-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, O6fW8gARXNY2DxxyeVR0C3jODtR2hMVAR254hGAGD/gVP+Yxkmo58s25p2Fe16DE uhvUgUsZXuM6vB/OY2vT6w== 0001047469-98-013459.txt : 19980403 0001047469-98-013459.hdr.sgml : 19980403 ACCESSION NUMBER: 0001047469-98-013459 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 18 CONFORMED PERIOD OF REPORT: 19980102 FILED AS OF DATE: 19980402 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: BURKE INDUSTRIES INC /CA/ CENTRAL INDEX KEY: 0001046777 STANDARD INDUSTRIAL CLASSIFICATION: PLASTICS, MATERIALS, SYNTH RESINS & NONVULCAN ELASTOMERS [2821] IRS NUMBER: 943081144 STATE OF INCORPORATION: CA FISCAL YEAR END: 0102 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 333-36675 FILM NUMBER: 98585915 BUSINESS ADDRESS: STREET 1: 2250 SOUTH TENTH STREET CITY: SAN JOSE STATE: CA ZIP: 95112 BUSINESS PHONE: 4082973500 MAIL ADDRESS: STREET 1: 2250 SOUTH TENTH STREET CITY: SAN JOSE STATE: CA ZIP: 95112 10-K405 1 FORM 10-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K (MARK ONE) /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JANUARY 2, 1998 OF / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURIITES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 333-36675 ------------------------ BURKE INDUSTRIES, INC. (See Table of Other Registrants Below) (Exact name of registrant as specified in its charter) CALIFORNIA 94-3081144 (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification number) 2250 SOUTH TENTH STREET SAN JOSE, CALIFORNIA 95112 (Address of principal executive offices) (Zip code) (408) 297-3500 (Registrant's telephone number, including area code) ------------------------ Securities Registered Pursuant to Section 12(b) of the Act: NAME OF EACH EXCHANGE ON WHICH TITLE OF EACH CLASS: REGISTERED: ---------------------------------------- --------------------------------- None None Securities Registered Pursuant to Section 12(g) of the Act: 10% SENIOR NOTES DUE 2007 GUARANTEES OF 10% SENIOR NOTES DUE 2007 (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. /X/ As of March 15, 1998, the aggregate market value of the registrant's Common Stock held by non-affiliates of the registrant was approximately $1,872,650. As of March 15, 1998, the number of outstanding shares of the registrant's Common Stock was 3,857,000. DOCUMENTS INCORPORATED BY REFERENCE None. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- TABLE OF OTHER REGISTRANTS
ADDRESS INCLUDING ZIP CODE AND AREA CODE AND JURISDICTION PRIMARY IRS EMPLOYER TELEPHONE NUMBER OF OF STANDARD INDUSTRIAL IDENTIFICATION PRINCIPAL EXECUTIVE NAME OF CORPORATION INCORPORATION CLASSIFICATION NUMBER NUMBER OFFICERS - --------------------------------------- ------------- ----------------------- ------------- ------------------------- Burke Flooring Products, Inc........... California 3069 94-2147284 2250 Tenth Street San Jose, CA 95112 (408) 297-3500 Burke Rubber Company, Inc.............. California 3069 94-2157283 2250 Tenth Street San Jose, CA 95112 (408) 297-3500 Burke Custom Processing, Inc........... California 3069 94-2157282 2250 Tenth Street San Jose, CA 95112 (408) 297-3500
i BURKE INDUSTRIES, INC. INDEX TO ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED JANUARY 2, 1998
CAPTION PAGE ----------------------------------------------------------------------------------------------- ----- PART I Item 1. Business....................................................................................... 3 Item 2. Properties..................................................................................... 16 Item 3. Legal Proceedings.............................................................................. 17 Item 4. Submission of Matters to a Vote of Security Holders............................................ 17 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.......................... 18 Item 6. Selected Financial Data........................................................................ 18 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.......... 23 Item 7A. Quantitative and Qualitative Disclosures About Market Risk..................................... 26 Item 8. Consolidated Financial Statements and Supplementary Data....................................... 26 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........... 26 PART III Item 10. Directors and Executive Officers of the Registrant............................................. 27 Item 11. Executive Compensation......................................................................... 30 Item 12. Security Ownership of Certain Beneficial Owners and Management................................. 32 Item 13. Certain Relationships and Related Transactions................................................. 33 PART IV Item 14. Exhibits, Consolidated Financial Statement Schedules, and Reports on Form 8-K.................. 36
2 PART I ITEM 1. BUSINESS OVERVIEW SUMMARY Burke, headquartered in San Jose, California, is a leading, diversified manufacturer of highly engineered, rubber, silicone and vinyl-based (herein "elastomer") products. Through its vertically integrated operations and reputation for quality elastomer-based products, Burke has become (i) the largest domestic producer of precision silicone seals for commercial and military aircraft ("Aerospace Products"), (ii) a leading nationwide producer of both rubber and vinyl cove base and floor covering accessories for commercial and industrial applications ("Flooring Products") and (iii) a value-added producer of high-performance silicone hose, roofing and membrane products for the heavy-duty truck, commercial building and fluid containment industries ("Commercial Products"). The Company has grown through new product development and the successful integration of acquired product lines and production assets. As a result, net sales increased from $36.4 million in 1993 to $90.2 million in 1997 and EBITDA increased from $3.8 million to $16.9 million (adjusted to exclude certain expenses and other items related to the Recapitalization (as defined under the caption "History" below)) over the same period. AEROSPACE PRODUCTS Burke is the largest domestic producer of precision silicone seals used at airframe and internal component junctures in commercial and military aircraft. Burke's seals are specified on virtually all major domestically produced commercial aircraft, including every aircraft series manufactured by Boeing and on substantially all United States military aircraft including cargo, fighter and bomber series airplanes and several helicopter models. As a result, Burke's products have been designed into some of the most successful commercial and military aircraft in the world, including the Boeing 717, 737, 747, 757, 767 and 777, the McDonnell Douglas DC and MD series, the Northrop Grumman F-14 and the Lockheed Martin L1011. Burke bases its belief that it is the largest domestic producer of certain components used in commercial and military aircraft upon internal analysis and informal feedback from customers and competitors. Products