretary of State of Oklahoma, and a
true copy of the Bylaws of Falcon certified by the Secretary of Falcon, will be
delivered to the Company prior to the Closing. Falcon is not qualified to do
business in any jurisdiction other than Oklahoma and its failure to be so
qualified will not have a material adverse effect on its business, its
prospects, its results of operations or its financial condition. Falcon has no
subsidiaries and no investments, directly or indirectly, or other financial
interests in any other corporation or business organization, joint venture or
partnership of any kind whatsoever except as may be reflected in the Schedules
hereto.
4.3 Authorized Capital. Falcon has an authorized capital of one hundred
------------------
thousand (100,000) shares of common stock, $.50 par value, of which seventy
thousand (70,000) shares are validly issued and outstanding, fully paid and
nonassessable, all of which are held of record and beneficially by Shareholder.
Except as set forth in Schedule 4.3 hereto, here are no (i) outstanding stock
------------
options, warrants, privileges or rights to purchase or subscribe for any capital
stock of Falcon, (ii) obligations or securities issued by Falcon convertible
into or exchangeable for capital stock of Falcon, (iii) agreements providing for
or relating to any options, warrants, privileges, rights, convertible
obligations or securities to which Falcon is a party, (iv) voting trust
agreements or other contractual obligations restricting or otherwise relating to
the voting, dividend rights or disposition of any capital stock of Falcon, or
(v) any agreements by Falcon to issue, sell, or acquire any of its capital
stock. Falcon does not directly or indirectly own capital stock of or other
equity interests in any other person, entity or venture.
4.4 No Breach or Default; Consents and Approvals.
--------------------------------------------
(a) No Breach or Default. Except as set forth in Schedule 4.4 hereto,
-------------------- ------------
the execution and delivery by Shareholder and Faulkner of this Agreement and
other documents referenced herein to which Shareholder, Faulkner or Falcon is a
party and the consummation of the transactions contemplated hereby and thereby
will not result in or constitute any of the following: (i) a default or an
event that, with the giving of notice or lapse of time, or both, would be a
default, breach or violation of any contractual obligation of Falcon, Faulkner
or Shareholder or the Articles of Incorporation or Bylaws of Falcon, (ii) an
event that would permit any party to terminate any contract, agreement or
understanding or to accelerate the maturity of any indebtedness or other
obligation of Falcon, Faulkner or Shareholder, (iii) the creation or imposition
of any lien or other obligation of any type on any of the properties of Falcon,
Faulkner or Shareholder, or (iv) a violation of any order, writ, injunction,
decree, statute, rule or regulation applicable to Falcon, Faulkner or
Shareholder.
(b) Consents and Approvals. Except as set forth in Schedule 4.4
---------------------- ------------
hereto, no authorization, consent or approval of any governmental authority or
any third party is necessary for the consummation by Shareholder, Faulkner or
Falcon of the transactions contemplated by this Agreement and the other
documents referenced herein to which either will be a party.
4.5 Permits. Falcon holds all permits, licenses, franchises,
-------
certificates and authorizations that are required by any governmental agency to
permit it to conduct its business as now conducted and as previously conducted
by it, and all such permits, licenses,
<PAGE>
franchises, certificates and authorizations are valid and in full force and
effect and will remain so upon consummation of the transactions contemplated by
this Agreement. No suspension, cancellation or termination of any of such
permits, licenses, franchises, certificates and authorizations is threatened or
imminent.
4.6 Financial Statements; Undisclosed Liabilities.
---------------------------------------------
(a) Financial Statements. Faulkner has furnished to the Company (i)
--------------------
an unaudited balance sheet of Falcon as of February 28, 1998 (the "Balance
Sheet"), (ii) an unaudited income statement of Falcon for the one month ended
February 28, 1998, and (iii) unaudited balance sheets and income statements of
Falcon for the fiscal years ended January 31, 1997 and 1998 (collectively, the
"Financial Statements"), as such Financial Statements are attached to Schedule
--------
4.6 hereto. The Financial Statements fairly present the financial condition of
- ---
Falcon as of the respective dates indicated, and the results of its operations
for the respective periods indicated, and were prepared in accordance with
generally accepted accounting principles consistently applied, except for the
absence of complete footnotes and as otherwise stated within the Financial
Statements. From and after the date hereof until the Closing, Shareholder
and/or Faulkner shall cause Falcon to deliver to the Company, within twenty (20)
days after each month end, monthly unaudited balance sheets and income
statements which, at the time they are delivered to the Company, will fairly
present the assets and aggregate liabilities and results of operations of Falcon
as of their respective dates.
(b) Undisclosed Liabilities. Falcon has and will have no
-----------------------
indebtedness, obligations or liabilities, whether accrued, absolute, contingent
or otherwise and whether due or to become due, known or unknown, including
without limitation tax liabilities due or to become due, as of date of the
Balance Sheet or as of the Closing Date, which are not reflected or reserved for
in the Balance Sheet or Closing Date balance sheet, respectively.
4.7 Absence of Certain Changes or Events. Except as set forth on
------------------------------------
Schedule 4.7 hereto, since December 31, 1997, there has not been a material
- ------------
adverse change in the assets, liabilities, business, prospects, financial
condition or results of operations of Falcon. Since the date of the Balance
Sheet, Faulkner has caused Falcon to conduct its business in the ordinary course
consistent with past practices, and neither Shareholder, Faulkner nor Falcon has
taken any action that, if taken after the date hereof, would constitute a breach
of any of the covenants set forth in Section 7.2 below.
-----------
4.8 Taxes. Falcon has, since its inception, duly and timely filed all
-----
federal, state, county and local tax returns required to have been filed by it
in those jurisdictions where the nature or conduct of its business required such
filing and where the failure to so file would be adverse to Falcon. Copies of
all tax returns for the past three years have been delivered to the Company
prior to the execution hereof. All federal, state, county and local taxes,
including but not limited to those taxes due with respect to Falcon's
properties, income, gross receipts, excise, occupation, franchise, permit,
licenses, sales, payroll, and inventory due and payable as of the date hereof
have been paid or validly extended. The amounts reflected in the Balance Sheet
or the Closing Date balance sheet as liabilities or reserves for taxes which are
due but not yet payable are sufficient for the full payment of all accrued and
unpaid taxes of the types referred to hereinabove. No consent to the application
of Section 341(f)(2) of the Internal Revenue Code of 1986, as amended, has
<PAGE>
been filed with respect to Falcon, there are no outstanding agreements or
waivers extending the statutory period of limitation applicable to any tax
returns, and all of the tax information set forth in the financial records of
Falcon relating to tax matters is true and complete.
4.9 Assets Other than Real Property Interests. Set forth in Schedule 4.9
----------------------------------------- ------------
hereto is a complete list of all items of tangible personal property (including
without limitation all items of tooling) owned, leased or otherwise used by
Falcon in the current conduct of its business, wherever located, for which the
original cost was in excess of $10,000.00, and the original cost, location and
ownership or lease of each such asset is indicated on the Schedule. Except as
set forth in Schedule 4.9, Falcon has, and at the Closing Date will have, good
------------
and marketable title to, or in the case of leased equipment a valid leasehold
interest in, and is in the possession of, all such items of personal property
owned or leased by it, free and clear of all title defects, mortgages, pledges,
security interests, condition sales agreements, liens, restrictions or
encumbrances whatsoever. Included in Schedule 4.9 is a list of all outstanding
------------
equipment leases and maintenance agreements to which Falcon is a party as lessee
and which individually provide for future lease payments in excess of $5,000 per
month, with the identities of the other parties to all such leases and
agreements shown thereon. All leases of tangible personal property to which
Falcon is a party and which are material to the business of Falcon are fully
effective in accordance with their respective terms, and there exists no
material default on the part of Falcon or termination thereof, except as may be
set forth in Schedule 4.9. Each item of capital equipment reflected in the
-------------
Balance Sheet which is used in the current conduct of Falcon's business is in
good operating and usable condition and repair, ordinary wear and tear excepted,
is suitable for use in the ordinary course of Falcon's business and fit for its
intended purposes and conforms with all applicable ordinances, regulations and
other laws, except as may be set forth in Schedule 4.9.
------------
4.10 Real Property. Set forth in Schedule 4.10 hereto is a complete and
------------- -------------
accurate description of each parcel of real property leased to and/or occupied
by Falcon, including any easement, covenants, rights of way or similar
restrictions, and Falcon does not own, lease nor occupy any other real property.
Except as set forth in Schedule 4.10, the buildings and all fixtures and
-------------
improvements located on such real property are in good operating condition,
ordinary wear and tear excepted. To the best Knowledge and belief of Falcon and
Shareholder, Falcon is not in violation of any zoning, building or safety
ordinance, regulation or requirement or other law or regulation applicable to
the operation of such properties, the violation of which may have a material
adverse affect upon Falcon, its condition (financial or otherwise), assets,
liabilities, properties or business, and Falcon has not received any notice of
violation with which it has not complied or is not taking steps to comply. All
leases of real property to which Falcon is a party were entered into at arms
length and are fully effective in accordance with their respective terms and
afford Falcon peaceful and undisturbed possession of the subject matter of the
lease, and there exists no material default on the part of Falcon or termination
thereof, except as may be set forth in Schedule 4.10.
-------------
4.11 Intellectual Property. Schedule 4.11 hereto sets forth a list of all
--------------------- -------------
patents, trademarks, trade names, brand names, service marks and copyrights and
all applications therefor, registered and unregistered, other than those
relating to computer software, owned, used, filed by or licensed to Falcon
(collectively, "Intellectual Property"). With respect to registered patents and
trademarks, Schedule 4.11 contains a list of all jurisdictions in which such
-------------
patent and trademarks are registered or applied for and all
<PAGE>
registration and application numbers. Except as disclosed on Schedule 4.11,
-------------
Falcon owns or has the unrestricted right to use, free and clear of any rights
of others and without payment to any other party, the Intellectual Property
listed on such Schedule 4.11 plus all trade secrets, customer lists,
-------------
manufacturing and secret processes owned or used by Falcon, and the consummation
of the transactions contemplated hereby will not alter or impair any such items
nor the right of Falcon to use such items; provided that, the License Agreement
set forth in Exhibit B hereto between Faulkner and the Company has been
---------
executed. Except as disclosed on Schedule 4.11, neither Falcon, Faulkner nor
-------------
Shareholder has licensed to any third party, on an exclusive basis or otherwise,
the right to use or exploit any Intellectual Property in any jurisdiction or
otherwise transferred or assigned any Intellectual Property to any third party
in any jurisdiction. Except as set forth on Schedule 4.11, no claims are pending
-------------
or threatened against Shareholder, Faulkner or Falcon by any person or entity
with respect to the ownership, validity, enforceability or use of any
Intellectual Property listed on Schedule 4.11 or otherwise challenging or
-------------
questioning the validity or effectiveness of any such Intellectual Property, and
neither Shareholder, Faulkner nor Falcon has received any verbal or written
notice, opinion or claim of any kind that any Falcon product may infringe any
intellectual property rights of any third party. Falcon has not used and is not
making use of any confidential information or trade secrets of any present or
past employee of Falcon that has not been assigned to Falcon or that Falcon does
not have the right to use.
4.12 Contracts. Falcon has no contract, agreement, obligation or
---------
commitment, written or oral, expressed or implied, which was not incurred in the
ordinary course of business, or involves a commitment or liability in excess of
$10,000, or is for a term of more than one year or whose terms do not permit
cancellation without liability on 30 days' notice or less (other than
obligations which are included in accounts payable), and has no union contracts,
employee or consultant contracts, loan, credit or other financing agreements,
inventory flooring arrangements, debtor or creditor arrangements, security
agreements, licenses, franchise, manufacturing, distributorship or dealership
agreements, leases, or bonus, health or stock option plans, except for those
described in Schedule 4.12 hereto, copies of all of which have been delivered to
-------------
the Company prior to the execution hereof. As of the date hereof, there exists
no circumstances which would affect the validity or enforceability of any of
such contracts and other agreements in accordance with their respective terms.
Except as set forth in Schedule 4.12, Falcon has performed and complied in all
-------------
material respects with all obligations required to be performed by it to date
under, and is not in default (without giving effect to any required notice or
grace period) under, or in breach of, the terms, conditions or provisions of any
of such contracts and other agreements. Except as set forth in Schedule 4.12,
-------------
the validity and enforceability of any contract or other agreement described
herein has not been and shall not in any manner be affected by the execution and
delivery of this Agreement or the consummation of the transactions contemplated
hereby. Except as set forth in Schedule 4.12, Falcon has no material contract,
-------------
agreement, obligation or commitment which requires or will require future
expenditures (including internal costs and overhead) in excess of reasonably
anticipated receipts, nor which is likely to be materially adverse to Falcon's
business, assets or condition (financial and otherwise).
4.13 Accounts Receivable. The accounts receivable reflected in the
-------------------
Balance Sheet constituted all accounts receivable of Falcon as of the date
thereof, other than accounts receivable fully written off as uncollectible as of
such date in accordance with consistently applied prior practice. All such
accounts receivable arose from valid sales made (as opposed to consignments) or
services rendered in the ordinary course of business, and are
<PAGE>
not subject to any return privileges, set-off or counterclaim. Except as
disclosed on Schedule 4.13 hereto, such accounts receivable have been collected
-------------
in full since the date of the Balance Sheet or are collectible at their full
respective amounts (net of allowance for doubtful accounts established in
accordance with consistently applied prior practice). Based upon the prior
experience of Falcon, the "allowance for doubtful accounts" shown on the Balance
Sheet is sufficient to cover all doubtful accounts.
4.14 Inventories. Falcon has good and marketable title to all of its
-----------
inventories of raw materials, work-in-process and finished goods, including
models and samples, free and clear of all security interests, liens, claims and
encumbrances, except as set forth in Schedule 4.14 hereto. All such inventories
-------------
consist of items that are usable and salable in the ordinary course of business
of Falcon for an amount at least equal to the book value thereto, plus the costs
of disposition thereof, and represent quantities, individually and in the
aggregate, not in excess of one year's requirements for its business as
currently conducted, except as may be set forth in Schedule 4.14.
-------------
4.15 Litigation. Except as set forth in Schedule 4.15 hereto, there
---------- -------------
are no actions, suits or proceedings pending or, to the Knowledge of
Shareholder, Faulkner or Falcon, threatened against or affecting Falcon,
Faulkner, Shareholder or any Intellectual Property used by Falcon (including
actions, suits or proceedings where liabilities may be adequately covered by
insurance) at law or in equity or before or by any federal, state, municipal or
other governmental department, commission, court, board, bureau, agency or
instrumentality, domestic or foreign, or affecting any of the officers,
directors or Shareholder in connection with the business, operations or affairs
of Falcon, which could reasonably be expected to result in any material adverse
change in the business, properties, assets or condition (financial or otherwise)
of Falcon, or which question or challenge the transactions contemplated hereby,
and Shareholder and Faulkner know of no facts which given the passage of time
are likely to result in any such an action, suit or proceeding. Except as set
forth in Schedule 4.15, neither Shareholder, Faulkner nor Falcon have, during
-------------
the past five (5) years, been threatened with any action, suit, proceedings or
claim (including actions, suits, proceedings or claims where its liabilities may
be adequately covered by insurance) for personal injuries allegedly attributable
to products sold or services performed by Falcon asserting a particular defect
or hazardous property in any of Falcon's products, services or business
practices or methods, nor has Shareholder, Faulkner or Falcon been a party to or
threatened with proceedings brought by or before any federal or state agency;
and Shareholder, Faulkner and Falcon have no Knowledge of any defect or
hazardous property, claimed or actual, in any such product, service, business
practice or method. Neither Shareholder, Faulkner nor Falcon is subject to any
voluntary or involuntary proceeding under the United States Bankruptcy Code and
neither has made an assignment for the benefit of creditors.
4.16 Environmental Matters.
---------------------
(a) Except as set forth on Schedule 4.16 hereto, and to the best
-------------
Knowledge and belief of Falcon and Shareholder:
(i) Falcon has complied with all applicable Environmental
Laws;
<PAGE>
(ii) Falcon's Property (including soils, groundwater,
surface water, buildings or other structures) is not contaminated with any
Hazardous Substances that may subject Falcon or the Company to liability under
any Environmental Law;
(iii) all properties formerly owned or operated by Falcon
are not contaminated with Hazardous Substances that may subject Falcon or the
Company to liability under any Environmental Law;
(iv) Falcon is not subject to liability under any
Environmental Law for any Hazardous Substance disposal or contamination on any
third party property;
(v) Falcon has not been associated with any release or
threat of release of any Hazardous Substance that may subject Falcon or the
Company to liability under any Environmental Law;
(vi) Falcon has not received any notice, demand, letter,
claim or request for information alleging that Falcon may be in violation of, or
liable under, any Environmental Law;
(vii) Falcon is not subject to any orders, decrees,
injunctions or other arrangements with any governmental entity, nor is subject
to any indemnity or other agreement with any third party relating to liability
under any Environmental Law or relating to Hazardous Substances;
(viii) there are no circumstances or conditions involving
Falcon that could reasonably be expected to result in any claims, liability,
investigations, costs or restrictions on the ownership, use or transfer of any
of Falcon's Property pursuant to any Environmental Law; and
(ix) Falcon's Property does not contain any underground
storage tanks, asbestos-containing material, lead-based products, halogenated
solvents or polychlorinated biphenyls.
(b) "Environmental Law" means any federal, state, local or
foreign law, statute, ordinance, rule, regulation, or treaty; all judicial
administrative, and regulatory orders, judgments, decrees, permits, and
authorizations; and common law relating to: (1) the protection, investigation,
remediation or restoration of the environment or natural resources, (2) the
handling, use, storage, treatment, disposal, release or threatened release of
any Hazardous Substance; or (3) noise, odor, pollution, contamination, land use,
or any injury or threat of injury to persons or property.
(c) "Hazardous Substance" means any substance, material or waste
that is: (1) listed, classified or regulated in any concentration pursuant to
any Environmental Law; (2) any petroleum product or by-product, asbestos-
containing material, lead-containing paint or plumbing, polychlorinated
biphenyls, radioactive materials or radon; or (3) any other substance, material
or waste which may be the subject of regulatory action by any governmental
entity pursuant to any Environmental Law.
<PAGE>
(d) "Property" means any real property and improvements owned,
leased, used, operated or occupied by Falcon.
4.17 Compliance With Laws. To the best Knowledge and belief of
--------------------
Falcon and Shareholder, Falcon has complied with, and is complying with, all
applicable laws, orders, rules and regulations promulgated by any federal,
state, municipal or other governmental authority relating to the operation and
conduct of the property and business of Falcon, and there are no material
violations of any such law, order, rule or regulation existing or threatened.
Falcon has not received any notices of violation of any applicable zoning
regulation or order, or other law, order, regulation or requirement relating to
the operation of its business or to its properties.
4.18 Insurance. Falcon maintains insurance with reputable insurance
---------
companies on such of its equipment, tools, machinery, inventory and properties
as are usually insured by companies similarly situated in the same geographic
location and to the extent customarily insured, and maintains products and
personal liability insurance, and such other insurance against hazards, risks
and liability to persons and property as is customary for companies similarly
situated in the same geographic location. A true and complete listing and
general description of each of Falcon's insurance policies as currently in
force, including all policies of life, group medical and/or dental insurance, is
set forth in Schedule 4.18 hereto, copies of all of which have previously been
-------------
made available to the Company. All such insurance policies currently are in
full force and effect.
4.19 Employee and Labor Matters.
--------------------------
(a) Employee. Except as set forth in Schedule 4.19 hereto, no
-------- -------------
shareholder, director, officer or employee of Falcon is presently a party to any
transaction with Falcon, including without limitation any contract, loan or
other agreement or arrangements providing for the furnishing of services by, the
rental of real or personal property from or to, or otherwise requiring loans or
payments to, any such shareholder, director, officer or employee, or to any
member of the family of any of the foregoing, or to Shareholder's and Faulkner's
Knowledge, to any corporation, partnership, trust or other entity in which any
shareholder, director, officer or employee or any member of the family of any of
them has a substantial interest or is an officer, director, trustee, partner or
employee. There is set forth in Schedule 4.19 a list showing (i) the name,
-------------
title, date and amount of last compensation increase, and aggregate
compensation, including amounts paid or accrued pursuant to any bonus, pension,
profit sharing, commission, deferred compensation or other plans or arrangements
in effect as of the date of this Agreement, of each officer or employee of
Falcon whose salary and other compensation, in the aggregate, received from
Falcon or accrued is at an annual rate (or aggregated for the most recently
completed fiscal year) in excess of $40,000, as well as any employment and/or
severance agreements relating to any such persons; (ii) a description of any and
all bonus, pension, profit sharing, commission, deferred compensation or other
plans or arrangements in effect for any of Falcon's employees as of the date of
this Agreement; (iii) a description of any noncompetition or similar agreements
to which Falcon or any shareholder, director, officer or employee of Falcon is a
party; (iv) all powers of attorney from Falcon to any person or entity; and (v)
the name of each person or entity authorized to borrow money or incur or
guarantee indebtedness on behalf of Falcon. Falcon has delivered to the Company
copies of all written personnel policies, including without limitation vacation,
severance, bonus, profit sharing and commission policies, applicable to any of
Falcon's employees. Neither the execution and
<PAGE>
delivery of this Agreement by Falcon, nor the consummation by Falcon of any of
the transactions contemplated hereby, or compliance by Falcon with any of the
provisions hereof, shall create any obligation or liability on the part of
Falcon under any bonus, profit sharing, deferred compensation or other plan or
arrangement in effect as of the date of this Agreement and the Closing Date.
(b) Labor. None of the facilities or operations of Falcon has
-----
been the subject of any strike, work stoppage, boycott, union organizational
effort, unfair labor practice charge or employment discrimination charge; and,
to the Knowledge of Shareholder, Faulkner and Falcon, no such action is pending
or threatened.
4.20 Warranties; Product Returns. Except as described in Schedule
--------------------------- --------
4.20 hereto, Falcon does not offer any warranties for its products and services.
- ----
Falcon's warranty reserve reflected in the Financial Statements and in the
Closing Date financial statements is adequate to cover all pending warranty
claims. Except where: (i) Falcon has a contractual right of return and full
refund with the suppliers of such products; (ii) the terms of routine sales
documentation (which contain provision for a restocking charge upon return); and
(iii) items which cannot be resold on Falcon premises in the "Demo" section
thereof, Falcon does not currently hold inventory, nor is Falcon obligated to
take back into inventory, products having an aggregate cost to Falcon of more
than five thousand dollars ($5,000.00).
4.21 Relationships with Customers and Suppliers. Except as set
------------------------------------------
forth in Schedule 4.21, no present customer or substantial supplier to Falcon
-------------
has indicated an intention to terminate or materially and adversely alter its
existing business relationship therewith, and Falcon has no reason to believe
that any of the present customers of or substantial suppliers to Falcon intends
to do so.
4.22 Bank Accounts. All bank and savings accounts, and other
-------------
accounts at similar financial institutions, of Falcon are listed in Schedule
--------
4.22 hereto, and copies of all signature cards or other documentation reflecting
- ----
all individuals who are authorized to withdraw funds from any such accounts have
been delivered to the Company.
4.23 Minute Books. The minute books of Falcon accurately reflect all
------------
actions and proceedings taken to date by Shareholder and by the Board of
Directors of Falcon, and such minute books contain true and complete copies of
the Articles of Incorporation and Bylaws of Falcon and all related amendments.
4.24 Brokerage. Neither Shareholder, Faulkner nor Falcon has any
---------
obligation to any person or entity for brokerage commissions, finder's fees or
similar compensation in connection with the transactions contemplated by this
Agreement.
4.25 Disclosure; Knowledge. Neither this Agreement nor any
---------------------
certificate, exhibit, or other written document or statement, furnished to the
Company by or on behalf of Shareholder or Falcon in connection with the
transactions contemplated by this Agreement contained or contains any untrue
statement of a material fact or omitted or omits to state a material fact
necessary to be stated in order to make the statements contained herein or
therein, in the light of the circumstances in which they were made, not
misleading. Neither Shareholder, Faulkner nor Falcon has any Knowledge of any
fact which has not been disclosed in writing to the Company which may reasonably
be expected to materially and adversely affect the business, operations,
properties, assets, condition (financial or other),
<PAGE>
and/or results of operations of Falcon or the ability of Shareholder, Faulkner
or Falcon to perform all of the obligations to be performed by Shareholder under
this Agreement and/or the obligations under any other agreement between the
Company and Shareholder, Faulkner or Falcon to be entered into pursuant to any
provision of this Agreement. As used in this Agreement, "Knowledge" means, with
respect to an entity, such knowledge as would be obtained after due inquiry by
the officers of that entity and, with respect to an individual, such knowledge
as would be obtained by that individual after due inquiry.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to Shareholder as of the date
hereof and as of the Closing Date as follows:
5.1 Authorization to Purchase. The Company and Summa are duly organized
-------------------------
and validly existing corporations under the laws of the State of California and
Delaware, respectively, have all of the corporate powers and authority necessary
to carry on the business each now conducts, and the Company has the power and
authority to purchase the Shares from Shareholder on the terms, conditions and
for the Purchase Price set forth herein.
5.2 Availability of Funds. The Company has a commitment as to the
---------------------
availability of all funds necessary to consummate the transactions contemplated
hereby.
5.3 Litigation. There are no actions, suits or proceedings pending or, to
----------
the Company's knowledge, threatened against or affecting the Company or Summa
(including actions, suits or proceedings where liabilities may be adequately
covered by insurance) at law or in equity or before or by any federal, state,
municipal or other governmental department, commission, court, board, bureau,
agency or instrumentality, domestic or foreign, or affecting any of the
shareholders, officers or directors of the Company or Summa in connection with
the business, operations or affairs of the Company or Summa, which could
reasonably be expected to have a material adverse effect on the ability of the
Company or Summa to consummate the transactions contemplated hereby. The Company
and Summa are not subject to any voluntary or involuntary proceeding under the
United States Bankruptcy Code and has not made an assignment for the benefit of
creditors.
5.4 Brokerage. The Company and Summa have no obligation to any person or
---------
entity for brokerage commissions, finder's fees or similar compensation in
connection with the transactions contemplated by this Agreement.
ARTICLE VI
MUTUAL COVENANTS
6.1 Confidentiality. Faulkner and the Company agree that the terms and
---------------
conditions set forth in that certain Confidentiality Agreement entered into as
of September 30, 1997 (the "Confidentiality Agreement") between Faulkner and
Summa remain in full force and effect and apply to the parties to this
transaction, and that neither party shall, without the prior written consent of
the other as to substance, existence and timing, disclose publicly or to any
third party (except such party's professional advisors) the existence of the
<PAGE>
transaction or the terms and conditions hereof, or any prior correspondence or
any subsequent negotiations between the parties, including any confidential
information obtained thereby, except to the extent required by law or as may be
required in connection with the financing and due diligence of the proposed
transaction. The parties will cooperate with each other to coordinate any and
all public statements and releases with respect to the Agreement, if any, and
the transactions contemplated hereby. From the date hereof until the Closing,
neither Shareholder, Faulkner nor Falcon nor any of their representatives shall
purchase, directly or indirectly, in the public marketplace or otherwise, any of
Summa's securities. Following the Closing, Faulkner shall keep confidential and
shall not disclose to any third party all information not then in the public
domain relating in any manner to Falcon, including, without limitation,
information relating to the Intellectual Property licensed to or used by Falcon.
6.2 Existing Business Opportunities. There are three (3) identified
-------------------------------
business opportunities whereby Faulkner has proposed to build proprietary belt
tooling for specific customers who wish to manufacture their own belts.
Faulkner and the Company agree that the status of these opportunities will be
determined during due diligence and an arrangement will be made to compensate
Faulkner for further work on them if the Company elects to proceed. If
desirable, Faulkner and the Company shall use their respective best efforts to
amend this Agreement to incorporate any agreed-upon arrangement.
6.3 Claims of Infringement. Faulkner and the Company agree as
----------------------
follows:
(a) At the Closing, Faulkner will relinquish any and all claims
Faulkner may have against the Company and/or its affiliates for infringement of
any of Faulkner's patents, including patent number 5,339,946 relating to
Falcon's Series 80 belt (the "Release"). The Release shall be substantially in
the form attached hereto as Exhibit D.
---------
(b) After the Closing, the Company and/or Falcon will be solely
responsible for payment of all costs (including attorneys' fees) and expenses
(and will be the sole beneficiaries of any settlements, judgments and/or other
payments) relating to any and all legal actions initiated after the Closing by
the Company and/or Falcon with respect to one or more of Faulkner's patents.
(c) After the Closing, the Company and/or Falcon, on the one
hand, and Faulkner and/or Shareholder on the other will be responsible on an
equal (fifty-fifty) basis for the payment of all costs (including attorneys'
fees) and expenses, judgments, settlements and other payments relating to any
and all legal actions initiated after the Closing by any third parties against
Falcon, the Company, Summa, Faulkner and/or Shareholder with respect to one or
more of Faulkner's patents or Falcon's products; provided that, in no event
shall Shareholder's and Faulkner's aggregate liability hereunder exceed the sum
of three hundred and fifty thousand dollars ($350,000).
6.4 Consents. Each of the parties shall use its best business
--------
efforts to obtain any and all necessary permits, approvals, qualifications,
consents or authorizations from third parties and governmental authorities which
are required to be obtained prior to the Closing Date, and shall use its best
efforts to make or complete all filings, proceedings and waiting periods
required to be made or completed prior to the Closing Date.
<PAGE>
6.5 No Equitable Conversion. Prior to the Closing Date, neither the
-----------------------
execution of this Agreement nor the performance of any provision contained
herein shall cause either the Company, on the one hand, or Falcon, on the other
hand, to be or become liable for or in respect of the operations or business of
the other, for the cost of any labor or materials furnished to or purchased by
the other, for compliance with any laws, requirements or regulations of, or
taxes, assessments or other charges now or hereafter due to, any governmental
authority, or for any other charges or expenses whatsoever pertaining to the
conduct of the business or the ownership, title, possession, use or occupancy of
the property of the other.
ARTICLE VII
COVENANTS OF SHAREHOLDER AND FAULKNER
7.1 Access to Properties and Records. Subject to the confidentiality
--------------------------------
provisions set forth in Section 6.1 above, until the Closing or abandonment
-----------
hereof, Shareholder and Faulkner shall cause Falcon to give the Company and its
authorized representatives full access, during reasonable business hours, in
such a manner as not unduly to disrupt normal business activities, to any and
all of its premises, properties, contracts, books, records and affairs, and will
cause its officers to furnish any and all data and information pertaining to its
business that the Company may from time to time reasonably require. If the
transactions contemplated hereby are not consummated, the Company will return or
destroy, if requested, all documents (and copies thereof) obtained hereunder.
7.2 Conduct of Business. Until the Closing or prior abandonment
-------------------
hereof, unless Shareholder and Faulkner shall have first obtained the Company's
written consent, which consent will not be unreasonably withheld, Shareholder
and Faulkner shall cause Falcon (a) to conduct its business only in the ordinary
course as presently conducted, (b) to maintain its books and records in
accordance with existing practices, (c) to not declare or pay dividends,
royalties or other distributions, (d) to not hire additional employees nor
become obligated for additional rental payments, (e) to not modify the
compensation or benefits paid to any employee, (f) to not undertake any material
expenditures, including, without limitation, the purchase of equipment or the
prepayment of debt, and (g) to not prepay any debt, other than the existing line
of credit. In addition, Shareholder, Faulkner and Falcon will not negotiate or
enter into any intellectual property agreements or licenses with any third
parties.
7.3 Exclusive Negotiations. From the date hereof until the earlier
----------------------
of the Closing or the Termination Date (as defined in Section 11.1 below),
------------
Shareholder and Faulkner will negotiate exclusively with the Company for the
acquisition of the Shares and will not, directly or indirectly, whether through
any of Shareholder's or Faulkner's representatives or agents or otherwise,
encourage, solicit or entertain any inquiries or proposals by, or engage in any
discussions or negotiations with, or furnish any non-public information to, any
person concerning the sale or other disposition of the Shares or any material
portion thereof, or the merger, consolidation, sale of assets or other
acquisition involving Falcon or any material portion thereof, and will promptly
notify the Company of the substance of any inquiry or proposal concerning any
such transactions which may be received.
7.4 Corporate Existence, Rights and Franchises. Shareholder and
------------------------------------------
Faulkner shall cause Falcon to take all necessary actions to maintain in full
force and effect its corporate existence, rights, franchises and good standing.
No change shall be made to the Articles of Incorporation or Bylaws of Falcon.
<PAGE>
7.5 Insurance. Shareholder and Faulkner shall cause Falcon to take
---------
all necessary actions to maintain in force all of its existing insurance
policies (or replacements therefor), subject only to variations in amounts
required by the ordinary operation of its business.
7.6 Resignations. On the Closing Date, Shareholder shall cause to be
------------
delivered to the Company a duly signed resignation, effective immediately after
the Closing, of Faulkner as sole director of Falcon and as President, Treasurer
and Secretary thereof.
7.7 Existing Litigation.
-------------------
Set forth on Schedule 4.15 hereto is a listing of all pending legal
-------------
actions, suits or other proceedings involving Falcon. From and after the Closing
Date, Falcon shall be responsible for payment of any and all damages, losses,
payments and expenses (including, without limitation, attorneys' fees and costs,
costs of investigation, judgments and settlement payments) incurred on or after
the Closing Date that result from, are based upon, arise under or in connection
with such legal actions not to exceed Seventy-Five Thousand Dollars ($75,000.00)
in the aggregate, and Shareholder and Faulkner hereby, jointly and severally,
indemnify and agree to promptly pay or reimburse Falcon and/or its affiliates
for any and all damages, losses, payments and expenses (including, without
limitation, attorneys' fees and costs, costs of investigation, judgments and
settlement payments) incurred in excess of such Seventy-Five Thousand Dollars
($75,000.00). In the event there is a recovery benefiting Falcon from any of the
existing litigation, the proceeds therefrom shall be used to reimburse Falcon
for any and all damages, losses, payments and expenses (including, without
limitation, attorney's fees and costs, costs of investigation, judgements and
settlement payments) incurred on or after the Closing Date that result from, are
based upon, arise under or in connection with such legal actions, up to Seventy-
Five Thousand Dollars ($75,000.00) in the aggregate. The balance of any recovery
benefiting Falcon in excess of Seventy-Five Thousand Dollars ($75,000.00) shall
be paid promptly to Faulkner.
ARTICLE VIII
COVENANTS OF THE COMPANY
8.1 Financing. The Company shall use its best efforts to consummate
---------
the financing required to fund full payment of the cash portion of the Purchase
Price payable to Shareholder at the Closing pursuant to the terms hereof, and
Falcon, Faulkner and Shareholder shall provide all reasonable cooperation to the
Company in connection therewith.
8.2 Stock Options. At the Closing, the Company shall cause Summa to
-------------
grant to those persons set forth on Schedule 8.2 hereto nonqualified stock
------------
options exercisable for shares of Summa's common stock with an exercise price
equal to the average of the high and low trading prices for a share of Summa
common stock for a ten (10) trading day period ending two (2) trading days prior
to the Closing, distributed as set forth in Schedule 8.2 hereto, with an
------------
aggregate exercise price of $750,000, in substantially the form set forth in
Exhibit B hereto.
- ---------
8.3 Deposit; Expenses. The Company has made an initial non-refundable
-----------------
earnest money deposit to Shareholder of $15,000, and shall deposit an additional
$5,000 per
<PAGE>
month thereafter, each of which shall be non-refundable, until consummation of
the transactions contemplated hereby or abandonment thereof, subject to a
maximum deposit of $25,000 (collectively, the "Deposit"). The Deposit will be
used by Shareholder for legal and accounting expenses incurred in connection
herewith. At the Closing, the Deposit will be credited against the cash portion
of the Purchase Price. Except for the Deposit, each party shall bear its or his
respective fees and expenses in connection with this transaction, including
attorneys' fees and costs.