are engineered to customer specifications for selected aircraft body and engine models and are generally made from custom tooling maintained and controlled by Burke for use over the life of the specific aircraft program. Burke benefits from a lengthy product-demand cycle, which can remain active for as long as 30 years, driven by new aircraft assembly and retrofit and maintenance projects. Retrofit and maintenance projects accounted for approximately one-third of the Company's 1997 Aerospace Products sales. The Aerospace Products business also manufactures low-observable, radar-absorbing seals and exterior tapes and coatings for stealth military aircraft and other military applications. These products are currently in use on the B-2 bomber and will also be used in the F-22, which is being developed to replace the F-15 as the premier fighter in the United States military arsenal. Aerospace Products sales increased from $3.6 million in 1993, the year that Burke first entered the aerospace market with its purchase of assets of Purosil, Inc. ("Purosil") to $31.2 million in 1997, accounting for approximately 35.0% of the Company's total net sales in 1997. Management believes the Aerospace Products business is well positioned to benefit from the strong increase in commercial aircraft build rates currently occurring and projected by industry analysts to continue, along with the associated retrofit, refurbishment, replacement and upgrade projects that are required over the life of the aircraft. 3 FLOORING PRODUCTS Through its Flooring Products business, Burke is a leading nationwide producer of floor covering accessories for commercial and industrial applications. Burke has historically been the dominant supplier of rubber cove base (floor border that joins flooring or carpet to a wall), manufactured under the name BurkeBase, and other rubber-based flooring accessories for commercial and industrial applications in the western United States. Burke's principal product offerings include vinyl cove base and rubber cove base, tile, stair treads, corners, shapes and other flooring accessories. Demand for the Company's cove base is driven by new commercial construction, remodeling, redecorating and general maintenance. During periods of slower growth in new commercial construction, remodeling and redecorating activities tend to increase, providing stable overall demand for the Company's products. Flooring Products sales were $23.5 million in 1997, comprising 26.0% of the Company's total net sales in 1997. COMMERCIAL PRODUCTS Burke's expertise in the mixing, blending and formulation of silicone and organic rubber compounds has established its Commercial Products business as a growing, value-added supplier of elastomer products for use in both intermediate and end products. The Commercial Products business is comprised of three primary product lines: (i) high-performance silicone truck hoses for heavy-duty trucks and buses marketed under the Purosil brand name, (ii) membranes for commercial roofing and fluid containment systems marketed under the Burkeline trade name and manufactured from DuPont's patented Hypalon polymer material and (iii) precision-formulated custom products and sheet goods that utilize Burke's extensive formulation and production capabilities for use in end-product elastomer applications. Commercial Products net sales increased from $14.8 million in 1993 to $35.5 million in 1997, and represented 39.4% of the Company's total net sales in 1997. Management believes that the Commercial Products business has significant growth potential primarily through the expansion of the Purosil line of high-end hoses to new customers and channels of distribution and the development of new applications for the silicone custom product line. COMPETITIVE STRENGTHS Burke has secured a strong competitive position in each of its specialized market segments. Burke is the largest provider of aerospace seals to the domestic commercial and military aerospace industries and also maintains strong positions in its flooring, roofing and membrane, truck hose and custom product lines. These competitive positions are sustained through the following strengths. ESTABLISHED CUSTOMER RELATIONSHIPS. The Company enjoys long-term relationships with many of its customers in each of its markets. These relationships, whether built by Burke over its long history or assumed in recent asset acquisitions, provide the Company with a stable base from which to pursue future expansion and give Burke a significant advantage over potential competitors seeking to enter the Company's markets. Several of the Burke trademarks and trade names (BurkeBase, Burkeline, SFS, Haskon and Purosil) are widely recognized by end users and distributors and are generally associated with superior levels of quality and customer service in their respective markets. DIVERSE REVENUE BASE. The Company's products are used in a wide variety of industries and applications and a significant share of the Company's revenue is derived from the repair and replacement market for its products, including aerospace seals and tape, cove base, truck hoses and fluid containment membrane. Replacement demand is typically less affected by slower economic periods. Management believes that this diversity has and will continue to mitigate the effect of economic fluctuations. TECHNOLOGICAL LEADERSHIPS IN ELASTOMER-BASED PRODUCTS. Burke is widely recognized as a technological leader in elastomer-based products due to its strong engineering, design and research capabilities. Burke 4 has 25 specialists in its engineering, design and laboratory departments devoted to new product development and product cost reduction. Management believes that its aerospace technical staff is significantly larger than those of its direct competitors, providing the Company with a competitive advantage in pursuing and maintaining relationships in the technologically advanced defense and commercial aerospace industries. VERTICALLY INTEGRATED PRODUCTION CAPABILITIES. Burke has vertically integrated production capabilities that enable it to transform raw organic rubber and silicone gum into a diverse array of finished products. This capability allows management more direct control over the Company's product development, cost structure and quality requirements, providing a competitive edge in its targeted market segments and enables Burke's Commercial Products business to selectively participate in market segments as a value-added, intermediate supplier to other elastomer product producers and users. EXPERIENCED MANAGEMENT TEAM. The management team has extensive experience both with the Company and within the industry and encompasses a balance of both senior leadership and a strong group of young managers. This management team has successfully managed the Company's continuing vertical integration efforts and acquired five independent operations since 1993. BUSINESS STRATEGY Burke intends to capitalize on its aforementioned competitive strengths in a variety of ways in each of its major