<PAGE>
ARTICLE IX
CONDITIONS PRECEDENT TO CLOSING
9.1 Conditions to Obligations of the Company. The obligations of the
----------------------------------------
Company to purchase the Shares shall be subject to the fulfillment at or prior
to the Closing of all of the following, one or more of which may be waived in
writing in whole or in part by the Company:
(a) Representations and Warranties. The representations and
------------------------------
warranties of Shareholder and Faulkner contained in this Agreement shall be true
and correct on the date hereof and as of the Closing with the same force and
effect as though made at such time, except with respect to representations and
warranties which, by their terms, speak as of a different time, which shall have
been or will be true and correct as of that time. Shareholder and Faulkner
shall have performed all obligations and complied with all covenants and
conditions required by this Agreement to be performed or complied with by
Shareholder and Faulkner at or prior to the Closing.
(b) Regulatory Approvals. There shall have been obtained any and all
--------------------
permits, approvals and qualifications of, and there shall have been made or
completed all filings, proceedings and waiting periods, required by any
governmental body, agency or regulatory authority which, in the reasonable
opinion of counsel to the parties, are required for the consummation of the
transactions contemplated hereby.
(c) No Action or Proceeding. No claim, action, suit, investigation or
-----------------------
other proceeding shall be pending or threatened before any court or governmental
agency, and no statute, rule or regulation shall have enacted or entered by a
governmental body of competent jurisdiction, which presents a substantial risk
of the restraint or prohibition of the transactions contemplated by this
Agreement or the obtaining of material damages or other relief in connection
therewith. No law or order shall have been enacted, entered, issued,
promulgated or enforced by any governmental entity, nor shall any claim have
been instituted and remain pending or threatened and remain so at what would
otherwise be the Closing, which would not permit the business of Falcon as
presently conducted to continue unimpaired in any material aspect following the
Closing.
(d) No Material Adverse Change. Prior to the Closing, there shall not
--------------------------
have been any material adverse change in the business of Falcon.
(e) Stock Certificates, Stock Ledger and Minute Book. Shareholder
------------------------------------------------
shall have delivered to the Company the stock certificates representing the
Shares, each duly executed in blank or accompanied by duly executed instruments
of transfer, all remaining blank certificates, Falcon's stock ledger(s) and
Falcon's minute book(s).
(f) Consents. Shareholder and Faulkner shall have obtained all
--------
necessary third party and/or governmental consents, waivers and approvals to the
transaction contemplated hereunder, including, without limitation, the consent
of the Bank of Oklahoma, N.A. and of Falcon's landlord.
(g) Debt; Guarantees. There shall be no agreements or instruments
----------------
evidencing loans to or interest bearing indebtedness incurred by Falcon, and
<PAGE>
Shareholder and/or Faulkner shall have paid the entire then existing balance on
Falcon's line of credit with the Bank of Oklahoma, N.A. and, at the Closing,
shall have paid all of Falcon's other interest bearing indebtedness and
shareholder loans, including current portions thereof. All guarantees by Falcon
of any type of obligation shall have been terminated.
(h) Termination of Encumbrances. All liens and encumbrances on the
---------------------------
assets and property of Falcon shall have been terminated, and Falcon shall have
received and delivered to the Company duly executed UCC termination statements
with respect to all UCC financing statements covering such assets and property.
(i) License. Falcon and Faulkner shall have entered into, and there
-------
shall be in effect as of the Closing, a License pursuant to which Faulkner shall
grant to Falcon and/or the Company an exclusive worldwide license for the
products listed therein in substantially the form attached hereto as Exhibit C
---------
(the "License").
(j) Releases. Shareholder and Faulkner shall have executed and
--------
delivered to the Company and Summa the Release in substantially the form set
forth as Exhibit D hereto. In addition, Faulkner shall have obtained an
---------
executed release of judgment from Marie-Francoise Bigot and shall have delivered
such release of judgment to the Company, and Faulkner shall have obtained and
delivered to the Company releases from one or more employees of Falcon as
reasonably requested by the Company.
(k) Lease. Falcon and EP, L.C., an Oklahoma limited liability company
-----
("EP"), shall have entered into, and there shall be in effect as of the Closing,
a real property lease pursuant to which Falcon shall lease its current premises
from EP for five (5) years plus one (1) additional five (5) year option, in
substantially the form attached hereto as Exhibit E (the "Lease").
---------
(l) Due Diligence. The Company shall have completed its due diligence
-------------
investigations, and the results of such investigations shall be acceptable to
the Company in its sole and absolute discretion.
(m) Board Approval. The Board of Directors of Summa shall have
--------------
approved consummation of the transactions contemplated hereby in their sole and
absolute discretion.
(n) Legal Opinion. The Company shall have received opinions dated as
-------------
of the Closing Date of McAlister McAlister & Burnett, counsel to Shareholder,
Faulkner and Falcon, as to the matters set forth in Exhibit F hereto.
---------
(o) Resignations. Faulkner shall have submitted his resignation as an
------------
officer and director of Falcon in writing to the Company, effective as of the
Closing. Neither Falcon nor the Company shall incur any cost or expense in
connection with, or as a result of, the termination of employment of Faulkner,
including, but not limited to, severance benefits.
(p) Tax Returns. Falcon shall have filed its federal and state tax
-----------
returns for the fiscal year ended January 31, 1998, with copies of all such
returns delivered to the Company.
<PAGE>
(q) Employment Arrangements. Falcon shall have entered into ongoing
-----------------------
employment arrangements in the form and substance satisfactory to the Company
with such employees of Falcon as the Company shall reasonably designate.
9.2 Conditions to Obligations of Shareholder. The obligations of
----------------------------------------
Shareholder to sell the Shares shall be subject to the fulfillment at or prior
to the Closing of all of the following, one or more of which may be waived in
writing by in whole or in part by Shareholder:
(a) Representations and Warranties. The representations and
------------------------------
warranties of the Company and Summa contained in this Agreement shall be true
and correct on the date hereof and as of the Closing with the same force and
effect as though made at such time, except with respect to representations and
warranties which, by their terms, speak as of a different time, which shall have
been or will be true and correct as of that time. The Company and Summa shall
have performed all obligations and complied with all covenants and conditions
required by this Agreement to be performed or complied with by the Company or
Summa at or prior to the Closing.
(b) Regulatory Approvals. There shall have been obtained any and all
--------------------
permits, approvals and qualifications of, and there shall have been made or
completed all filings, proceedings and waiting periods, required by any
governmental body, agency or regulatory authority which, in the reasonable
opinion of counsel to the parties, are required for the consummation of the
transactions contemplated hereby.
(c) No Action or Proceeding. No claim, action, suit, investigation or
-----------------------
other proceeding shall be pending or threatened before any court or governmental
agency, and no statute, rule or regulation shall have enacted or entered by a
governmental body of competent jurisdiction, which presents a substantial risk
of the restraint or prohibition of the transactions contemplated by this
Agreement or the obtaining of material damages or other relief in connection
therewith.
(d) Payment of Purchase Price. Shareholder shall have received the
-------------------------
cash portion of the Purchase Price as calculated in accordance with Sections
--------
2.1(a) and 8.3 above.
- ------ ---
(e) Delivery of Note. The Company shall have caused Summa to execute
----------------
and deliver to Shareholder, and Shareholder shall have received, the Note.
(f) License. Falcon and Faulkner shall have entered into, and there
-------
shall be in effect as of the Closing, the License.
(g) Lease. Falcon and EP shall have entered into, and there shall be
-----
in effect as of the Closing, the Lease.
(h) Guarantees. All guarantees by Faulkner of obligations of Falcon
----------
shall have been terminated.
(i) Refinancing. EP and Faulkner shall have refinanced their
-----------
obligations with respect to the land and building owned by EP to be leased to
Falcon pursuant to the Lease.
<PAGE>
ARTICLE X
COVENANT NOT TO COMPETE
10.1 Covenant Not to Compete. Faulkner agrees that he will not, directly
-----------------------
or indirectly, own, manage, operate, join, control, or participate in the
ownership, management, operation or control of, or be employed or connected in
any manner with or by, any business or operation which engages in or competes
with the manufacture and/or design and/or distribution of material handling
components or systems, including without limitation plastic conveyor belts and
similar or related products (the "Business"), worldwide (the "Restricted
Territory") for a period of fifteen (15) years from the date hereof (the
"Term"). In addition, Faulkner will not solicit any employees of Falcon to
leave their current positions nor induce any Falcon customers or suppliers to
cease doing business with Falcon and/or the Company.
10.2 Consideration. In consideration of the covenants made by Faulkner in
-------------
Section 10.1 above, and except as otherwise set forth herein, the Company shall
- ------------
pay Faulkner the total sum of Seven Hundred Fifty Thousand Dollars
($750,000.00), payable over the Term in quarterly increments of Twelve Thousand
Five Hundred Dollars ($12,500.00) each, with the first payment payable at
Closing and each subsequent payment within twenty (20) days after the end of
each fiscal quarter. Faulkner acknowledges and agrees that he will receive a
direct, material and substantial benefit for his covenant not to compete and
that such direct, material and substantial benefit is good and sufficient
consideration to him for the performance of his obligations under this Article
X.
10.3 Limited Guaranty. Provided that Shareholder and/or Faulkner have not
----------------
breached any of their respective representations, warranties and covenants under
this Agreement (including the Covenant Not to Compete), the Note, the Lease, the
License or any other document executed by either of them in connection herewith,
Summa guarantees to Faulkner the complete and timely performance of the
covenants of the Company set forth in Sections 10.2 and 10.7 hereof.
------------- ----
10.4 Reasonableness of Covenant. Faulkner recognizes and acknowledges that
--------------------------
the Covenant Not to Compete together with Faulkner 's performance thereunder is
necessary in order to protect and maintain the proprietary interests and other
legitimate business interests of the Company and to afford the Company the
benefit of its bargain under this Agreement and that such covenants are
reasonable in all respects.
10.5 Separate Covenants; Severability. The parties intend for the
--------------------------------
covenants contained in this Article X to comply with the provisions of the laws
of each country and each state in the United States and to be construed as a
series of separate covenants, one for each city, county, market area or business
area in the Restricted Territory, for each year. Except for geographic coverage,
each such covenant shall be deemed identical in terms to the covenants contained
herein. The failure of a trier of fact to enforce any portion of the Term in one
or more area(s) of the Restricted Territory shall not affect its enforceability
in any other area(s).
10.6 Equitable Relief. The parties hereto agree that the obligations
----------------
contained in this Article X are of a special and unique character which gives
them a peculiar value, and that the Company may not be reasonably or adequately
compensated in damages in an action at law in the event that Faulkner breaches
such obligations. Faulkner therefore expressly agrees that the Company shall be
entitled to preliminary and permanent injunctive
<PAGE>
and other equitable relief to prevent a breach of said obligations, without the
necessity of posting a bond, in addition to any other rights and remedies that
the Company may have.
10.7 Cross Default. An uncured breach of or default under any of the
-------------
Event of Default provisions set forth in the Note or Lease or under any material
provision of the License shall be deemed a breach of or default under this
Article X, entitling Shareholder and Faulkner to terminate the Covenant Not to
Compete, including the Company's payment obligations set forth in Section 10.2
------------
above; provided that, Shareholder and Faulkner shall have no right to terminate
the Covenant Not to Compete if either is in breach of or default under any terms
of the License, the Note or this Agreement.
ARTICLE XI
TERMINATION OF OBLIGATIONS; NO SURVIVAL OF LIABILITIES
11.1 Termination of Agreement. Anything herein to the contrary
------------------------
notwithstanding, this Agreement and the transactions contemplated by this
Agreement may be terminated by either party in writing if the Closing does not
occur on or before the close of business on July 12, 1998 ("Termination Date"),
and may otherwise be terminated at any time before the Closing as follows and in
no other manner:
(a) Mutual Consent. By mutual written consent of Shareholder and the
--------------
Company.
(b) Conditions to the Company's Performance Not Met. By the Company
-----------------------------------------------
in writing if any event occurs which would render impossible the satisfaction of
one or more conditions to the obligations of the Company to consummate the
transaction contemplated by this Agreement as set forth in Section 9.1.
-----------
(c) Conditions to Shareholder's Performance Not Met. By Shareholder
-----------------------------------------------
in writing if any event occurs which would render impossible the satisfaction of
one or more conditions to the obligation of Shareholder to consummate the
transaction contemplated by this Agreement as set forth in Section 9.2.
-----------
(d) Breach of Representation, Warranty or Covenant. By Shareholder or
----------------------------------------------
the Company in writing if there has been a material misrepresentation or
material breach on the part of the other party in its representations,
warranties and covenants set forth herein, which, if curable, has not been cured
within ten (10) business days after receipt of notice from the other party of
its intention to terminate if such misrepresentation or breach continues.
11.2 Effect of Termination. If this Agreement is terminated and the
---------------------
transactions contemplated hereby are abandoned as described in this Article XI,
this Agreement shall become void and of no further force and effect, except for
the provisions of (i) Section 6.1 relating to the obligations to keep
-----------
confidential certain information and data, (ii) Sections 8.3 and 13.5 relating
------------ ----
to certain expenses, (iii) Section 13.6 relating to attorneys' fees and
------------
expenses, (iv) Sections 4.24 and 5.4 relating to finder's fees and broker's
------------- ---
fees, (v) Section 13.13 relating to jurisdiction and forum selection, and (vi)
-------------
this Article XI; provided, however, that if any party hereto willfully fails to
perform its obligations herein or willfully neglects to perform acts that are
necessary to the fulfillment of conditions hereof or willfully
<PAGE>
prevents the fulfillment of a condition hereof, the other party may seek any
available legal and equitable remedies in addition to those provided herein.
ARTICLE XII
INDEMNIFICATION AND REMEDIES
12.1 Obligation to Indemnify.
-----------------------
(a) Indemnification by Shareholder and Faulkner. Except as otherwise
-------------------------------------------
provided on Schedule 12.1 hereto, Shareholder and Faulkner jointly and severally
--------------
agree to indemnify and hold harmless the Company, Falcon and their directors,
officers, employees, parent, affiliates, agents and assigns (each, a "Company
Party") from and against any and all damages, losses, payments and expenses
(including, without limitation, attorneys' fees and costs, costs of
investigation, judgments and settlement payments) of any such parties as a
result of, or based upon, arising from or in connection with (i) any inaccuracy
in or breach or nonperformance of any of the representations, warranties,
covenants or agreements made by Shareholder or Faulkner in or pursuant to this
Agreement, or (ii) the conduct of the business of Falcon prior to the Closing
Date (including, without limitation, all liability for pre-closing tax periods,
including amounts not paid or provided for through estimated taxes or deposits
for the partial period ending at the close of business on the day preceding the
Closing Date), or (iii) any claims or demands by any governmental authority or
third party arising under any Environmental Law to the extent attributable to
Falcon's use and/or occupancy of any premises owned or used by Falcon at any
time prior to the Closing Date, or to Hazardous Substances transported by or on
behalf of Falcon prior to the Closing Date.
(b) Indemnification by the Company and Summa. The Company and Summa
----------------------------------------
jointly and severally agree to indemnify and hold harmless the Shareholder and
Faulkner and their heirs, successors and assigns from and against any and all
damages, losses, payments and expenses (including, without limitation,
attorneys' fees and costs, costs of investigation, judgments and settlement
payments) of any such parties as a result of, or based upon, arising from or in
connection with any inaccuracy in or breach or nonperformance of any of the
representations, warranties, covenants or agreements made by the Company or
Summa in or pursuant to this Agreement.
(c) Waiver of Certain Indemnification. Faulkner agrees that, from and
---------------------------------
after the Closing, he shall waive any and all rights that he may have for
indemnification or advancement of expenses by Falcon (or the Company as
Falcon's successor in interest) under law, the Articles of Incorporation of
Falcon, Bylaws of Falcon or any agreement with Falcon.
12.2 Certain Indemnification Procedures.
----------------------------------
(a) Notice of Claim. If and whenever a party to this Agreement (the
---------------
"Indemnified Party") shall claim indemnification under Section 12.1, such party
------------
shall send written notice of the same to the other party (the "Indemnifying
Party") at such person's address set forth in Section 13.2 below (a "Notice of
------------
Claim"). A Notice of Claim hereunder (which in the case of third party claims
shall be delivered within a reasonable time after the Indemnified Party receives
actual written notice of such third party claim) shall state the basis for such
claim supported by relevant information and documentation with respect thereto
and the total amount claimed, and if such claim is based upon an action,
proceeding
<PAGE>
or claim by a third party, offer the Indemnifying Party the right to participate
in (but not control) the defense of such action, proceeding or claim at the
Indemnifying Party's own expense insofar as such action, proceeding or claim is
the basis on which indemnity is sought.
(b) Claim Response. Within twenty (20) days after receipt of a Notice
--------------
of Claim, the Indemnifying Party shall give written notice to the Indemnified
Party as to whether it objects to or acquiesces in the claim, in whole or in
part (the "Claim Response"). If the Indemnifying Party acquiesces to the claim,
in whole or in part, it shall state its acquiescence, or the extent thereof, in
the Claim Response and shall pay the claim in whole, or that part to which it
acquiesces, within such twenty (20) day period. If the Indemnifying Party
objects to the claim, in whole or in part, within such twenty (20) day period,
its Claim Response shall set forth with reasonable particularity the grounds,
amount of, and basis upon which the claim is disputed. If the Indemnifying
Party fails to object to the claim, in whole or in part, within twenty (20) days
after receipt of the Notice of Claim, it shall pay the same in whole, or that
portion of the claim to which it failed to object, within ten (10) days after
the expiration of such twenty (20) day period.
(c) Meet and Confer. In the event the Indemnifying Party disputes the
---------------
whole or a portion of a claim as set forth in this Section 12.2, the
------------
Indemnifying and Indemnified Parties shall meet within five (5) days of the
Indemnifying Party's delivery of the Claim Response and attempt in good faith to
resolve the dispute without third party intervention. The parties shall have
ten (10) days in which to resolve their dispute. If the parties cannot resolve
their dispute within such ten (10) day period, then the dispute may be submitted
to binding arbitration only by mutual agreement.