market segments. Key components of this strategy for each of the Company's businesses include: AEROSPACE PRODUCTS - PENETRATE INTERNATIONAL MARKET FOR AEROSPACE SEALS. Management believes that the Company is the largest domestic aerospace seal manufacturer and has the production capacity to market beyond the United States. With the Company's recent acquisitions dramatically increased production capacity and, as a result, the Company recently sought and was successful, in being designated as a qualified parts manufacturer for a large subcontractor of Airbus. - FOCUS ON VALUE-ADDED MANUFACTURING. Management intends to further increase its participation in the trend towards integrating higher levels of processing and finishing to products before shipping to OEMs. - MAINTAIN STRONG RELATIONSHIPS WITH LEADING PRIME CONTRACTORS. Management believes that its existing relationships with leading prime military contractors have positioned the Company to continue to participate in "next generation" stealth military programs, including the Joint Strike Fighter currently being developed for NATO, through the sale of low-observable seals and tape. FLOORING PRODUCTS - BROADEN DOMESTIC DISTRIBUTION OF FLOORING PRODUCTS. Although the Company is the dominant producer of rubber cove base in the western United States, the Company believes it can successfully expand this product line into other geographic regions by offering the full complement of its rubber and newly acquired vinyl flooring products. - LEVERAGE BRAND NAME RECOGNITION AND EXISTING DISTRIBUTION CHANNELS. The Company intends to continue to capitalize on the BurkeBase trade name by expanding and upgrading its existing product line. The Company also believes that it can leverage its strong distribution network for its flooring products through the introduction of flooring accessories. For example, the Company's new BurkeEmerge product line of photoluminescent emergency lighting is an alternative to strip lighting at a 70% lower cost. Emergency lighting is increasingly being utilized due to heightened public awareness of the dangers that can result from unlit corridors and confusing exit signs. 5 COMMERCIAL PRODUCTS - INCREASE PENETRATION OF PUROSIL SILICONE HOSES. The Company believes the growth opportunities for its Purosil silicone hoses have not yet fully been developed, particularly in the heavy-duty truck and bus aftermarket. New initiatives include increasing customer share at a major new private-label customer, initiating production of silicone hoses for a major new OEM customer, and expanding into new product lines. - PROMOTE ADDITIONAL HYPALON APPLICATIONS. Management is continuing to work with DuPont to promote Hypalon as a durable and environmentally sound liner product suitable for new water-containment applications. In addition to these internal growth strategies, the Company intends to seek selective acquisitions, where it can expand and strengthen existing product lines and its distribution and technological capabilities. The Company believes that certain market niches in which it competes are highly fragmented, with a number of manufacturers that would make attractive acquisition candidates. INDUSTRY OVERVIEW Virtually every industry contains applications for elastomeric products. These products are used wherever there is a need for materials that are flexible, yet retain their original shape and other properties. Elastomeric products tend to be a small portion of the total cost of any product, yet can be critical to a successful design. The Company believes that the demand for elastomeric products will continue to grow as the performance requirements of various products are increased. The Company serves a number of industries with significant usage of highly-engineered elastomer-based products, including organic rubber, silicone rubber and vinyl. Customers in these industries value quality, on-time performance, and the ability to provide technical problem-solving capabilities. The increasingly complex product design effort of companies in these and other industries provides ongoing and new opportunities for elastomeric product applications. The Company believes that its technical resources, experience, and reputation provide it with a competitive advantage in seeking to provide products to these industries. HISTORY The Burke Rubber Company was founded in 1942 as a family-owned manufacturer of custom industrial rubber products. By the early 1950s, Burke manufactured a proprietary line of rubber floor tile and cove base as well as custom-molded rubber products. The Burke product line subsequently grew to include flexible membrane products for industrial uses, as well as engineered elastomer-based products for defense-related applications. In 1970, Burke developed an improved roofing and fluid barrier technology based upon DuPont's patented Hypalon elastomer polymer. The Company was renamed Burke Industries, Inc. in 1972 to reflect its broadened base of business. In August 1997, the Company entered into a recapitalization (the "Recapitalization") pursuant to which the Company was recapitalized by means of a merger and J.F. Lehman Equity Investors I, L.P. ("JFLEI") and its affiliates became the owners of approximately 65% of the common equity of the Company, without giving effect to the exercise of certain options issued to management of the Company. The Company began expanding beyond its traditional product lines with its acquisition of the silicone-based aerospace seal and automotive hose production assets of Purosil in March 1993. In 1995, recognizing that the seals segment of the aerospace industry was fragmented and ripe for consolidation, Burke sought to expand its position in the category through the acquisition of assets of two former industry leaders that were then experiencing financial difficulties: California-based SFS Industries and Massachusetts-based Haskon Corporation. Purosil, SFS and Haskon had each been an independent producer of precision silicone aerospace components, and together had over 100 years of service to the commercial and military 6 aerospace industry. In the Flooring Products division, the Company expanded its product lines through the purchase of Kentile's vinyl cove base production assets in April 1996. Burke's integration of these acquisitions has led to a dominant position in the aerospace seals market, opened new markets for its Flooring Products business, improved operating efficiencies, consolidated overhead and strengthened technical capabilities. PRODUCTS AND MARKETS Burke is a leader in a number of markets where the Company's vertically integrated production capabilities and design, engineering and manufacturing expertise result in a strong competitive position. The Company currently serves markets for aerospace components, floor covering accessories and a variety of other commercial products. AEROSPACE PRODUCTS Operating out of Santa Fe Springs, California and Taunton, Massachusetts, Burke, through its Aerospace Products business, is the leading domestic manufacturer of