12.3 Right to Cure. Prior to any party making a claim for monetary damages
-------------
under this Agreement, adequate notice of an alleged right to indemnity must be
provided in writing to the other party, with a subsequent twenty (20) day
period for the other to investigate the claim and to cure it if possible.
12.4 Survival of Representations and Warranties. The representations,
------------------------------------------
warranties and covenants of each of the parties to this Agreement shall survive
the execution of this Agreement and the consummation of the purchase and sale
herein described.
ARTICLE XIII
MISCELLANEOUS
13.1 Best Efforts; Further Assurances. Both before and after the Closing,
--------------------------------
each party will use its reasonable best efforts to cause all conditions to its
obligations under this Agreement to be timely satisfied and to perform and
fulfill all covenants and obligations on its part to be performed and fulfilled
under this Agreement, to the end that the transaction contemplated by this
Agreement shall be effected substantially in accordance with its terms as soon
as reasonably practicable. The parties shall cooperate with each other in such
actions and in securing requisite approvals. Each party shall execute and
deliver both before and after the Closing such further certificates, agreements
and other documents and take such other actions as may be necessary or
appropriate to consummate or implement the transactions contemplated hereby or
to evidence such events or matters.
<PAGE>
13.2 Notices. All notices or other communications required or
-------
permitted to be given hereunder shall be in writing and shall be delivered by
hand or sent prepaid telex, cable or telecopy, or sent, postage prepaid, by
registered, certified or express mail, or reputable overnight courier service
and shall be deemed given when so delivered by hand, telexed, cabled or
telecopied, or if mailed, three days after mailing (one Business Day in the case
of express mail or overnight courier service), as follows:
(i) if to the Company:
KVP Systems, Inc.
c/o Summa Industries
21250 Hawthorne Blvd., Suite 500
Torrance, CA 90503
FAX: (310) 792-7079
Attention: Trygve M. Thoresen
with a copy to:
Summa Industries
21250 Hawthorne Blvd., Suite 500
Torrance, CA 90503
FAX: (310) 792-7079
Attention: James R. Swartwout
(ii) if to Summa:
Summa Industries
21250 Hawthorne Blvd., Suite 500
Torrance, CA 90503
FAX: (310) 792-7079
Attention: James R. Swartwout
(iii) if to Shareholder
and/or Faulkner:
Mr. William G. Faulkner
c/o McAlister McAlister & Burnett
15 E. 15th Street, Suite 200
Edmond, OK 73083
FAX: (405) 359-0806
with a copy to:
McAlister McAlister & Burnett
15 E. 15th Street, Suite 200
Edmond, OK 73083
FAX: (405) 359-0806
Attention: Kevin W. Burnett, Esq.
<PAGE>
13.3 Assignment. This Agreement and the rights and obligations
----------
hereunder shall be binding upon each party hereto and shall inure to the benefit
of and be binding upon each party's successors, heirs and permitted assigns
prior to the Closing. Following the Closing, this Agreement and the rights and
obligations hereunder may not be assigned nor transferred (including transfers
by operation of law) by Shareholder or Faulkner without the prior written
consent of the Company in its sole and absolute discretion.
13.4 No Third-Party Beneficiaries. Except as provided in Article XII
----------------------------
as to Company Parties, this Agreement is for the sole benefit of the parties
hereto and their permitted assigns and nothing herein expressed or implied shall
give or be construed to give to any person or entity, other than the parties
hereto and such assigns, any legal or equitable rights hereunder.
13.5 Expenses. Whether or not the transactions contemplated hereby
--------
are consummated, and except as otherwise provided in this Agreement, all fees,
costs and expenses incurred in connection with this Agreement and the
transactions contemplated hereby shall be paid by the party incurring such fees,
costs or expenses.
13.6 Attorneys' Fees. Should any litigation be commenced concerning
---------------
this Agreement or the rights and duties of any party with respect to it, the
party prevailing shall be entitled, in addition to such other relief as may be
granted, to a reasonable sum for such party's attorneys' fees and expenses
determined by the court in such litigation or in a separate action brought for
that purpose.
13.7 Amendments. No amendment to this Agreement shall be effective
----------
unless it shall be in writing and signed by both parties hereto.
13.8 Interpretation; Exhibits and Schedules. The headings contained
--------------------------------------
in this Agreement, in any Exhibit or Schedule hereto and in the table of
contents to this Agreement, are for reference purposes only and shall not affect
in any way the meaning or interpretation of this Agreement. All Exhibits and
Schedules annexed hereto or referred to herein are hereby incorporated in and
made a part of this Agreement as if set forth in full herein. Any capitalized
terms used in any Schedule or Exhibit, but not otherwise defined therein, shall
have the meaning as defined in this Agreement.
13.9 Counterparts. This Agreement may be executed in counterparts,
------------
each of which shall be deemed an original, and all of which taken together shall
constitute one and the same instrument.
13.10 Entire Agreement. This Agreement and the Confidentiality
----------------
Agreement contain the entire agreement and understanding between the parties
hereto with respect to the subject matter hereof and supersede all prior oral
and written agreements and understandings relating to the subject matter hereof.
13.11 Severability. If any provision of this Agreement or the
------------
application of any such provision to any person or circumstance shall be held
invalid, illegal or unenforceable in any respect by a court of competent
jurisdiction, such invalidity, illegality or unenforceability shall not affect
any other provision hereof or the portion, if any, of such provision that may be
enforceable.
<PAGE>
13.12 Governing Law. This Agreement shall be governed by and
-------------
construed in accordance with the internal laws of the State of Delaware
applicable to agreements made and to be performed entirely within such State,
without regard to the conflicts of law principles of such State.
13.13 Consent to Jurisdiction: Forum Selection. The parties agree
----------------------------------------
that all actions or proceedings arising in connection with this Agreement shall
be tried and litigated exclusively in the Federal courts located in the County
of Los Angeles, State of California. The aforementioned choice of venue is
intended by the parties to be mandatory and not permissive in nature, thereby
precluding the possibility of litigation between the parties with respect to or
arising out of this Agreement in any jurisdiction other than those specified in
this section. Each party hereby waives any right it may have to assert the
doctrine of forum non conveniens or similar doctrine or to object to venue with
respect to any proceeding brought in accordance with this section, and
stipulates that the Federal courts located in the County of Los Angeles, State
of California shall have in personam jurisdiction and venue over each of them
for the purpose of litigating any dispute, controversy or proceeding arising out
of or related to this Agreement. Each party hereby authorizes and accepts
service of process sufficient for personal jurisdiction in any action against it
as contemplated by this paragraph by registered or certified mail, return
receipt requested, postage prepaid, to its address for the giving of notices as
set forth in this Agreement, or in the manner set forth in Section 13.2 of this
------------
Agreement for the giving of notice. Any final judgment rendered against a party
in any action or proceeding shall be conclusive as to the subject of such final
judgment and may be enforced in other jurisdictions in any manner provided by
law.
IN WITNESS WHEREOF, the parties hereto, intending legally to be bound
hereby, have each caused this Agreement to be duly executed as of the date first
above written.
"SHAREHOLDER"
/s/ William G. Faulkner
-----------------------------------
William G. Faulkner, Trustee of the
William G. Faulkner 1994 Revocable Trust
under Agreement dated August 8, 1994
"FAULKNER"
/s/ William G. Faulkner
-----------------------------------
William G. Faulkner, an individual
"THE COMPANY"
KVP SYSTEMS, INC.,
<PAGE>
a California corporation
By: /s/ James R. Swartwout
------------------------------
James R. Swartwout,
Chairman of the Board
"SUMMA"
SUMMA INDUSTRIES,
a Delaware corporation
By: /s/ James R. Swartwout
------------------------------
James R. Swartwout,
Chairman of the Board
<PAGE>
AMENDMENT NO. 1
TO
STOCK PURCHASE AGREEMENT
This Amendment No. 1 ("Amendment") to that certain Stock Purchase Agreement
("Agreement") dated April 8, 1998 by and among Mr. William G. Faulkner, as an
individual and a resident of the State of Florida ("Faulkner") and as Trustee of
the William G. Faulkner 1994 Revocable Trust under Agreement dated August 8,
1994 ("Shareholder"), KVP Systems, Inc., a California corporation (the
"Company"), and Summa Industries, a Delaware corporation and parent of the
Company ("Summa"), is made and entered into as of April 24, 1998.
Capitalized terms used herein but not defined shall have the meanings
ascribed to them in the Agreement.
For good and valuable consideration, the receipt and sufficiency of which
is hereby acknowledged, intending to be legally bound, the parties hereto hereby
agree as follows:
1. Section 2.1(a) of the Agreement is hereby amended and restated in its
entirety to read as follows:
"(a) Cash. Two Million Three Hundred and Ten Thousand Five Hundred
----
Twenty Five and No/100 Dollars ($2,310,525.00), which includes the first
$12,500.00 quarterly payment for the Covenant Not to Compete due under Section
-------
10.2 hereof, less all amounts previously paid or paid after the date hereof and
- ----
prior to the Closing as a deposit under Section 8.3 hereof."
-----------
2. Section 2.2 of the Agreement is hereby amended and restated in its
entirety to read as follows:
"2.2 Other Amounts Due and Payable. On the Closing Date (as defined
-----------------------------
in Section 3.1 below), the Company shall cause Falcon to pay the following: (i)
-----------
Three Hundred Fifty Four Thousand Nine Hundred Seventy Five and No/100 Dollars
($354,975.00) to Faulkner representing the total amount due for accrued but
unpaid royalties under that certain Second Amended and Restated License
Agreement dated January 14, 1995 and related promissory note, and (ii) One
Hundred Ninety Seven Thousand Dollars ($197,000.00) to certain employees of
Falcon for previously declared but unpaid bonuses, in the individual amounts and
to the persons set forth in the books and records of Falcon and as shown on
Schedule 2.2 hereto."
- ------------
3. Schedule 2.2 of the Agreement is hereby amended and restated in its
entirety to read as set forth on Schedule I hereto.
----------
4. Schedule 4.11 of the Agreement is hereby amended and restated in its
entirety to read as set forth on Schedule II hereto.
-----------
5. Schedule 8.2 of the Agreement is hereby amended and restated in its
entirety to read as set forth on Schedule III hereto.
------------
<PAGE>
6. Schedule 12.1 of the Agreement is hereby amended and restated in its
entirety to read as set forth on Schedule IV hereto.
-----------
7. Exhibit A to the License Agreement is hereby amended and restated in
its entirety to read as set forth on Schedule V hereto.
----------
Except as expressly modified by this Amendment, the Agreement remains in
full force and effect as of the date hereof. All of the terms and conditions
set forth in Article XIII of the Agreement (Miscellaneous) are incorporated
herein by this reference.
IN WITNESS WHEREOF, the parties hereto, intending legally to be bound
hereby, have each caused this Amendment No. 1 to be duly executed as of the date
first above written.
"SHAREHOLDER"
/s/ William G. Faulkner
------------------------------------
William G. Faulkner, Trustee of the
William G. Faulkner 1994 Revocable Trust
under Agreement dated August 8, 1994
"FAULKNER"
/s/ William G. Faulkner
------------------------------------
William G. Faulkner, an individual
"THE COMPANY"
KVP SYSTEMS, INC.,
a California corporation
By: /s/ James R. Swartwout
--------------------------------
James R. Swartwout,
Chairman of the Board
"SUMMA"
SUMMA INDUSTRIES,
a Delaware corporation
By: /s/ James R. Swartwout
--------------------------------
James R. Swartwout,
Chairman of the Board
<PAGE>
EXHIBIT 10.2
STOCK PURCHASE AGREEMENT
This STOCK PURCHASE AGREEMENT (this "Agreement") dated effective as of June
12, 1998, is made and entered into by and between P&L GROWTH INDUSTRIES, INC., a
California corporation ("Buyer"), and SUMMA INDUSTRIES, a Delaware corporation
("Seller"), relating to the sale by the Seller and purchase by the Buyer of all
of the outstanding shares of capital stock of GST Industries, Inc., a California
corporation (the "Company").
WHEREAS, there are currently outstanding four hundred thousand (400,000)
shares of Common Stock of the Company (the "Shares"), all of which are owned
beneficially and of record by the Seller.
WHEREAS, Buyer desires to purchase the Shares and the Seller desires to
sell the Shares on the terms and subject to the conditions set forth in this
Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and agreements set
forth in this Agreement, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
1. Purchase and Sale of Shares. Subject to the terms and conditions
----------------------------
hereof, at the Closing to be held in accordance with the provisions of Section 3
hereof, Buyer agrees to purchase the Shares from Seller, and Seller agrees to
sell the Shares to Buyer.
2. Purchase Price. The aggregate purchase price to be paid by Buyer for
---------------
the Shares (the "Purchase Price") shall be determined and paid as follows:
(a) At the Closing (as defined in Section 3 below), Buyer shall pay
to Seller the sum of One Million Two Hundred Thousand Dollars ($1,200,000.00) in
cash by transfer from the account of Buyer to the account of Seller at Comerica
Bank California (the "Bank"), or by cashier's or certified check or checks in
immediately available funds, at Seller's election; and
(b) At the Closing, Buyer shall execute and deliver to Seller a
subordinated promissory note in the principal amount of One Million Five Hundred
Thousand Dollars ($1,500,000.00) (the "Note"), which shall be substantially in
the form of Exhibit A attached hereto.
---------
3. Closing. The Closing shall take place at the offices of Seller in
-------
Torrance, California, at 10:00 a.m., local time, on June 22, 1998 (the "Closing
Date"), or at such other time, date and place as may be mutually agreed upon in
writing by the parties hereto. If the Closing fails to occur by June 22, 1998,
or by such later date to which the Closing may be extended as provided
hereinabove, this Agreement shall automatically terminate, all parties shall pay
their own expenses incurred in connection herewith, and neither Buyer nor Seller
shall have any further obligations hereunder; provided, however, that no such
------------------
termination shall constitute a waiver by either Buyer or Seller who is not in
default of any of its respective representations, warranties or covenants
herein, of any rights or remedies it might
<PAGE>
have at law if the other is in default of any of its respective representations,
warranties or covenants under this Agreement.
At the Closing, Buyer shall pay the Purchase Price in cash and by issuance
of the Note, as provided in Section 2, and Seller shall assign and transfer to
Buyer good and valid title in and to the Shares, free and clear of all liens, by
delivering to Seller a certificate or certificates representing the Shares, duly
endorsed in blank or accompanied by duly executed stock powers in form
reasonably satisfactory to Seller endorsed in blank. At the Closing, there shall
also be delivered to Seller and Buyer the opinions, certificates and other
contracts, documents and instruments to be delivered under Sections 7.3 and 7.4
hereof.
4. Representations and Warranties of Seller. Seller hereby represents and
-----------------------------------------
warrants to, and covenants with, Buyer as follows (it being acknowledged that
Buyer is entering into this Agreement in material reliance upon each of the
following representations and warranties, and that the truth and accuracy in all
material respects of each of which constitutes a condition precedent to Buyer's
obligations hereunder):
4.1 Organization and Corporate Power. Seller is a corporation duly
--------------------------------
organized, validly existing and in good standing under the laws of the State of
Delaware. Seller has full corporate power and authority to execute and deliver
this Agreement, to perform its obligations hereunder and to consummate the
transactions contemplated hereby. The Company is a corporation duly organized,
validly existing and in good standing under the laws of the State of California,
and is duly qualified and in good standing to do business as a foreign
corporation in each jurisdiction where the failure to be so qualified would have
a materially adverse effect upon the Company. The Company has all requisite
corporate power and authority to conduct its business as now being conducted and
to own and lease the properties which it now owns and leases. The Articles of
Incorporation, as amended to date, certified by the Secretary of State of
California, and the Bylaws of the Company, as amended to date, which have
previously been provided to Buyer by Seller, are true and complete copies
thereof as currently in effect.
4.2 Authorizations. This Agreement, and each and every other
-----------------
agreement, document and instrument to be executed by Seller in connection
herewith, has been effectively authorized by all necessary action on the part of
Seller, has been duly and validly executed and delivered by Seller and
constitutes a legal, valid and binding obligation of Seller enforceable against
Seller in accordance with its terms, subject, as to enforcement, to bankruptcy,
insolvency, reorganization and other laws of general application relating to or
affecting creditors' rights and to general equity principles. The resolutions
of Seller's Board of Directors authorizing the execution and delivery of this
Agreement by Seller, which have previously been provided to Buyer by Seller, are
true and complete copies thereof as currently in effect.
4.3 Capitalization of the Company. The authorized capital stock of
------------------------------
the Company consists of 500,000 shares of Common Stock. As of the date hereof,
there are 400,000 shares of Common Stock issued and outstanding, all of which
are owned, beneficially and of record, by Seller. Except as may be disclosed in
the Disclosure Schedule attached hereto as Exhibit B, all of such shares are
---------
free and clear of (i) any lien, charge, mortgage, pledge, conditional sale
agreement, or other encumbrance of any kind or nature whatsoever, and (ii) any
claim as to ownership thereof or any rights, powers or interest therein by any
third party, whether legal or beneficial, and whether based on contract, proxy
or other document or otherwise. The delivery of a certificate or certificates
at the Closing
<PAGE>
representing the Shares in the manner provided in Section 2 above will transfer
to Buyer good and valid title to the Shares, free of any liens or encumbrances.
As of the date hereof, except as expressly set forth hereinabove, there are no
warrants, options, calls, commitments or other rights to subscribe for or to
purchase from the Company any capital stock of the Company or any securities
convertible into or exchangeable for any shares of capital stock of the Company,
or any other securities or agreements pursuant to which the Company is or may
become obligated to issue any shares of its capital stock, nor is there
outstanding any commitment, obligation or agreement on the part of the Company
to repurchase, redeem or otherwise acquire any of the outstanding shares of its
capital stock.