two principal product lines: highly engineered elastomer-based seals for commercial and military aircraft and low-observable, radar-absorbing materials for stealth military applications. Burke's non-stealth aerospace components are marketed under the SFS and Haskon trade names. PRODUCTS Burke's major aerospace seals products include: aerodynamic seals for commercial and military airframes, firewall seals for aircraft engines and nacelles, aircraft door and hatch seals, inflatable seals for cockpit canopies and large openings, aircraft window seals, and aircraft conductive seals for electromagnetic interference survivable conditions. Burke's product line ranges from the most basic extruded seals, costing an average of $30 to $40, to exceptionally complex seals which may cost in excess of $10,000. Burke's design and engineering teams have a history of developing solutions for difficult sealing and shielding problems. Burke's silicone seals are also reinforced (if required) with a variety of materials including Kevlar, Dacron, Nomex, ceramic cloth, fiberglass, conductive fabrics, metal mesh, nylon and other materials which accommodate their demanding applications. During the late 1980s and early 1990s, SFS invested significant capital towards the research and development of radar-absorbing and signature-masking composite materials. This initial research and development established SFS as the technological leader in this niche defense-related area. Burke has continued the development of this technology since its acquisition of SFS in 1995. Generally, Burke works on an exclusive basis with the United States military to test and develop these highly engineered and technical materials. Once a contract has been awarded, Burke has historically become the sole supplier to the United States government as an approved defense contractor. Based on its history and the Company's proven record in this area, management believes that Burke will remain a critical partner in product development opportunities in this sector. Burke maintains a classified area within the Santa Fe Springs facility where stealth technology products are developed, manufactured and tested. MARKETS AND CUSTOMERS Burke's silicone seals are sold directly to manufacturers of commercial and military aircraft, aerospace component distributors and the United States government. Burke has maintained its leading position in this market through its advanced in-house design, engineering, technical and production capabilities coupled with superior customer service. The engineering staff at Burke works directly with OEMs to design custom silicone sealing applications. Burke's aerospace products are designed by Burke engineers in accordance with precise OEM specifications and quality requirements. Products are rigorously tested against ISO and OEM standards by Burke and its customers before final approval. In 1997, the top five 7 customers of the Aerospace Products division accounted for $22.1 million in net sales, representing 24.5% and 70.8%, respectively, of the Company's total and the Aerospace Product division's net sales in that year. Boeing is the single largest customer of Aerospace Products, and management believes Burke is likewise the leading supplier of these products to Boeing. Boeing currently controls over 60% of the worldwide commercial passenger aircraft market and is enjoying a dramatic expansion in its backlog and orders. In addition to Boeing, the Company produces seals for every major commercial aircraft manufacturer in the world and for substantially all major military manufacturers in the United States, including McDonnell Douglas, Lockheed Martin, Northrop Grumman, Airbus Industries, Pratt & Whitney, General Electric, Gulfstream, Rohr, Bombardier and Textron. As a result, Burke's products have been designed into some of the most successful commercial and military aircraft in the world, including the Boeing 717, 737, 747, 757, 767 and 777, the McDonnell Douglas DC and MD series, the Northrop Grumman F-14 and the Lockheed Martin L1011. Burke's advanced Aerospace Products business has successfully introduced several technologies in use by branches of the United States Navy, Air Force and Army. These include radar-absorbing seals, tapes and other composite materials utilized on the B-2 bomber, the F-22 fighter and naval surface ships. Ground-based applications are also being developed in conjunction with United Defense. The Burke radar-absorbing material technology has potentially much broader applications than are currently in use, and the Company is presently involved in initiatives that management believes will greatly expand the market for its Advanced Aerospace Products business. The Northrop Grumman B-2 radar-resistant tape program presents a potential opportunity for expansion of Burke's aerospace business. Burke's revenues from this program are generated both by new aircraft production and by replacement tape applied as part of the repair or scheduled maintenance of the aircraft. Burke has also been qualified to supply the F-22 program. The F-22 is the latest generation United States Air Force fighter aircraft and is designed to replace the F-15 as the premier fighter in the United States military arsenal in approximately four to five years. However, both the B-2 bomber and the F-22 fighter are subject to continuous budgetary scrutiny and Burke's ability to expand its aerospace business could be limited if either of these programs were to be curtailed or eliminated. The advanced Aerospace Products business is also in the second phase of redesigning the original "over-wing-fairing" seal for the B-1 bomber. This redesign will proceed with the sale by the Company of working models of the seal to the United States government in mid 1998. The Company has also bid on a contract to develop seals for the new Joint Strike Fighter program. Both Boeing and Lockheed Martin have been selected as the finalists for this program which is ultimately expected to procure approximately 3,000 multi-service aircraft for the United States Air Force, Marine Corps and Navy and the United Kingdom Royal Navy. The program is scheduled for production after the year 2005. COMPETITION Burke is the largest domestic supplier of highly-engineered silicone seals for the aerospace OEM market and aftermarket. Burke's domestic competitors are primarily small, privately-held companies which generally lack Burke's track record, long-term OEM relationships and capabilities. These competitors include Kirkhill Rubber Company, Chase-Walton Elastomers, Inc. and Elastomeric Silicone Products, which was purchased by Bestobell Aviation in August 1997. Management believes that each of Burke's competitors had silicone aerospace seals revenues that were significantly less than the Company's revenues from those products in 1997. Additionally, the Company has two principal European competitors, Dunlop France S.A. and Bestobell Aviation, of the United Kingdom, which enjoy significant market share among European aircraft manufacturers, including Airbus Industries. Management believes that Burke's long-standing customer relationships, unique design capabilities and superior product quality will continue to support its position as the leading supplier of engineered silicone seals within this fragmented market. 