4.4 No Conflicts. Except as set forth in the Disclosure Schedule,
-------------
neither the execution and delivery of this Agreement, nor the consummation by
Seller of any of the transactions contemplated hereby, or compliance with any of
the provisions hereof, will (i) conflict with or result in a breach of,
violation of, or default under, any of the terms, conditions or provisions of
any material note, bond, mortgage, indenture, license, lease, credit agreement
or other agreement, document, instrument or obligation to which Seller or the
Company is a party or by which any of their respective assets or properties may
be bound, or (ii) violate any judgment, order, injunction, decree, statute, rule
or regulation applicable to Seller or the Company, or any of the assets or
properties of either of them. No authorization, consent or approval of any
public body or authority is necessary for the consummation by Seller of the
transactions contemplated by this Agreement.
4.5 Financial Statements. Attached hereto as Exhibit C are (i)
--------------------- ---------
unaudited financial statements of the Company for each of its fiscal years ended
August 31, 1995 through 1997, consisting of the Company's balance sheets as of
such dates, the related income statements for the periods then ended, and (ii)
unaudited financial statements of the Company as of and for the eight months
ended April 30, 1998, consisting of the Company's balance sheet as of such date
(the "Balance Sheet") and the related income statement for the period then
ended. Such financial statements are herein sometimes collectively referred to
as the "Financial Statements." The Financial Statements (i) are derived from
the books and records of the Company, which books and records have been
consistently maintained in a manner which reflects, and such books and records
do fairly and accurately reflect in all material respects, the assets and
liabilities of the Company, (ii) fairly and accurately present in all material
respects the financial condition of the Company on the respective dates of such
statements and the results of its operations for the periods indicated, except
as may be disclosed in the Disclosure Schedule, and (iii) have been prepared in
all material respects in accordance with generally accepted accounting
principles consistently applied throughout the periods involved (except as
otherwise disclosed in the notes thereto).
4.6 Absence of Undisclosed Liabilities. Except as and to the extent
----------------------------------
reflected or reserved against in the Balance Sheet or set forth in the
Disclosure Schedule, the Company has no liability or obligation (whether
accrued, to become due, contingent or otherwise) which individually or in the
aggregate could reasonably be expected to have a materially adverse effect on
the business, assets, condition (financial or otherwise) or prospects of the
Company.
4.7 Absence of Certain Developments. Except as set forth in the
--------------------------------
Disclosure Schedule, since the date of the Balance Sheet there has been (i) no
declaration, setting aside or payment of any dividend or other distribution with
respect to the Shares or redemption, purchase or other acquisition of any Shares
or any split-up or other recapitalization relative
<PAGE>
to any Shares or any action authorizing or obligating the Company to do any of
the foregoing; (ii) no loss, destruction or damage to any material property or
asset of the Company, whether or not insured; (iii) no acquisition or
disposition of assets (or any contract or arrangement therefor), or any other
transaction by the Company otherwise than for fair value and in the ordinary
course of business; (iv) no discharge or satisfaction by the Company of any lien
or encumbrance or payment of any obligation or liability (absolute or
contingent) other than current liabilities shown on the Balance Sheet, or
current liabilities incurred since the date thereof in the ordinary course of
business, (v) no sale, assignment or transfer by the Company of any of its
tangible or intangible assets except in the ordinary course of business,
cancellation by the Company of any debts, claims or obligations, or mortgage,
pledge, subjection of any assets to any lien, charge, security interest or other
encumbrance, or waiver by the Company of any rights of value which, in any such
case, is material to the business of the Company; (vi) no payment by the Company
of any bonus to or change in the compensation of any director, officer or
employee, whether directly or by means of any bonus, pension plan, contract or
commitment; (vii) no write-off or material reduction in the carrying value of
any asset which is material to the business of the Company; (viii) no
disposition or lapse of rights as to any intangible property which is material
to the business of the Company (other than as contemplated by the License
Agreement specified in Section 7.4(c) below); (ix) except for ordinary travel
advances, no loans or extensions of credit to shareholders, officers, directors
or employees of the Company, (x) no agreement to do any of the things described
in this Section 4.7, and (xi) no materially adverse change in the condition
(financial or otherwise) of the Company or in its assets, liabilities,
properties, business or prospects.
4.8 Real Property. The Company does not own any real property. The
--------------
Disclosure Schedule contains a complete and accurate description of each parcel
of real property leased to and occupied by the Company. The buildings and all
fixtures and improvements located on such real property are in good operating
condition, ordinary wear and tear excepted. The Company is not in violation of
any material zoning, building or safety ordinance, regulation or requirement or
other law or regulation applicable to the operation of leased properties, and
the Company has not received any notice of violation with which it has not
complied. The Company has valid leasehold interests in all such real property,
free and clear of all liens, mortgages, encumbrances, easements, leases,
restrictions and claims of any kind whatsoever except for (i) those matters
shown on the Disclosure Schedule; (ii) liens for taxes and tax assessments not
yet due and payable; and (iii) mechanics' or similar liens for materials or
services furnished or to be furnished after the date hereof. All leases of real
property to which the Company is a party and which are material to the business
of the Company are fully effective in accordance with their respective terms and
afford the Company peaceful and undisturbed possession of the subject matter of
the lease, and there exists no default on the part of the Company or termination
thereof, except as may be set forth on the Disclosure Schedule.
4.9 Tangible Personal Property. The Disclosure Schedule sets forth a
--------------------------
complete list of all items of tangible personal property owned or leased and
used by the Company in the current conduct of its business, where the original
cost was in excess of $1,000. Except as set forth on the Disclosure Schedule,
the Company has, and at the Closing will have, good and marketable title to, or
in the case of leased equipment a valid leasehold interest in, and is in
possession of, all such items of personal property owned or leased by it, free
and clear of all material title defects, mortgages, pledges, security interests
conditional sales agreements, liens, restrictions or encumbrances whatsoever.
Included in
<PAGE>
the Disclosure Schedule is a list of all outstanding equipment leases and
maintenance agreements to which the Company is a part as lessee and which
individually provide for future lease payments in excess of $1,000 per month,
with the identities of the other parties to all such leases and agreements shown
thereon. True and complete copies of all such equipment leases and maintenance
agreements listed on the Disclosure Schedule have been made available to Buyer
prior to the execution hereof. All leases of tangible personal property to which
the Company is a party and which are material to the business of the Company are
fully effective in accordance with their respective terms, and there exists no
default on the part of the Company or termination thereof, except as may be set
forth on the Disclosure Schedule. Each item of capital equipment reflected in
the Balance Sheet which is used in the current conduct of the Company's business
is, and on the date of the Closing will be, in good operating and usable
condition and repair, ordinary wear and tear excepted, and is and will be
suitable for use in the ordinary course of the Company's business and fit for
its intended purposes, except as may be set forth on the Disclosure Schedule.
4.10 Taxes. The Company has, since 1991, duly filed all federal,
------
state, county and local tax returns required to have been filed by it in those
jurisdictions where the nature or conduct of its business requires such filing
and where the failure to so file would be materially adverse to the Company.
Copies of all such tax returns have been made available for inspection by Buyer
prior to the execution hereof. All federal, state, county and local taxes,
including but not limited to those taxes due with respect to the Company's
properties, income, gross receipts, excise, occupation, franchise, permit,
licenses, sales, payroll, and inventory due and payable as of the date of the
Closing by the Company have been paid. The amounts reflected in the Balance
Sheet as liabilities or reserves for taxes which are due but not yet payable is
sufficient for the payment of all accrued and unpaid taxes of the types referred
to hereinabove. No consent to the application of Section 341(f)(2) of the
Internal Revenue Code of 1986, as amended, has been filed with respect to the
Company.
4.11 Accounts Receivable. The accounts receivable reflected in the
--------------------
Balance Sheet constituted all accounts receivable of the Company as of the date
thereof, other than accounts receivable fully written off as uncollectible as of
such date. All such accounts receivable arose from valid sales, were recorded
in the ordinary course of business and, to Seller's knowledge, are not subject
to any set-off or counter claim, except as set forth in the Disclosure Schedule.
Such accounts receivable have been collected in full since the date of the
Balance Sheet or, to Seller's knowledge, are collectible at their full
respective amounts (net of allowance for doubtful accounts established in
accordance with consistently applied prior practice). Based upon the prior
experience of the Company, the "allowance for doubtful accounts" shown on the
Balance Sheet is sufficient to cover all doubtful accounts. The accounts
receivable of the Company existing as of the close of business on the Closing
Date will be fully collectable within one year from the Closing Date.
4.12 Inventories. The Company has, and on the Closing Date will
------------
continue to have, good and marketable title to all of its inventories of raw
materials, work-in-process and finished goods, including models and samples,
free and clear of all security interests, liens, claims and encumbrances, except
as set forth in the Disclosure Schedule. All such inventories consist of items
that are usable and salable in the ordinary course of business of the Company
for an amount at least equal to the book value thereto, plus the costs of
disposition thereof, and represent quantities not in excess of one year's
requirements for its business as currently conducted.
<PAGE>
4.13 Contracts and Commitments. The Company has no contract,
--------------------------
agreement, obligation or commitment, written or oral, expressed or implied,
which involves a commitment or liability in excess of $10,000 or for a term of
more than 6 months (other than obligations which are included in accounts
payable), and no union contracts, employee or consulting contracts, financing
agreements, debtor or creditor arrangements, licenses, franchise, manufacturing,
distributorship or dealership agreements, leases, or bonus, health or stock
option plans, except as described in the Disclosure Schedule. True and complete
copies of all such contracts and other agreements listed on the Disclosure
Schedule have been made available to Buyer prior to the execution hereof. As of
the date hereof, to Seller's knowledge there exists no circumstances which would
affect the validity or enforceability of any of such contracts and other
agreements in accordance with their respective terms. The Company has performed
and complied in all material respects with all obligations required to be
performed by it to date under, and is not in default (without giving effect to
any required notice or grace period) under, or in breach of, the terms,
conditions or provisions of any of such contracts and other agreements. The
validity and enforceability of any contract or other agreement described herein
has not been and shall not in any manner be affected by the execution and
delivery of this Agreement without any further action. To Seller's knowledge,
the Company has no contract, agreement, obligation or commitment which requires
or will require future expenditures (including internal costs and overhead) in
excess of reasonably anticipated receipts, nor which is likely to be materially
adverse to the Company's business, assets, condition (financial and otherwise)
or prospects.
4.14 Patents, Trade Secrets and Customer Lists. The Company does not
-----------------------------------------
have any patents, applications for patents, trademarks, applications for
trademarks, trade names, licenses or service marks relating to the business of
the Company, except as set forth in the Disclosure Schedule, nor does any
present or former shareholder, officer, director or employee of the Company own
any patent rights relating to any products manufactured, rented or sold by the
Company. Except as disclosed on the Disclosure Schedule and as set forth in the
License Agreement, the Company has the unrestricted right to use, free and clear
of any claims or rights of others, all trade secrets, customer lists, and
manufacturing and secret processes reasonably necessary to the manufacture and
marketing of all products made or proposed to be made by the Company, and the
continued use thereof by the Company following the Closing will not conflict
with, infringe upon, or otherwise violate any rights of others. The Company has
not used and is not making use of any confidential information or trade secrets
of any present or past employee of the Company.
4.15 No Pending Litigation or Proceedings. Except as set forth in the
------------------------------------
Disclosure Schedule, there are no actions, suits or proceedings pending or, to
Seller's knowledge, threatened against or affecting the Company (including
actions, suits or proceedings where liabilities may be adequately covered by
insurance) at law or in equity or before or by any federal, state, municipal or
other governmental department, commission, court, board, bureau, agency or
instrumentality, domestic or foreign, or, to Seller's knowledge, affecting any
of the shareholders, officers or directors of the Company in connection with the
business, operations or affairs of the Company, which could reasonably be
expected to result in any adverse change in the business, properties or assets,
or in the condition (financial or otherwise) or prospects of the Company, or
which question or challenge the sale of the Shares by Seller to Buyer. Except
as disclosed in the Disclosure Schedule, the Company has not, during the past
three years, been threatened with any action, suit, proceedings or claim
(including actions, suits, proceedings or claims where its liabilities may be
adequately covered by insurance) for personal injuries allegedly attributable to
<PAGE>
products sold or services performed by the Company asserting a particular defect
or hazardous property in any of the Company's products, services or business
practices or methods, nor has the Company been a party to or threatened with
proceedings brought by or before any federal or state agency; and the Company
has no knowledge of any defect or hazardous property, claimed or actual, in any
such product, service or business practice or method. The Company is not
subject to any voluntary or involuntary proceeding under the United States
Bankruptcy Code and has not made an assignment for the benefit of creditors.
4.16 Insurance. The Company maintains insurance with reputable
----------
insurance companies on such of its equipment, tools, machinery, inventory and
properties as it deems necessary, and maintains products and personal liability
insurance, and such other insurance against hazards, risks and liability to
persons and property as it deems necessary. A true and complete listing and
general description of each of the Company's insurance policies as currently in
force is set forth on the Disclosure Schedule. All such insurance policies
currently are, and through the Closing shall be, in full force and effect.
4.17 Arrangements with Personnel. Except as set forth in the
---------------------------
Disclosure Schedule, no stockholder, director, officer or employee is presently
a party to any transaction with the Company, including without limitation any
contract, loan or other agreement or arrangement providing for the furnishing of
services by, the rental of real or personal property from or to, or otherwise
requiring loans or payments to, any such stockholder, director, officer or
employee, or to any member of the family of any of the foregoing, or to any
corporation, partnership, trust or other entity in which any stockholder,
director, officer or employee or any member of the family of any of them has a
substantial interest or is an officer, director, trustee, partner or employee.
There is set forth on the Disclosure Schedule a list showing (i) the name,
title, date and amount of last compensation increase, and aggregate
compensation, including amounts paid or accrued pursuant to any bonus, pension,
profit sharing, commission, deferred compensation or other plans or arrangements
in effect as of the date of this Agreement, of each officer, employee, agent or
contractor of the Company whose salary and other compensation, in the aggregate,
received from the Company or accrued is at an annual rate (or aggregated for the
most recently completed fiscal year) in excess of $50,000 as well as any
employment agreements relating to any such persons; (ii) all powers of attorney
from the Company to any person or entity; (iii) the name of each person or
entity authorized to borrow money or incur or guarantee indebtedness on behalf
of the Company; and (iv) all bank and savings accounts, and other accounts at
similar financial institutions, of the Company.
4.18 Labor Relations. The Company has no obligations under any
---------------
collective bargaining agreement or other contract with a labor union, under any
employment contract or consulting agreement, or under any executive's
compensation plan, agreement or arrangement nor, to Seller's knowledge, is any
union, labor organization or group of employees of the Company presently seeking
the right to enter into collective bargaining with the Company on behalf of any
of its employees. The Company has made available to Buyer a copy of all written
personnel policies, including without limitation vacation, severance, bonus,
pension, profit sharing and commissions policies, applicable to any of the
Company's employees.
4.19 Absence of Questionable Payments. Neither the Company nor, to
--------------------------------
Seller's knowledge, any shareholder, director, officer, agent, employee,
consultant or other person associated with or acting on behalf of any of them,
has (i) used any corporate funds
<PAGE>
for unlawful contributions, gifts, entertainment or other unlawful expenses
relating to political activity, (b) made any direct or indirect unlawful
payments to governmental officials or others from corporate funds, engaged in
any payments or activity which would be deemed a violation of the Foreign
Corrupt Practices Act or rules or regulations promulgated thereunder, or (c)
established or maintained any unlawful or unrecorded accounts.
4.20 Compliance with Laws. The Company holds all licenses,
--------------------
franchises, permits and authorizations necessary for the lawful conduct of its
business as presently conducted, has complied with all applicable statutes,
laws, ordinances, rules and regulations of all governmental bodies, agencies and
subdivisions having, asserting or claiming jurisdiction over it, with respect to
any part of the conduct of its business and corporate affairs, where the failure
to so hold or comply could reasonably be expected to have a material adverse
affect upon the Company's condition (financial or otherwise), business, assets,
properties or prospects.
4.21 Environmental Matters. Since 1991 the Company has not, nor to
----------------------
Seller's knowledge, has any previous owner, tenant, occupant, user or operator
of any of the real property owned, leased or otherwise occupied by the Company,
used, generated, manufactured, installed, released, discharged, stored or
disposed of any "Hazardous Materials," as defined below, on, under, in or about
the site of such real property, except as set forth in the Disclosure Schedule.
To Seller's knowledge, all such real property complies with all applicable
Federal, state and local laws, ordinances and regulations pertaining to air and
water quality, Hazardous Materials, waste, disposal or other environmental
matters, including the Clean Water Act, the Clean Air Act, the Federal Water
Pollution Control Act, the Solid Waste Disposal Act, the Resource Conservation
Recovery Act, the Comprehensive Environmental Response, Compensation, and
Liability Act, and the rules, regulations and ordinances of the city and county
in which such real property is located, the California Department of Health
Services, the Regional Water Quality Control Board, the State Water Resource
Control Board, the Environmental Protection Agency and all other applicable
Federal, state, regional and local agencies and bureaus. The term "Hazardous
Materials" shall mean any substance, material or waste which is regulated by any
local government authority, the State of California, or the United States
Government, including, without limitations, any mater or substance which is (a)
defined as a "hazardous waste," "hazardous material," "hazardous substance,"
"extremely hazardous waste" or "restricted hazardous waste" under any provision
of California law, (b) petroleum, (c) asbestos, (d) designated as a "hazardous
substance" pursuant to section 311 of the Clean Water Act or listed pursuant to
Section 307 of the Clean Water Act, (e) defined as a "hazardous waste" pursuant
to Section 1004 of the Resource Conservation and Recovery Act.
4.22 Relationships with Customers and Suppliers. No present customer
------------------------------------------
or substantial supplier to the Company has indicated an intention to terminate
or materially and adversely alter its existing business relationship therewith,
and Seller has no knowledge that any of the present customers of or substantial
suppliers to the Company intends to do so.