8 Burke is one of only a few companies with the combination of knowledge and manufacturing capabilities required to develop, test and manufacture engineered elastomer-based products to military specifications. Many of Burke's Advanced Aerospace Products are classified in nature, and in many cases project leaders return to previous classified product suppliers for a preliminary assessment of future development opportunity. GROWTH AND OPPORTUNITIES The strong expansion in 1997 commercial aircraft build rates is expected to continue and to drive long-term growth within Burke's Aerospace Products business. Boeing and other aircraft producers continue to experience strong demand for new aircraft. According to recent publications, Boeing expects to deliver over 500 new aircraft in 1998, compared with 374 in 1997. This increase in deliveries is the continuation of what many industry analysts believe is a prolonged industry upturn. The demand for new aircraft is being driven by increases in passenger miles traveled and an aging aircraft fleet worldwide. The Aerospace Industries Association reports that approximately 3,900 existing aircraft will require replacement over the next 20 years due to age, regulations and prohibitive maintenance costs. The two largest commercial aircraft manufacturers, Boeing and Airbus, have recently released their annual market forecasts which corroborate this view. Management believes that the continuing need for aircraft replacement parts and upgrades will provide ongoing sales opportunities for Burke over the life of the aircraft due to Burke's proprietary, in-house tooling for specified seals and related components. As an OEM-specified supplier of multiple seals and related components to a variety of aircraft, Burke should benefit from a substantial installed base for future retrofit and refurbishment projects. Defense-related applications are also expected to provide significant, ongoing growth. Lockheed Martin is the primary contractor for the F-22 program and has been selected as a finalist, along with Boeing, to develop the Joint Strike Fighter for the United States military and the United Kingdom Royal Navy. Management believes that Burke's existing supplier relationships with both of these prime contractors will provide opportunities to participate in these and other future program developments. Burke management is also participating in a trend towards more value-added manufacturing for aerospace OEMs by integrating higher levels of processing and finishing to components before shipping to OEMs. Burke is encouraging this higher value-added, higher margin practice with several of its customers in an effort to strengthen its position as a long-term key supplier. Burke is currently cooperating with United Defense to develop and test products that utilize the Company's signature-masking stealth capabilities for conventional ground-based military applications. Management is optimistic that one or more of these concepts will receive federal funding and become important products for Burke. Management has committed significant technical, engineering and production resources to the Advanced Products division and believes that programs from this division have the potential to generate substantial revenues and profitability going forward. FLOORING PRODUCTS Burke is the leading producer and distributor of specialty rubber flooring accessory products for use in commercial markets in the western United States. Burke's trademark BurkeBase has enjoyed a dominant market share in that region since the early 1950s and is well known throughout the industry. In addition, Burke extended its BurkeBase flooring product lines beyond rubber products through its 1996 acquisition of the vinyl cove base production assets of Kentile. Kentile was a nationally recognized producer of vinyl cove base and flooring products which were sold into the commercial construction and refurbishment markets. Burke purchased the cove base manufacturing assets and subsequently relocated them to its San Jose, California facility. The integration of Burke's newly acquired vinyl cove base products from Kentile significantly enhances Burke's national market position in flooring accessories given vinyl's broad appeal in geographic regions where rubber products have traditionally been less popular. 9 PRODUCTS Burke's Flooring Product line consists of a variety of commercial rubber and vinyl flooring products and accessories including rubber and vinyl cove base, flooring tiles, stair treads, corners, shapes, special application adhesives and newly developed luminescent emergency lighting accessories sold under the BurkeEmerge trademark. Burke flooring and flooring accessory products are generally recognized by architects, builders, and contractors as the highest-quality commercial rubber flooring and flooring accessory products available in terms of construction, durability and ease of installation. In its principal markets, BurkeBase is utilized in most commercial applications using resilient tile flooring and virtually all commercial applications involving carpeting. Other Burke flooring products are employed in commercial and institutional settings where durability and resilience are of primary importance. The addition of commercial vinyl cove base production capabilities from the acquisition of the Kentile assets in 1996 was an important complement to Burke's product offerings. Rubber flooring products are generally more expensive than vinyl products due to their material and manufacturing cost but yield a longer-lasting product. However, vinyl flooring products are extremely popular for less demanding applications and are the predominant commercial flooring construction material in geographic regions outside of the western United States. The addition of a vinyl cove base product line will create a lower-cost, complementary offering targeted at less demanding, more cost-sensitive applications. New product developments, including profile stair treads, tiles and other shapes, are becoming increasingly important components of the Flooring Products business as well. For example, Burke previously sourced its profile tile from an offshore manufacturer of specialty flooring products. However, in 1996 the Company invested in production machinery and tooling necessary to manufacture profile tile in the San Jose facility. This investment will enable Burke to service this market in a more responsive and price-competitive manner. Utilizing a proprietary, patent-pending system developed by Burke, the BurkeEmerge safety strips are photoluminescent runners which can be attached to cove bases in corridors, on stairwell treads and hand rails, around doors, windows and signs and in basements, providing up to eight hours of illumination and leading people to building exits in the event of a power failure. Unlike conventional emergency lighting, BurkeEmerge requires no batteries or other electrical power source. These safety strips serve a market for internal emergency exit aids that has grown due to heightened public awareness of the dangers that can result from unlit corridors and confusing exit signage. BurkeEmerge is available in a variety of colors and can be easily installed over existing cove base, making it suitable for new construction as well as emergency retrofitting applications. MARKETS AND CUSTOMERS Burke's Flooring Products are sold primarily to dealers and distributors in the western United States and through a network of flooring products distributors in other regions. BurkeBase products are mostly found in commercial and industrial buildings in the western United States, where the Company enjoys a dominant market share, including an estimated 80% share of the commercial rubber cove base market in California. In addition to the San Jose manufacturing facility, the Company has distribution facilities in Santa Fe Springs, California and in Bensonville, Illinois, and has hired additional sales personnel to expand the Company's historically regional focus. As vinyl cove base is more widely used than rubber cove base at the national level, the introduction of a Burke vinyl cove base product is expected to create significant opportunities beyond Burke's traditional product line and geographic territories. In 1997, the top five customers of the Flooring Products division accounted for $7.7 million in net sales, representing 8.5% and 32.8%, respectively, of Burke's total and the Flooring Product division's net sales in that year. Sales in the western United States accounted for over 80% of Burke's Flooring product sales in 1997. 10 COMPETITION While there are a number of companies, both large and small, servicing the floor covering market, Burke is the largest producer of rubber cove base in the western United States. Burke's focus over many years on this specialized niche has created significant brand awareness and customer loyalty. Burke's primary competitors in flooring accessory products include Roppe Corporation, Johnsonite, Flexco and Vinyl Plastics Incorporated. GROWTH AND OPPORTUNITIES While Burke enjoys the leading share of the western United States rubber cove base market, management believes there are opportunities to increase its national presence through promotional and incentive-based distributor programs and through the introduction of its vinyl wall base and moulding product line. The continued development of the Company's vinyl product line, will allow the Company to penetrate the eastern United States markets where vinyl has historically been preferred. Burke's distributor organization is being strengthened as new distributors either take on Burke as a new supplier due to its new vinyl production capabilities or, in an effort to consolidate their supplier base, allow Burke, as its existing rubber flooring products supplier, to displace other vinyl flooring products suppliers. A relatively small portion of Burke's Flooring Products sales are currently made outside of the western United States, although the market for rubber cove base nationwide is estimated by management at approximately $100 million. Management believes that its new vinyl product line and midwestern distribution center will increase Burke's scope and presence in the midwestern and eastern regions. These initiatives, along with Burke-produced profile tile and BurkeEmerge safety luminescent products, are expected to support the ongoing growth within and beyond Burke's traditional markets. COMMERCIAL PRODUCTS Burke's Commercial Products business serves end markets with both intermediate and finished silicone and organic rubber-based compounds and products. PRODUCTS PUROSIL PRODUCTS. Burke manufactures and markets a wide range of private label and Purosil-branded engineered silicone hose products for high-pressure, heat-sensitive applications. These high-performance products are sold primarily to OEMs and the aftermarket for heavy-duty trucks and buses. Burke was the first silicone hose producer in the industry to become ISO 9002 certified and is preparing for QS 9000 certification. The Company guarantees the performance of certain higher quality silicone truck hoses for 1,000,000 miles and experiences negligible product returns and warranty claims each year. The Company also manufactures silicone hose products for applications in the powerboat, potable water and food service industries. New product development is an important focus within this group. Purosil has responded to recent market demand with newly designed charged-activated-coupling and knitted hose products for specific applications within the Class 8 truck market. These additions are expected to strengthen the silicone hose product line and increase Burke's penetration of the OEM market. Burke plans to lease an additional facility of approximately 45,000 square feet beginning in mid 1998. This facility will be devoted to the manufacture and distribution of Purosil products and should help to increase efficiency and customer service levels for all of the Company's silicone-based products. MEMBRANE PRODUCTS. Burke's membrane products business utilizes the Company's elastomer-based manufacturing expertise to produce high-end, single-ply commercial roof-covering systems and flexible liner membranes. Commercial roofing systems are sold into the new roofing and re-roofing markets under the Burkeline trade name and have been installed in large and small commercial and institutional facilities 11 around the world. The Company's membrane products are also used as reservoir liners and floating potable and waste water covers. Burke's roofing and liner membrane systems are designed with DuPont's patented Hypalon polymer material, which is an extremely durable and flexible material, widely regarded as the highest-quality single-ply product available in the commercial roofing and membrane market. Burke's membrane products typically incorporate structural fabric laminated between thin layers of Hypalon. Burkeline roofing systems are installed by Burke-approved contractors and technical assistants and are fully warranted for up to 20 years. Membrane liners and covers are used primarily for protective purposes in potable water and wastewater projects. The liners and covers are most often used to protect against contamination of potable water during its storage and transfer. Hypalon is one of the few polymers which meets environmental standards regarding sanctioned potable water contact materials. Burke's in-house technical and engineering groups work directly with municipal engineers and with distributors and fabricators to assist in the design, testing and selection of the final product. Burke also manufactures and provides a full line of custom-made shrouds, gas vents, adhesives and other components necessary to produce a complete system package. CUSTOM PRODUCTS. The custom