4.23 Brokerage. Except as set forth in the Disclosure Schedule,
---------
neither Seller nor the Company has any obligation to any person or entity for
brokerage commissions, finder's fees or similar compensation in connection with
the transactions contemplated by this Agreement, and Seller shall indemnify and
hold Buyer harmless against any liability or expenses arising out of such a
claim asserted against either Buyer or the Company by any party.
<PAGE>
4.24 Disclosure. Neither this Agreement, the Disclosure Schedule, any
----------
exhibit to the Disclosure Schedule, nor any certificate furnished to Buyer by or
on behalf of Seller pursuant to the provisions hereof, contained or contains any
untrue statement of a material fact or omitted or omits to state a material fact
necessary to be stated in order to make the statements contained herein or
therein not misleading. Neither Seller nor the Company has any knowledge of any
fact which has not been disclosed in writing to Buyer which may reasonably be
expected to materially and adversely affect the business, properties,
operations, and/or prospects of the Company or the ability of the Company to
perform all of the obligations to be performed by the Company under this
Agreement and/or any other agreement between Buyer and the Company to be entered
into pursuant to any provision of this Agreement.
5. REPRESENTATIONS AND WARRANTIES OF BUYER.
Buyer represents and warrants to Seller as follows (it being acknowledged
and agreed that Seller entering into this Agreement in material reliance upon
each of the following representations and warranties, and that the truth and
accuracy in all material respects of each of which constitutes a condition
precedent to the obligations of Seller hereunder):
5.1 Organization and Authorization. Buyer is a corporation duly
------------------------------
organized, validly existing and in good standing under the laws of the State of
California, with full power, corporate or otherwise, legal capacity and
authority to enter into and perform its obligations under this Agreement, and to
execute, deliver and perform all attendant documents and instruments and to
consummate the transactions herein contemplated, including all attendant acts.
The execution and delivery of the this Agreement and all attendant documents,
and the consummation by Buyer of the transactions contemplated hereby and
thereby, have been duly and validly authorized by the Board of Directors of
Buyer, which authorization remains in full force and effect, and no other
corporate proceedings on the part of Buyer are necessary to authorize this
Agreement and all attendant documents and the transactions contemplated thereby
and hereby. This Agreement constitutes the legal, valid and binding act of
Buyer and is enforceable with respect to Buyer in accordance with its terms,
except as enforcement hereof may be limited by bankruptcy, insolvency,
reorganization, priority, or other laws relating to or affecting generally the
enforcement of creditors rights or by laws affecting generally the availability
of equitable remedies. Neither the execution and delivery by Buyer nor the
consummation by Buyer of the transactions contemplated by this Agreement and all
attendant documents, nor compliance by Buyer with any of the provisions thereof
or hereof, will (i) conflict with or result in a breach or violation of, or
default under, any of the terms, conditions or provisions of any note, bond,
mortgage, indenture, license, agreement or other instrument or obligation
(including, without limitation, its Articles of Incorporation and Bylaws) to
which Buyer is a party or by which it is bound, or (ii) violate any judgment,
order, injunction, decree, statute, rule or regulation applicable to Buyer or
any of its properties or assets.
5.2 Consents. No governmental consents, approvals or authorizations,
---------
and no consents or approvals by any third party, are required to be obtained
Buyer, and no registration or declarations are required to be filed by Buyer, in
connection with the execution and delivery of this Agreement and all attendant
documents or the consummation of the transactions contemplated hereby and
thereby.
<PAGE>
5.3 No Pending Material Litigation or Proceedings. There are no
---------------------------------------------
actions, suits or proceedings pending or, to Buyer's knowledge, threatened,
against or affecting Buyer (including actions, suits or proceedings where
liabilities may be adequately covered by insurance) at law or in equity or
before or by any federal, state, municipal or other governmental department,
commission, court, board, bureau, agency or instrumentality, domestic or
foreign, which might prevent the purchase of the Shares by Buyer from Seller
pursuant to this Agreement or the performance by Buyer of any of the obligations
to be performed by Buyer hereunder.
5.4 Brokerage. Buyer has no obligation to any person or entity for
---------
brokerage commissions, finder's fees or similar compensation in connection with
the transactions contemplated by this Agreement, and shall indemnify and hold
Seller harmless against any liability or expenses arising out of such a claim
asserted against Seller by any party.
5.5 Purchase for Investment. Buyer is acquiring, and at the Closing
------------------------
shall acquire, the Shares for investment only, and not for distribution within
the meaning of the Federal securities laws, and no one else has, or at the time
of the Closing will have, any beneficial ownership or interest in the Shares to
be purchased pursuant hereto, nor are the Shares to be subject to any lien or
pledge. Buyer acknowledges and agrees that no further transfer of the Shares
shall be made except in compliance with applicable Federal and state securities
laws. Buyer, through its principal shareholders, has the knowledge and
experience in business and financial matters to meaningfully evaluate the merits
and risks of the purchase of the Shares contemplated hereby and has determined
that it is both willing and able to undertake the economic risk of this
purchase. Buyer understands and acknowledges that the Shares are being offered
and sold by Seller pursuant to one or more exemptions from the registration
requirements of the Securities Act of 1933, as amended, the availability of
which depends upon the bona fide nature of the foregoing representations and
warranties, and agrees to indemnify and hold Seller and its officers, directors,
employees, agents, and stockholders harmless from and against any and all
damages suffered and liabilities incurred by any of them (including costs of
investigation and defense and attorneys' fees) arising out of any inaccuracy in
such representations and warranties.
6. COVENANTS OF THE PARTIES PRIOR TO THE CLOSING
Seller and Buyer hereby covenant to and agree with the other that between
the date hereof and the Closing:
6.1 Access to Properties and Records.
---------------------------------
(a) The Company shall give to Buyer and its authorized
representatives full access, during reasonable business hours, in such a manner
as not unduly to disrupt normal business activities, to any and all of the
Company's premises, properties, contracts, books, records and affairs, and will
cause its officers to furnish any and all data and information pertaining to its
business that Buyer may from time to time reasonably require.
(b) Unless and until the transactions contemplated by this
Agreement have been consummated, Buyer and its representatives shall hold in
confidence all
<PAGE>
information so obtained and if the transactions contemplated hereby are not
consummated will return all documents hereinabove referred to and obtained
therefrom, and all copies thereof and notes relating thereto. Such obligation
of confidentiality shall not extend to any information which as shown to have
been previously (i) known to Buyer, (ii) generally known to others engaged in
the trade or business of the Company, (iii) part of public knowledge or
literature, or (iv) lawfully received by the Buyer from a third party not under
a duly of confidentiality.
6.2 Corporate Existence, Rights and Franchises. Seller shall take
-------------------------------------------
all necessary actions to cause the Company to maintain in full force and effect
its corporate existence, rights, franchises and good standing. No change shall
be made in the Articles or Bylaws of the Company.
6.3 Insurance. Seller shall take all necessary actions to cause the
----------
Company to maintain in force until the Closing all of its existing insurance
policies, subject only to variations in amounts required by the ordinary
operation of the Company's business.
6.4 Conduct of Business in the Ordinary Course. Seller shall not
-------------------------------------------
permit to be done any act which would result in the breach of any of the
covenants of the Company contained herein or which would cause the
representations and warranties of the Company contained herein to become untrue
or inaccurate as of any date subsequent to the date hereof. Without limiting
the generality of the foregoing, except as may be contemplated by this
Agreement, Seller shall take all necessary actions to cause the Company to (i)
operate its business diligently in the ordinary course of business as an ongoing
concern, and will use their best efforts to preserve intact the Company's
organization and operations at current levels and to make available to Buyer the
services of the Company's present employees and to preserve for Buyer the
Company's relationships with its suppliers and customers and others having
business relationships with the Company; (ii) maintain in good operating
condition, ordinary wear and tear excepted, all of the Company's assets and
properties which are in such condition as of the date hereof; (iii) maintain the
books, accounts and records of the Company in the usual, regular and ordinary
manner, on a basis consistent with past practice in recent periods; (iv) refrain
from entering into any contract, agreement, sales order, lease, capital
expenditure or other commitment of a value in excess of $10,000 (other than
purchases of raw materials and sales of inventory in the ordinary course of
business), or from modifying, amending, canceling or terminating any of such
contracts, agreements, leases or other commitments presently in force, except as
expressly contemplated by this Agreement, without the prior approval of Buyer
(which approval shall not be unreasonably withheld and which may be verbal to be
followed by written confirmation); (v) refrain from paying any bonus to any
employee, officer or director, and from declaring or paying any dividend, or
making any other distribution in respect of, or from redeeming, the Shares; and
(vi) refrain from issuing any capital stock or other securities convertible into
capital stock.
6.5 Risk of Loss. In the event that all or a material part of the
-------------
assets or properties of the Company are destroyed or substantially damaged prior
to the Closing, or are taken by eminent domain by any governmental entity, Buyer
shall be entitled to elect within five (5) business days of notice thereof to
terminate this Agreement, in which case all parties hereto shall pay their own
expenses. In the event that Buyer elects not to terminate this Agreement as
provided immediately above, Buyer shall have a period of (5) business days
within which to obtain the agreement of Seller as to an appropriate adjustment
to the aggregate Purchase Price for the Shares, at the end of which period this
Agreement shall
<PAGE>
terminate if such further agreement has not been reached, and all parties shall
pay their own expenses.
6.6 Consents. Each of the parties shall use its best efforts to
--------
obtain any and all necessary permits, approvals, qualifications, consents or
authorizations from third parties and governmental authorities which are
required to be obtained prior to the Closing, and shall use its best efforts to
make or complete all filings, proceedings and waiting periods required to be
made or completed prior to the Closing.
6.7 Release of Security Interests in Assets. Seller shall cause the
---------------------------------------
Company to use its best efforts to obtain consents, in form and substance
satisfactory to Buyer, from any and all lienholders and those holding security
interests any of the Company's assets, to all of the transactions contemplated
by this Agreement, without acceleration of any indebtedness secured by such
deeds of trust, mortgages, liens and security interests.
6.8 No Equitable Conversion. Prior to the Closing, neither the
-----------------------
execution of this Agreement nor the performance of any provision contained
herein shall cause either Buyer, on the one hand, or the Company or Seller, on
the other hand, to be or become liable for or in respect of the operations or
business of the other, for the cost of any labor or materials furnished to or
purchased by the other, for compliance with any laws, requirements or
regulations of, or taxes, assessments or other charges now or hereafter due to,
any governmental authority, or for any other charges or expenses whatsoever
pertaining to the conduct of the business or the ownership, title, possession,
use or occupancy of the property of the other, and each hereby agrees to
indemnify and hold the other harmless from any such liability.
7. CONDITIONS TO THE OBLIGATIONS OF THE PARTIES
The respective obligations of the parties hereto to consummate the
transactions contemplated hereby shall be subject to the fulfillment or written
waiver, at or prior to the Closing, of the following conditions:
7.1 Regulatory Approvals. There shall have been obtained any and all
--------------------
permits, approvals and qualifications of, and there shall have been made or
completed all filings, proceedings and waiting periods, required by any
governmental body, agency or regulatory authority which, in the reasonable
opinion of counsel to Buyer and Seller, are required for the consummation of the
transactions contemplated hereby.
7.2 No Action or Proceeding. No claim, action, suit, investigation
-----------------------
or other proceeding shall be pending or threatened before any court or
governmental agency which presents a substantial risk of the restraint or
prohibition of the transactions contemplated by this Agreement or the obtaining
of material damages or other relief in connection therewith.
7.3 Obligations of Buyer. The obligation of Buyer hereunder to
--------------------
consummate the transactions contemplated by this Agreement are expressly subject
to the satisfaction of each of the further conditions set forth below, any or
all of which may be waived by Buyer in whole or in part without prior notice;
provided, however, that no such waiver of a condition shall constitute a waiver
- ------------------
by Buyer of any other condition or of any of its rights or remedies, at law or
in equity, if Seller shall be in default or breach of any of any of the
representations, warranties or covenants of Seller under this Agreement:
<PAGE>
(a) Seller shall have performed the agreements and covenants
required to be performed by Seller under this Agreement prior to the Closing,
there shall have been no material adverse change in the condition (financial or
otherwise), assets, liabilities, earnings, business or prospects of the Company
since the date hereof, and the representations and warranties of Seller
contained herein shall, except as contemplated or permitted by this Agreement or
as qualified in a writing dated as of the date of the Closing delivered by the
Company to Buyer with the approval of Buyer indicated thereon (which writing is
to be attached hereto as Exhibit D, be true in all material respects on and as
---------
of the Closing Date as if made on and as of such date, and Buyer shall have
received certificates, dated as of the Closing Date, signed by the chief
executive and financial officers of Seller, reasonably satisfactory to Buyer and
its counsel, to such effect.
(b) Seller shall have provided Buyer with certified copies of
resolutions (certified as of the Closing Date as being in full force and effect
by the President of Seller) duly adopted by the Board of Directors of Seller
authorizing the making and performance by Seller of this Agreement.
(c) Buyer shall have been provided with written releases of
Buyer, in form and substance reasonably satisfactory to Buyer, from each person,
if any, who may be entitled to receive a finders fee or other commission from
the Company as a consequence of the transactions contemplated hereby.
(d) Each of the current officers and directors of the Company
shall have resigned all of their respective offices of the Company, effective as
of the Closing.
(e) Buyer shall have obtained the financing for consummation
of the transactions contemplated hereby, as provided in paragraph 8 of the
letter of intent between the parties hereto dated May 12, 1998 (the "Letter of
Intent").
7.4 Obligations of Seller. The obligation of Seller hereunder to
----------------------
consummate the transactions contemplated by this Agreement are expressly subject
to the satisfaction of each of the further conditions set forth below, any or
all of which may be waived, in whole or in part, by Seller, without prior
notice; provided, however, that no such waiver of a condition shall constitute a
------------------
waiver by Seller of any other condition or of any of their rights or remedies,
at law or in equity, if Buyer shall be in default or breach of any of its
representations, warranties or covenants under this Agreement:
(a) Buyer shall have performed the agreements and covenants
required to be performed by Buyer under this Agreement prior to the Closing, and
the representations and warranties of Buyer contained herein shall, except as
contemplated or permitted by this Agreement or as qualified in a writing dated
as of the date of the Closing delivered by the Buyer to the Company with the
approval of the Company indicated thereon (which writing is to be attached
hereto as Exhibit E), be true in all material respects on and as of the date of
---------
Closing as if made on and as of such date, and Buyer shall have provided Seller
with a certificate, dated as of the date of Closing, signed by the chief
executive and financial officers of Buyer, reasonably satisfactory to the
Company and its counsel, to such effect.
(b) Buyer shall have provided Seller with certified copies of
resolutions (certified as of the Closing Date as being in full force and effect
by the President
<PAGE>
of Buyer) duly adopted by the Board of Directors of Buyer authorizing the making
and performance by Buyer of this Agreement.
(c) The Company shall have entered into a License Agreement
substantially in the form of Exhibit F attached hereto setting forth the terms
and conditions upon which the Company would be obligated to pay Seller annual
royalties.
8. ADDITIONAL AGREEMENTS OF THE PARTIES
8.1 Taxes and Expenses.
-------------------
(a) Except as otherwise expressly provided in (b) immediately
below, each of Seller and Buyer shall pay all of their own respective taxes,
attorneys' fees and other costs and expenses payable in connection with or as a
result of the transactions contemplated hereby and the performance and
compliance with all agreements and conditions contained in this Agreement
respectively to be performed or observed by each of them.
(b) Seller shall pay any and all income taxes which become
due on account of the sale and transfer of the Shares to Buyer, and Buyer shall
pay all California sales and use taxes, if any, which become due on account of
the sale of the Shares to Buyer, each party reserving the right to contest any
assessment of taxes as a consequence of the sale and transfer of the Shares to
Buyer.
8.2 Expiration of Representations and Warranties.
--------------------------------------------
(a) The representations and warranties of Seller contained
herein and in any other document or instrument delivered by or on behalf of
Seller and/or the Company pursuant hereto, as such may be qualified in Exhibit D
hereto, shall survive the Closing and any investigations made by or on behalf of
Buyer made prior to the Closing, and shall remain in full force and effect for a
period of eighteen (18) months from the date of the Closing (the "Warranty
Period"), and thereupon expire.
(b) Nothing contained in Section 8.2(a) shall in any way
affect any obligations of any party under this Agreement that are to be
performed, in whole or in part, after the Closing, nor shall it prevent or
preclude either party from pursuing any and all available remedies at law or in
equity for actual fraud in the event that, prior to the Closing, either had
actual knowledge of any material breach of any of their respective
representations and warranties herein but failed to disclose to or actively
concealed such knowledge from the other party prior to the Closing. After
expiration of the Warranty Period, Buyer's sole recourse shall be for claims of
actual fraud.
8.3 Indemnification.
----------------
(a) Seller hereby agrees to indemnify and hold Buyer and the
Company harmless with respect to any and all claims, losses, damages,
obligations, liabilities and expenses, including without limitation reasonable
legal and other costs and expenses of investigating and defending any actions or
threatened actions, which Buyer and/or the Company may incur or suffer following
the Closing by reason of (i) any debts, obligations and liabilities of the
Company existing as of the Closing which in accordance with generally accepted
accounting principles would be required to be reflected in the
<PAGE>
balance sheet of the Company as of the date of Closing that were not disclosed
to Buyer prior to or at the Closing, and (ii) any breach of any of the
representations and warranties of Seller contained herein.
(b) Buyer hereby agrees to indemnify and hold Seller harmless
with respect to any and all claims, losses, damages, obligations, liabilities
and expenses, including without limitation reasonable legal and other costs and
expenses of investigating and defending any actions or threatened actions, which
Seller may incur or suffer following the Closing by reason of (i) any breach of
the representations and warranties of Buyer contained herein, and (ii) the
conduct and operations of the Company following the Closing.
(c) Whenever any claim shall arise for indemnification
hereunder, the party asserting the claim for indemnification shall give written
notice to the other of its claim for indemnification prior to the expiration of
the Warranty Period, which notice shall set forth the amount involved in the
claim for indemnification and contain a reasonably thorough description of the
facts constituting the basis of such claim. Resolution of such claim for
indemnification shall be determined in accordance with the procedures specified
in Section 8.4 below. Buyer shall have the right to offset and deduct from any
amounts remaining to be payable by Buyer to the Seller hereunder, or otherwise,
the amount of an claim for indemnification when, and only when, the amount of
such claim has been agreed upon by the parties in writing or determined a court
of competent jurisdiction as provided in Section 8.4 below.
(d) If a third party claim is asserted which would likely
result in a claim for indemnification hereunder, the party seeking
indemnification shall, with reasonable promptness, provide the other with notice
of any such claim, make available to the other all information within the
knowledge or control of the party seeking indemnification which reasonably might
be deemed relevant and material to the defense of any such claim, and otherwise
cooperate with the other in the defense of the claim. Neither party shall settle
or compromise any such claim without the prior written consent of the other
unless suit shall have been instituted against the party seeking indemnification
and the other party shall have failed, after reasonable notice of institution of
the suit, to take control of such suit as provided below. If the party against
which indemnification is sought admits in writing that it will be required to
fully indemnify the other party with respect to a third party claim alleging
damages, up to the maximum amount for which such party may be liable under this
Section 8.3, should the third party prevail in such suit, then the party against
which indemnification is sought in respect of such suit shall have the right to
assume full control of the defense of such claim, and the other party shall be
entitled to participate in the defense of such claim only with the consent of
the party in control of such defense. As to any third party claim alleging
damages in excess of the maximum amount for which Seller may be liable under
this Section 8.3, Buyer and the Company shall have and retain the right to
control the defense of such claim, and Seller shall be entitled to participate
in the defense of such claim only with the consent of Buyer.
(e) Except as otherwise expressly provided below in this
subsection 8.3(e), (i) Seller shall have no obligation to indemnify Buyer and
the Company under the provisions of Section 8.3(a)(ii) above unless and until
the aggregate amount as to which Buyer and the Company seek indemnification
exceeds $25,000, and then only to the extent of such excess, and (ii) the
maximum aggregate liability of Seller to Buyer and the Company as a consequence
of any one or more breach or breaches of one or more of the representations and
warranties of Seller contained herein shall be limited to the aggregate
<PAGE>
amount paid and payable to Seller in cash as the Purchase Price for the Shares.
In the case of actual fraud, Buyer may, in addition to the foregoing right of
indemnification, pursue any and all legal and equitable remedies it may have
against Seller.
8.4 Dispute Resolution. Any dispute arising out of or relating to
-------------------
this Agreement shall be resolved in accordance with the following procedures:
(a) The parties shall first attempt in good faith to resolve
any claim or controversy arising out of or relating to the execution,
interpretation and performance of this Agreement (including the validity, scope
and enforceability of these dispute resolution provisions) promptly by
negotiations between executives who have authority to settle the controversy.
(b) Any party may give the other party written notice of any
dispute not resolved in the ordinary course of business (the "Notice"). Within
thirty (30) days from the receipt of such Notice, the receiving party shall
submit to the other a written response setting forth a statement of the
responding party's position and a summary of the arguments supporting that
position, together with the name and title of the executive who will represent
the responding party and any other person who will accompany the named
executive. Within thirty (30) days after receipt of the responsive notice,
executives of both parties shall meet at a mutually acceptable time and place,
and thereafter as often as they deem necessary, and shall use their respective
best efforts to attempt in good faith to agree upon a mutually acceptable
resolution of the dispute, in which case the parties shall promptly prepare and
sign a memorandum setting forth such agreement. All reasonable requests for
information made by one party to the other will be honored. All negotiations
pursuant hereto shall be confidential and shall be treated as compromise and
settlement negotiations for purposes of applicable rules of evidence.
(c) Any party to a dispute who is not satisfied with the
outcome of the dispute resolution provisions of Sections 8.4(a) and (b) above
may file suit in any court of competent jurisdiction located in Orange County or
Los Angeles County, California. The parties hereby waive any objection to the
foregoing location based upon venue or forum non-conveniens. The parties hereby
waive the right to trial by jury to the fullest extent permissible under
applicable law.
(d) The substantially prevailing party in any litigation
under Section 8.4(c) hereof shall be entitled to recover the amount of any and
all fees and costs (including reasonable attorney's fees) incurred by the
substantially prevailing party if and to the extent that the amount awarded to
such party in such litigation (excluding the recovery of fees and costs) exceeds
the last written offer in settlement given by the other party thereto.
8.5 Non-Competition. Seller shall not, at any time within a five (5) year
----------------
period commencing immediately following the Closing (the "Effective Period"),
directly or indirectly engage in, or have any interest in any person, firm,
corporation or business (whether as an employee, officer, director, agent,
security holder, creditor, consultant, contractor or otherwise) that engages in
the design, development, marketing, manufacture and/or sale, in any county or
counties in any area throughout the world, of any product which is the same as
or directly competitive with any product manufactured, marketed or sold by the
Company in any such area as of the date of Closing, for either the above-
mentioned five-year period or for so long as the Company or any of its
successors shall engage in any of such activities in any such area (whichever
period is the lesser), it being
<PAGE>
expressly understood and agreed that the Buyer is purchasing the Shares for the
purpose of causing the Company to continue to engage in such activities within
such areas. Seller further agrees that during the Effective Period Seller will
not (i) divulge, communicate, use to the detriment of the Company or any of its
successors or for the benefit of any other person or persons, or misuse in any
way, any confidential information, trade secrets, secret processes, know-how,
customer lists, marketing strategies or other technical data, unless required by
law; (ii) directly or indirectly, either for itself or for any other person,
firm or other entity, divert or take away or solicit or attempt to divert or
take away any present or former customers of the Company (provided that this
provision shall not apply to the solicitation of such customers relating to a
business activity that is not the same as or directly competitive with any
activity of the Company); nor (iii) initiate any offer of employment to, or in
any other manner solicit the services of, directly or indirectly, any person who
is an employee of or service provider to the Company as of the date hereof,
unless Seller first obtains the Company's prior written consent or such person's
relationship with the Company has been terminated for at least on full year
prior thereto. Notwithstanding anything to the contrary hereinabove, nothing
contained herein shall prevent Seller from acquiring (whether through a purchase
of assets or stock), at any time and from time to time during the last four
years of the Effective period, one or more businesses or product lines from any
third party(s), provided that the net sales of products of any such businesses
or product lines so acquired that are the same as or directly competitive with
any product manufactured, marketed or sold by the Company as of the date of
Closing comprise less than ten percent (10%) of the total annual net sales of
any such businesses or product lines as of the acquisition date.
9. MISCELLANEOUS
9.1 Other Documents. Each of the parties hereto shall execute and
---------------
deliver such other and further documents and instruments, and take such other
and further actions, as may be reasonably requested of them for the
implementation and consummation of this Agreement and the transactions herein
contemplated.
9.2 Parties in Interest. This Agreement shall be binding upon and
-------------------
inure to the benefit of the parties hereto, the heirs, personal representatives,
successors and assigns of Seller and of Buyer, but shall not confer, expressly
or by implication, any rights or remedies upon any other party.
9.3 Governing Law. This Agreement is made and shall be governed in
-------------
all respects, including validity, interpretation and effect, by the laws of the
State of California.
9.4 Notices. All notices, requests or demands and other
-------
communications hereunder must be in writing and shall be deemed to have been
duly made if personally delivered or two days after mailed, postage prepaid, to
the parties as follows:
(a) If to Seller, to: Summa Industries
21250 Hawthorne Blvd., Ste. 500
Torrance, CA 90503
Attn: James R. Swartwout
(b) If to Buyer, to: James M. Phillips, Jr.
2603 Main Street
<PAGE>
East Tower, Suite 1300
Irvine, CA 92614
Any party hereto may change its address by written notice to the other party
given in accordance with this Section 9.4.
9.5 Entire Agreement. This Agreement, together with the exhibits
----------------
attached hereto, contains the entire agreement between the parties and supersede
all prior agreements, understandings and writings between the parties with
respect to the subject matter hereof and thereof, including without limitation
the Letter of Intent. Each party hereto acknowledges that no representations,
inducements, promises or agreements, oral or otherwise, have been made by any
party, or anyone acting with authority on behalf of any party, which are not
embodied herein or in an exhibit hereto, and that no other agreement, statement
or promise may be relied upon or shall be valid or binding. Neither this
Agreement nor any term hereof may be changed, waived, discharged or terminated
orally. This Agreement may be amended or any term hereof may be changed,
waived, discharged or terminated by an agreement in writing signed by both
Seller and Buyer.
9.6 Headings. The captions and headings used herein are for
--------
convenience only and shall not be construed as a part of this Agreement.
9.7 Attorneys' Fees. In the event of a dispute between Seller and
----------------
Buyer, the non-prevailing party shall pay the reasonable expenses, including
attorneys' fees, of the prevailing party in connection therewith as provided in
Section 8.4(d) above.
9.8 Counterparts. This Agreement may be executed in counterparts,
------------
each of which shall be deemed an original but all of which taken together shall
constitute but one and the same document.
IN WITNESS WHEREOF, the parties hereto have duly executed and delivered this
Agreement as of the day and year first above written.
SUMMA INDUSTRIES
By: /s/ James R. Swartwout
----------------------------
James R. Swartwout,
President
P&L GROWTH INDUSTRIES, INC.
By: /s/ Robert S. Levine
----------------------------
Robert S. Levine,
Chief Executive Officer
<PAGE>
EXHIBIT 10.3
SUBORDINATED CONVERTIBLE PROMISSORY NOTE,
SECURITY AGREEMENT AND GUARANTEE
$1,500,000.00
June 26, 1998
Torrance, California
THIS SUBORDINATED CONVERTIBLE PROMISSORY NOTE, SECURITY AGREEMENT AND
GUARANTEE (this "Agreement") is made and entered into as of the date above by
and among P&L Growth Industries, Inc., a California corporation ("Maker"),
Summa Industries, a Delaware corporation ("Payee"), and GST Industries, Inc., a
California corporation all of whose capital stock is concurrently being
purchased by Maker from Payee (the "Company").
RECITALS
WHEREAS, Maker was recently established with the issuance of 1,000,000
shares of its common stock for the purpose of purchasing of all of the issued
and outstanding capital stock of the Company (the "Shares");
WHEREAS, Maker and Payee have previously entered into that certain Stock
Purchase Agreement dated as of June 18, 1998 (the "Stock Purchase Agreement")
providing for the purchase by Maker from Payee of all of the Shares. As set
forth in Section 2(b) of the Stock Purchase Agreement, a portion of the
------------
Purchase Price (as defined therein) for the Shares is to be paid by Maker to
Payee pursuant to the terms and conditions of this Agreement, the form of which
is attached as Exhibit A to the Stock Purchase Agreement; and
---------
WHEREAS, this Agreement is being executed and delivered in order to set
forth the terms and conditions upon which the indebtedness evidenced hereby is
to be paid to Payee by Maker, together with interest thereon as set forth
herein, to provide for the subordination of such payment in certain
circumstances, to provide for optional conversion of a portion of the principal
balance hereunder, and to provide for a guarantee of and security for the
payment all amounts due Payee hereunder.
NOW, THEREFORE, in consideration of the foregoing recitals and the mutual
covenants herein contained, the parties hereto hereby agree as follows:
1. Promise to Pay. Maker promises to pay to the order of Payee, at
--------------
Torrance, California, or at such other place as Payee may designate and so
notify Maker , the principal sum of ONE MILLION FIVE HUNDRED THOUSAND DOLLARS
($1,500,000.00), with simple interest thereon from the date hereof through June
30, 2005 at the rate of ten percent (10.0%) per annum. Unless sooner due as
hereinafter provided, but subject in all events to the provisions of Section 2
---------
below, principal and interest shall be due and payable as follows:
(a) Interest Payments. Interest on the unpaid principal balance shall
-----------------
be due and payable in arrears on a monthly basis on the last day of each full or
partial calendar
<PAGE>
month until all principal and accrued but unpaid interest due and payable
hereunder has been paid.
(b) Principal Payments. Principal shall be due and payable on a
------------------
calendar quarterly basis as follows: (i) no principal shall be due and payable
until September 30, 2000; (ii) twelve quarterly payments of fifty thousand
dollars ($50,000.00) each shall be due and payable on the last day of each
quarter, with the first payment commencing on September 30, 2000 and continuing
through and until June 30, 2003; (iii) eight quarterly payments of seventy five
thousand dollars ($75,000.00) each shall be due and payable on the last day of
each quarter commencing on September 30, 2003 and continuing through and until
June 30, 2005; and (iv) on June 30, 2005, any and all unpaid principal and
accrued interest shall be immediately due and payable in full. Any payment
under this Agreement shall first be applied to interest due and owing at the
date of such payment, and whatever remains after the amount of such interest is
deducted from such payment shall be applied to the principal balance due
hereunder.
(c) Prepayment. Maker shall have the right, without penalty, to prepay
----------
the indebtedness represented hereby in part or in full at any time or times
during the continuance hereof. Any prepayment pursuant hereto shall first be
applied to interest due and owing at the date of such payment, and whatever
remains after the amount of such interest is deducted from such prepayment
shall be applied to the principal balance due hereunder in reverse order of the
maturity schedule set forth in Section 1(b) above.
------------
(d) Default Interest Rate. If the indebtedness represented hereby is
---------------------
not paid in full at maturity (or earlier upon the acceleration thereof as
provided in Section 4 below), it shall thereupon accrue, and Maker hereby
---------
expressly agrees to pay as liquidated damages and not as a penalty, interest on
the remaining unpaid balance of principal and accrued but unpaid interest at
fourteen percent (14%) per annum or the highest rate then permitted by law,
whichever is greater, until all unpaid principal and interest is paid in full.
(e) Certain Waivers. Maker hereby waives demand, presentment for
---------------
payment, protest, notice of protest, notice of nonpayment and diligence in
collecting the indebtedness represented hereby.
2. Subordination. The payment of principal and interest hereunder is
-------------
expressly subordinated to the full payment of up to a maximum of one million six
hundred twenty five thousand dollars ($1,625,000.00) in the aggregate of
indebtedness of Maker for money borrowed from Comerica Bank-California (the
"Senior Lender"), whether currently outstanding or from time to time incurred
hereafter (collectively, the "Senior Debt"). Concurrently with the execution and
delivery hereof, Seller and Senior Lender will enter into a mutually acceptable
agreement setting forth in more detail the terms and conditions upon which
payments hereunder shall be subordinated to the Senior Debt. It is expressly
understood, however, that so long as there is no default in payment of principal
or interest on the Senior Debt, Maker shall make all payments hereunder when
due, and may make prepayments of principal and interest hereunder.
3. Events of Default. The failure of Maker to fully pay or perform or
-----------------
observe, on a timely basis, any of its obligations contained in this Agreement
shall constitute a default hereunder and shall entitle Payee to the rights and
remedies provided in Section 4 below.
---------
<PAGE>
Without limiting the foregoing, a default hereunder shall also occur in the
event that, without the prior written consent of Payee:
(a) Bankruptcy. A voluntary or involuntary petition is filed for the
----------
bankruptcy or reorganization of Maker and/or the Company under the Federal
bankruptcy or reorganization laws, or if a receiver or keeper is appointed for
Maker or the Company or any of their respective assets, or if Maker or the
Company makes a voluntary assignment for the benefit of creditors, or if an
attachment is levied against a substantial part of the assets of Maker or of the
Company, and any such event or condition has not terminated or been removed
within thirty (30) days after commencement of such event or condition;
(b) Merger. Maker and/or the Company is a party to any merger or
------
consolidation with one or more other entities, sells all or a substantial
portion of its assets or equity, or otherwise engages in any transaction which
results in a change in control of Maker or the Company;
(c) Additional Indebtedness. Maker and/or the Company incurs,
-----------------------
additively and cumulatively during the continuance hereof, new interest-bearing
indebtedness for borrowed money exceeding $500,000.00 in the aggregate
(excluding amounts borrowed from Senior Lender that are subject to the
provisions of Section 2 above) or makes, cumulatively during the continuance
---------
hereof, new capital expenditures exceeding $500,000.00 in the aggregate;
(d) Acquisitions. Maker and/or the Company acquires another company
------------
for a purchase price of $250,000.00 or more, whether as an acquisition of stock
or assets;
(e) Company Quick Ratio. The Quick Ratio (as defined below) of the
-------------------
Company becomes less than 0.35 at any time during any full or partial fiscal
year during the continuance hereof, as reflected in the financial reports from
the Company to Payee specified in Section 3(i) below. For purposes of Sections
------------ --------
3(e) and 3(f), the Quick Ratio shall be calculated by dividing (i) the sum of
- -------------
all cash and cash equivalents and all trade accounts receivable not greater than
sixty (60) days old, by (ii) the sum of all current liabilities, including
principal payments due to Senior Lender and/or Payee within twelve (12) months;
(f) Maker Quick Ratio. The Quick Ratio of Maker (on a consolidated
-----------------
basis, calculated as provided in Section 3 (e) above), becomes less than 0.35 at
-------------
any time during any full or partial fiscal year during the continuance hereof,
as reflected in the consolidated financial reports from Maker to Payee specified
in Section 3(j) below;
------------
(g) Company Specified Net Worth. The tangible net worth of the
---------------------------
Company shall at any time be less than Specified Net Worth (as defined below).