products group within Burke's Commercial Products division has capitalized on the Company's sophisticated formulation and production capabilities to become a value-added partner that collaborates closely with its customers in designing application-specific advanced products in both the silicone and organic rubber products markets. The group focuses on identifying high-margin products that complement its existing product lines and utilize excess production capacity. These custom products are typically complex blending and compounding formulations serving as intermediate or finished products for manufacturers of specialty rubber products and include oil drilling equipment components, road tape, rocket motor insulation and surface ship bow domes. MARKETS AND CUSTOMERS Management believes that the Company is the only approved supplier of silicone hoses to Mack Trucks. Burke's automotive hose products are also designed and specified into model builds of other major Class 8 truck OEMs including Peterbilt and Freightliner. Burke's membrane roofing products are sold both to distributors and directly to end-users who favor higher-quality roofing systems and who select Burke based on its reputation for quality. These roofing systems are typically employed in high value-added applications where quality, as measured by durability and ease of maintenance, is critical. Burke's liner membrane products are used in applications which are typically outsourced by municipalities on a bid basis and take several months to complete. Burke's covers and liners are sold to distributors and fabricators who heat weld the Hypalon-constructed sheets together to create a final product. It is not unusual for Burke to work with multiple distributors who are bidding for the same municipal project. Most of Burke's customers of the custom products unit are repeat users and range from large industrial companies to niche manufacturers producing specialized elastomeric products. Burke has developed long-standing relationships with a broad base of customers as a supplier of both intermediate and finished products whose technical complexities are suited to its unique capabilities. Burke markets these products using direct and independent sales representatives in both the United States and Europe. In 1997, the top five customers of the Commercial Products division accounted for $11.7 million in net sales, representing 12.9% and 32.9%, respectively, of the Company's total and the Custom Product division's net sales in that year. 12 COMPETITION The marketplace for engineered silicone hose applications is supplied by three principal companies: Flexfab Horizons International, Thermopol Incorporated and the Company. In both roofing and liner systems, Burke competes with other Hypalon-based product manufacturers and with lower-cost alternatives. Leading manufacturers of these alternative systems include JPS Elastomerics Corp. and Carlisle Companies, Inc. Each has significant single-ply membrane roofing businesses and emphasize their membrane products manufactured from alternative materials as lower-cost, higher-volume products. Their Hypalon offerings represent a small portion of their aggregate sales. There are a number of manufacturers that compete in custom-mixing and product formulation business, although management believes that only a few match Burke's comprehensive capabilities in terms of its research, design, materials compounding, engineering and laboratory testing resources. Burke's custom products product line has developed a reputation for solving complex formulation problems and is staffed with experienced compounding professionals. GROWTH AND OPPORTUNITIES Management believes that the Commercial Products division has significant growth potential. The Company's Purosil line of silicone truck and industrial hose is expected to command an increased share of the market based on its development of new clients and new distribution channels. New initiatives include increasing customer share at a major private-label customer, initiating the production of silicone hoses for a major new OEM customer and expanding into new product areas. Management also foresees growth potential in the membrane products line as it works with DuPont to promote Hypalon as a durable and environmentally sound liner product for new applications. Moreover, management continues to look for opportunities to capitalize on the Company's vertical integration, wide customer base and technological leadership to identify new high-margin custom elastomer-based products. SALES AND MARKETING Burke's sales and marketing personnel are organized by product lines. Based on the nature of the markets served and the established distribution channels in a particular segment, products are sold either directly to end-users or through distributors and independent sales representatives. Burke's Aerospace Products business has long-standing direct relationships with OEMs and aftermarket suppliers to the aerospace industry and supports these relationships by integrating its engineering and operating groups during the design, tooling and production phases of a customer's project. Burke solidifies its relationships through ongoing technical support throughout the life of a project. Burke's Flooring Products business sells through a direct sales effort and through flooring products distributors. The addition of a vinyl-based product line will enable Burke to (i) increase its number of first-tier distributors, specifically in the midwest and east, who, in the past, have not carried Burke products due to Burke's lack of a vinyl product offering, and (ii) displace other vinyl suppliers with distributors that already carry Burke's rubber flooring products line. The Flooring Products business currently utilizes 14 direct sales representatives who manage direct sales and orchestrate the Company's national marketing efforts through approximately 90 commercial flooring products distributor locations. Burke's Commercial Products business utilizes several different sales and marketing approaches due to the scope of its product offering. Purosil's high-performance silicone hoses are sold directly to OEMs in the heavy-duty truck and bus market. The Company also manufactures a number of "standard" product hoses which are marketed through sales representatives and a national network of distributors. The other commercial products that Burke produces are primarily sold through specialized in-house representatives adept at identifying potential customers who can benefit from Burke's vertically integrated manufacturing, compound formulation and engineering capabilities. 