For purposes of this Section 3(g), the Specified Net Worth shall be $800,000.00
------------
during the first full year following the date hereof, with the Specified Net
Worth to be increased by at least $150,000.00 in the first year thereafter and
by at least $200,000.00 each year thereafter during the continuance hereof, in
each case as reflected in the financial reports to Payee specified in Section
-------
3(i) below;
- ----
(h) Maker Specified Net Worth (Deficit). The tangible net worth of
-----------------------------------
Maker, on a consolidated basis, shall at any time be less than Specified Net
Worth (Deficit) (as defined below). For purposes of this Section 3(h), the
------------
Specified Net Worth (Deficit)
<PAGE>
shall be ($1,200,000.00) during the first full year following the date hereof,
with the Specified Net Worth to be increased by at least $150,000.00 in the
first year thereafter and by at least $200,000.00 each year thereafter during
the continuance hereof, in each case as reflected in the financial reports to
Payee specified in Section 3(j) below;
------------
(i) Company Financial Statements. The Company shall fail to provide
----------------------------
to Payee (i) internally prepared quarterly reports of the Company (within 25
days following the end of each fiscal quarter), consisting of income statements
for the preceding calendar quarter and the fiscal year to date, a balance sheet
as of the end of the calendar quarter, and a receivables listing as of the end
of the calendar quarter, and (ii) internally prepared annual financial
statements of the Company (within 90 days following the end of each fiscal
year), in all cases prepared in accordance with generally accepted accounting
principles applied on a basis consistent with that on which the historical
financial statements of the Company were most recently prepared prior to the
date hereof;
(j) Maker Consolidated Financial Statements. Maker shall fail to
---------------------------------------
provide to Payee (i) internally prepared consolidated quarterly reports
pertaining to Maker (within 25 days following the end of each fiscal quarter),
consisting of consolidated income statements for the preceding calendar quarter
and the year to date and a consolidated balance sheet as of the end of the
calendar quarter, and (ii) annual consolidated financial statements of Maker
(within 90 days following the end of each fiscal year) which have been reviewed
by an independent, certified public accounting firm reasonably acceptable to
Payee, in all case prepared in accordance with generally accepted accounting
principles applied on a basis consistent with that on which the historical
financial statements of the Company were most recently prepared prior to the
date hereof;
(k) No Material Transfers of Company Assets. During the continuance
---------------------------------------
hereof, the Company shall transfer, in any single action or a series of related
actions, a material quantity of the assets of the Company to any other person or
entity, other than the sale or disposition of products in the ordinary course of
business and as may be permitted under Section 3(l) below;
------------
(l) Company Distributions. Other than in connection with
---------------------
participation in group benefit plans, the Company shall make any payment or
other distribution of any kind to or for the account or benefit of Maker or any
owners of Company equity, whether as salary, fees, expenses, corporate charges
or other remuneration, dividends, repurchases or redemptions of capital stock,
or otherwise, which exceed $100,000.00 in the aggregate on an annual basis;
provided, however, that Buyers may distribute to Maker amounts necessary to pay
- -----------------
(i) principal and interest on this Agreement, (ii) principal and interest on the
Senior Debt, (iii) amounts required to pay Maker's and the Company's portion of
lawful taxes if Maker files on a consolidated basis, and (iv) amounts due Payee
pursuant to that certain License Agreement between Payee and the Company entered
into concurrently herewith;
(m) Cross Default - Senior Lender. There shall have occurred an event
-----------------------------
which constitutes, or with the passage of time or the giving of notice would
constitute, a default under any agreements now or hereafter existing between
Maker and/or the Company, on the one hand, and Senior Lender on the other, and
any such event has not terminated or been removed within ten (10) days after
Maker or the Company has received written notice of the commencement of such
event; or
<PAGE>
(n) Cross Default - Stock Purchase Agreement. There shall have
----------------------------------------
occurred an event which constitutes, or with the passage of time or the giving
of notice would constitute, a default under any term or condition of the Stock
Purchase Agreement or the documents related thereto (including the License
Agreement referenced therein), or any other agreement to which the Company
and/or Maker is a party, or by which any of their respective assets or
properties may be bound, involving an amount in excess of $10,000.00 or having a
term of six (6) months or more, and any such event has not terminated or been
removed within ten (10) days after Maker or the Company has received written
notice of the commencement of such event.
4. Acceleration Upon Default. Upon the occurrence of a default
-------------------------
specified in Section 3 above, but subject in all events to the provisions of
---------
Section 2 above, the principal amount of all indebtedness then owing hereunder
- ---------
and all unpaid accrued interest thereon, together with any and all additional
indebtedness owed by Maker and/or the Company to Payee, shall become immediately
due and payable, without notice, presentment or demand of any kind, all of which
are expressly waived by each of Maker and the Company. In such event, Payee may
proceed to satisfy such default by enforcing its rights under this Agreement in
any manner provided by law, which may include, without limitation, proceeding
against the Pledged Stock, the Guarantor and/or the Collateral pursuant to the
provisions of Sections 5, 6 and 7 below. The amount involved in the default
-------------------
shall include the costs and expenses, including attorneys' fees, incurred by
Payee in enforcing its rights hereunder. Payee may exercise all of its rights
and remedies concurrently or in such order as it may determine, and the failure
of Payee to exercise any rights or remedies it may have upon a default hereunder
shall not be deemed a waiver of any rights, or a release of the Company or Maker
from any obligation hereunder, unless such waiver or release is given in writing
by Payee, and, in such event, no such waiver shall be deemed to constitute a
waiver of any succeeding default. In the event that Payee is precluded from
enforcing any of its rights hereunder by virtue of the provisions of Section 2
---------
above, and for so long as the restrictions imposed under Section 2 shall
---------
continue, neither the Company nor Maker shall incur any new interest bearing
indebtedness for borrowed money, make any new capital expenditures, acquire any
other company, whether as an acquisition of stock or assets, or enter into any
transaction specified in Section 3(b) above.
------------
5. Pledged Stock.
-------------
(a) Pledge of the Shares. As security for the prompt and full
--------------------
performance by Maker of all of its obligations hereunder, Maker grants a
security interest in and pledges to Payee the Shares. Concurrently with the
execution hereof, Maker shall deliver to Senior Lender, as "Pledgeholder," the
stock certificates evidencing ownership of the Shares. The Shares, as such may
be adjusted by any reclassification, stock split, stock dividend or similar
adjustment, or pursuant to any merger, consolidation, sale of assets or
reorganization, and any and all subsequently issued ownership interests in the
Company held by anyone other than Payee (all of which shall be delivered to
Pledgeholder to hold as provided herein), are hereinafter collectively referred
to as the "Pledged Stock". Pledgeholder shall hold the Pledged Stock as security
for the performance by Maker and the Company of all of their obligations under
and in accordance with the terms of this Agreement.
<PAGE>
(b) Ownership of Pledged Stock. During the continuance of this
--------------------------
Agreement, except for the security interest created hereby and any of the Shares
obtained by Payee as provided herein, Maker shall remain the sole owner of the
Pledged Stock, free from any adverse claim of ownership or any lien, security
interest or encumbrance of any kind, and shall retain all dividend, voting and
other rights with respect to any securities subject hereto, except for the right
to sell, assign, encumber or otherwise transfer the Pledged Stock or any
interest therein without the prior written consent of Payee, to be given or
withheld in Payee's sole discretion.
(c) Future Obligations. During the continuance of this Agreement, the
------------------
security interest granted hereby shall also cover any present or future
indebtedness or obligations of Maker and/or the Company to Payee, whether
absolute or contingent, which Payee may permit Maker and/or the Company to incur
during the continuance hereof.
(d) Release of Pledged Stock. Upon the full and complete discharge of
------------------------
all of the indebtedness and obligations guaranteed hereby, the Pledged Stock
shall be released from the security interest created hereby. Pledgeholder will
thereupon promptly take such actions and deliver such documents and instruments
as may be necessary to reconvey and return the Pledged Stock to Maker and to
release the security interest therein created hereby, and this Agreement shall
thereafter terminate.
6. Guarantee. Subject in all events to the provisions of Section 2 above,
--------- ---------
the Company (as used herein, the "Guarantor") hereby unconditionally guarantees
to Payee the timely payment and performance of all of the obligations of Maker
hereunder. The obligations of Guarantor shall be independent of the obligations
of Maker and a separate action or actions may be brought and prosecuted by Payee
against Guarantor. Guarantor authorizes Payee, without notice or demand and
without exonerating or otherwise affecting the liability of Maker, to
compromise, extend, accelerate or otherwise change the time for payment or to
modify any other term(s) of payment of the indebtedness guaranteed hereby, or to
take, hold or release additional security for the performance of this guarantee
or the payment of the indebtedness and obligations of Maker guaranteed hereby,
or to apply any and all security in whatever manner Payee may determine.
Guarantor waives any right to require Payee to proceed against Maker, to proceed
against or exhaust any security, including without limitation the Pledged Stock
specified in Section 5 above and the Collateral specified in Section 7 below, or
--------- ---------
to pursue any other remedy in Payee's power whatsoever. Guarantor waives all
demand or notice of nonpayment or nonperformance by Maker of the indebtedness
and obligations hereby guaranteed. Any indebtedness of Maker now or hereafter
owed to Guarantor is hereby subordinated to any amounts or other monies due and
payable by Maker to Payee. Guarantor agrees to pay all attorneys' fees and other
costs and expenses which may be incurred by Payee in enforcement of this
guarantee. In the event that the right to receive the payment and performance
of Maker guaranteed hereby is assigned, this guarantee shall continue and the
assignee shall be entitled to the full benefits hereof.
7. Security for Performance of Guarantee.
-------------------------------------
(a) Grant of Security Interest. As security for the prompt and full
--------------------------
performance by Guarantor of the obligations of Guarantor to Payee under the
provisions of Section 6 above, the Company hereby grants to Payee a security
---------
interest in those tangible
<PAGE>
and intangible assets of the Company (the "Assets") described on the Financing
Statement on Form UCC-1 attached hereto as Exhibit A and by this reference
---------
incorporated herein which the Company has executed and is delivering to Payee
concurrently with the execution of this Agreement, together with such other
documents and instruments as may be necessary or appropriate to enable Payee to
perfect this security interest in the Assets.
(b) Collateral. The Assets, together with any other property of the
----------
Company that may become subject hereto, are hereinafter collectively referred to
as the "Collateral." The security interest granted hereby covers all properties
of the same kind and character as those which are covered by and subject hereto
which the Company may hereafter acquire at any time until the termination of
this Agreement, as well as any and all of the proceeds resulting from therefrom.
(c) Future Obligations. The security interest granted hereby shall
------------------
also cover any present or future indebtedness or obligations of the Company to
Payee, whether absolute or contingent, which Payee may permit the Company to
incur during the continuance hereof.
(d) Collateral Ownership. Except for the security interest created
--------------------
hereby and the security interest therein granted by the Company to Senior Lender
as contemplated by the agreements between such parties, the Company is the owner
of the Collateral free from any adverse claim of ownership or any lien, security
interest or encumbrance of any kind, and shall retain all rights therein subject
to the terms and conditions hereof, except for the right to sell, assign,
encumber or otherwise transfer the Collateral or any interest therein (other
than in connection with the acquisition by the Company of new assets wherein one
or more third parties from whom such new assets are obtained reserves a purchase
money or comparable security interest therein) without the prior written consent
of Payee, to be given or withheld in Payee's sole discretion.
(e) Subordination to Senior Lender. Payee understands and agrees that
------------------------------
the security interest in the Collateral granted hereby shall be subordinate to
the security interest therein granted by the Company to Senior Lender in the
agreements between such parties.
8. Convertibility.
--------------
(a) Conversion of Principal. Payee, at its sole option at any time
-----------------------
during the term of this Agreement, may elect by written notice delivered to
Maker at its address set forth in Section 9 hereof to convert up to five hundred
---------
and twenty five thousand dollars ($525,000.00) of unpaid principal due hereunder
into shares of common stock (or any other form of equity into which shares of
such common stock have been converted) of Maker ("Conversion Stock") at a
conversion price equal to three dollars ($3.00) per share ("Conversion Price").
NO PORTION OF THE PRINCIPAL DUE HEREUNDER SHALL BE CONVERTED INTO SECURITIES OF
MAKER IF SUCH CONVERSION WOULD VIOLATE FEDERAL SECURITIES LAWS OR APPLICABLE
STATE SECURITIES LAWS.
(b) Antidilution. The number of shares of Conversion Stock and the
------------
Conversion Price thereof shall be proportionately adjusted for any and all
declared or actual increases or decreases in the number of issued securities of
Maker resulting from any
<PAGE>
subdivisions or consolidations or the payment of any stock dividends, stock
splits or any other increases or decreases in the number of issued securities
effected without receipt of consideration by Maker. If Maker is a party to or
involved in any mergers or consolidations or changes in control, the conversion
rights in subsection 8(a) above shall entitle Payee to the same consideration as
a holder of the number of shares of Conversion Stock subject to such conversion
rights would have been entitled if such conversion rights had been exercised in
their entirety immediately prior to any such merger or consolidation or change
in control.
9. Notices. Any notice or other communication given hereunder to any party
-------
by another shall be in writing and delivered personally or by overnight,
registered or certified mail, postage prepaid, as follows:
To Maker:
James M. Phillips, Jr.
2603 Main Street
East Tower, Suite 1300
Irvine, CA 92614
To the Company:
GST Industries, Inc.
3601 West Central Avenue
Santa Ana, CA 92704
Attn: Mr. Robert S. Levine
To Payee:
Summa Industries
21250 Hawthorne Blvd., Suite 500
Torrance, CA 90503
Attn: James R. Swartwout
or to such other address as a party shall hereafter designate in
writing and give notice thereof to the others in accordance with the foregoing.
Any such notice or other communication shall be deemed delivered upon receipt if
personally delivered, or forty-eight (48) hours after sent by overnight,
registered or certified mail.
10. Successors and Assigns. Except as may be provided herein to the
----------------------
contrary, the provisions hereof shall inure to the benefit of and be binding
upon the heirs, administrators, executors, assigns and successors in interest of
each of the parties hereto. Maker and the Company may not assign or transfer any
of their rights or obligations hereunder without the prior written consent of
Payee, to be given or withheld in Payee's sole discretion. Any notice or other
action hereunder by any successor shall be effective only if accompanied by
proper evidence of authority to act.
11. Governing Law. This Agreement shall be governed by and construed in
-------------
all respects in accordance with the laws of the State of California, excluding
choice of law provisions thereof.
<PAGE>
12. Counterparts; Originals; Headers. This Agreement may be executed in
--------------------------------
any number of counterparts, each of which shall be deemed an original for all
purposes, including the judicial proof of any of the terms hereof, but all of
which taken together shall constitute one and the same agreement. Headers used
herein are for convenience of reference only and shall not affect the
interpretation of this Agreement.
13. Cooperation. Each party hereto agrees to execute and deliver such
-----------
other documents and instruments and to cooperate in the filing, recordation or
other acts similarly necessary, and to take such other actions as may be
necessary or appropriate in order to carry out the intent and purposes of this
Agreement.
14. Consent to Jurisdiction: Forum Selection. The parties agree that all
----------------------------------------
actions or proceedings arising in connection with this Agreement shall be tried
and litigated exclusively in the Federal or state courts located in the County
of Los Angeles or County of Orange, State of California. The aforementioned
choice of venue is intended by the parties to be mandatory and not permissive in
nature, thereby precluding the possibility of litigation between the parties
with respect to or arising out of this Agreement in any jurisdiction other than
those specified in this section. Each party hereby waives any right it may have
to assert the doctrine of forum non conveniens or similar doctrine or to object
to venue with respect to any proceeding brought in accordance with this section,
and stipulates that the Federal and state courts located in the County of Los
Angeles and County of Orange, State of California shall have in personam
jurisdiction and venue over each of them for the purpose of litigating any
dispute, controversy or proceeding arising out of or related to this Agreement.
Each party hereby authorizes and accepts service of process sufficient for
personal jurisdiction in any action against it as contemplated by this paragraph
by registered or certified mail, return receipt requested, postage prepaid, to
its address for the giving of notices as set forth in this Agreement, or in the
manner set forth in Section 8 of this Agreement for the giving of notice. Any
---------
final judgment rendered against a party in any action or proceeding shall be
conclusive as to the subject of such final judgment and may be enforced in other
jurisdictions in any manner provided by law.
15. Attorneys' Fees. Should any litigation be commenced concerning this
---------------
Agreement or the rights and duties of any party with respect to it, the party
prevailing shall be entitled, in addition to such other relief as may be
granted, to such party's attorneys' fees, costs and expenses, determined by the
court in such litigation or in a separate action brought for that purpose.
16. Entire Agreement. This Agreement, together with the Stock Purchase
----------------
Agreement, contains the entire agreement and understanding between the parties
hereto with respect to the subject matter hereof and supersedes all prior oral
and written agreements and understandings relating to the subject matter hereof.
17. Severability. If any provision of this Agreement or the application
------------
of any such provision to any person or circumstance shall be held invalid,
illegal or unenforceable in any respect by a court of competent jurisdiction,
such invalidity, illegality or unenforceability shall not affect any other
provision hereof or the portion, if any, of such provision that may be
enforceable.
<PAGE>
18. Waivers. Any particular Event of Default as described in Section 3
------- ---------
may be waived only upon the written consent of Payee or the subsequent holder(s)
of this Agreement. Payee shall not be deemed by any act, omission or commission
to have waived any of its rights or remedies hereunder unless such waiver is in
writing and signed by Payee and then only to the extent specifically set forth
in such writing. A waiver of one event shall not be construed as continuing or
a bar to or waiver of any right or remedy with respect to a subsequent event.
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto, intending to be legally
bound, has caused this Agreement to be executed and delivered by a duly
authorized agent effective as of the date first above written.
PAYEE:
SUMMA INDUSTRIES, a
Delaware corporation
By: /s/ James R. Swartwout
---------------------------------------------
James R. Swartwout, President
MAKER:
P&L GROWTH INDUSTRIES, INC., a
California corporation
By: /s/ Robert S. Levine
---------------------------------------------
Robert S. Levine, Chief Executive Officer
THE COMPANY:
GST INDUSTRIES, INC., a
California corporation
By: /s/ Robert S. Levine
---------------------------------------------
Robert S. Levine, Chief Executive Officer
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<FISCAL-YEAR-END> AUG-31-1998 AUG-31-1998
<PERIOD-START> MAR-01-1998 SEP-01-1997
<PERIOD-END> MAY-31-1998 MAY-31-1998
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<INCOME-TAX> 988,000 2,207,000
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<DISCONTINUED> 66,000 299,000
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<NET-INCOME> 1,400,000 3,379,000
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