13 MANUFACTURING RAW MATERIALS Principal raw materials purchased by the Company for use in its products include various custom and standard grades of rubber, silicone gum and vinyl as well as the Hypalon polymer material. The Company has historically not experienced any significant supply restrictions and has generally been able to pass through increases in the price of these materials to customers. In 1995, however, the Company experienced a significant price increase in one of the raw materials used in the manufacture of one of its Flooring Products. Due to the competitive nature of the Flooring Products business and the Company's proprietary formula for this product, the Company was unable to fully pass this price increase along to its consumers and its gross margins for this product were adversely affected. Although the Company does not currently anticipate that it will experience any similar price increases for this or any other raw material used by the Company in the near future, there can be no assurance that such price increases will not occur and that the Company's results of operations will not be adversely affected thereby. VERTICAL INTEGRATION Burke's operations are vertically integrated for the production of both silicone and organic rubber-based products. The Company's production process commences with the receipt of raw materials, followed by a variety of production steps which generally include mixing, milling, calendering (or extrusion or stripping), forming and molding and, in the case of silicone, roto-curing. Management believes Burke's vertical integration provides a key competitive advantage within the markets it serves. OTHER INFORMATION BACKLOG AND WARRANTY The Company's backlog consists of cancelable orders and is dependent upon trends in consumer demand throughout the year. Customer order patterns vary from year to year, largely because of annual differences in consumer end-product demand, marketing strategies, overall economic and weather conditions. Orders for the Company's products are generally subject to cancellation until shipment. As a result, comparison of backlog as of any date in a given year with backlog at the same date in a prior year is not necessarily indicative of sales trends. Moreover, the Company does not believe that backlog is necessarily indicative of the Company's future results of operations or prospects. The Company's warranty policy is to accept returns of products with defects in materials or workmanship. The Company will also accept returns of incorrectly shipped goods where the Company has been notified on a timely basis and, in certain cases, to maintain customer goodwill. In accordance with normal industry practice, the Company ordinarily accepts returns only from its customers and does not ordinarily accept returns directly from consumers. Certain of the products returned to the Company by its customers, however, may have been returned to those customers by consumers. The Company generally warrants its roofing products for two years, for which the related costs are not significant. In addition, the Company sells extended warranties on roofing products for ten to twenty years. During the three-year period ended January 2, 1998, the Company incurred insignificant warranty costs with respect to its roofing products. 14 EMPLOYEES The Company employed at January 2, 1998, 887 employees at its four locations, including 780 involved in manufacturing and manufacturing support and 85 involved in product sales. Employees at the Company's four locations receive comparable insurance and benefit programs. Burke's employees at the San Jose and Taunton locations are represented by the International Association of Machinists and Electrical Workers Unions, respectively. The collective bargaining agreement for the Taunton location was renegotiated in June 1997 for a three-year term and the agreement for the San Jose location was renegotiated in October 1997 for a three-year term. The Company has not experienced a work stoppage due to a labor dispute since 1975 and management believes that the Company's relationships with its employees and unions are good. PATENTS, TRADEMARKS, TRADE NAMES AND TRADE SECRETS The success of the Company's various businesses depends in part on the Company's ability to exploit certain proprietary patents, trademarks, trade names and trade secrets on an exclusive basis in reliance upon the protections afforded by applicable copyright, patent and trademark laws and regulations. The loss of certain of the Company's rights to such patents, trademarks, trade names and trade secrets or the inability of the Company effectively to protect or enforce such rights could adversely affect the Company. The duration of the Company's intellectual property rights is as follows: PATENTS
GATT PATENT NO. TITLE EXPIRY - ------------ ------------------------------------------------ --------- 4,608,792 Roof membrane holdown system 11/12/08 4,603,790 Tensioned reservoir cover, rainwater run-off 3/11/05 enhancement system
TRADEMARKS
MARK EXPIRATION - -------------------------------------------------------------- ----------- VAC-Q-ROOF.................................................... 12/1/98 ROULEAU....................................................... 12/27/08 BURKEBASE..................................................... 6/4/05 SURETITE...................................................... 7/4/01 BURKE INDUSTRIES.............................................. 4/19/07 ARGONAUT...................................................... 4/1/09
ENVIRONMENTAL LIABILITY The Company is subject to various evolving federal, state and local environmental laws and regulations governing, among other things, emissions to air, discharge to waters and the generation, handling, storage, transportation, treatment and disposal of hazardous and non-hazardous substances and wastes. These laws and regulations provide for substantial fees and sanctions for violations and, in many cases, could require the Company to remediate a site to meet applicable legal requirements. In connection with the Recapitalization, JFLEI conducted certain investigations (including, in some cases, reviewing environmental reports prepared by others) of the Company's operations and its compliance with applicable environmental laws. The investigations, which included Phase I assessments (consisting generally of a site visit, records review and non-intrusive investigation of conditions at the subject facility) by independent consultants, found that certain facilities have had or may have had releases of hazardous materials that 15 may require remediation. Pursuant to the Merger Agreement (as defined below), the former shareholders of the Company have agreed, subject to certain limitations as to survival and amount, to indemnify the Company against certain environmental liabilities incurred prior to the consummation of the Recapitalization. Based in part on the investigations conducted and the indemnification provisions of the Agreement and Plan of Merger, dated as of August 13, 1997 (the "Merger Agreement") among JFLEI, JFL Merger Co. ("MergerCo") and certain former shareholders of the Company (pursuant to which the Company was recapitalized by means of a merger of MergerCo into the Company (the "Merger") with the Company surviving the Merger) with respect to environmental matters, the Company believes, although there can be no assurance, that its liabilities relating to these environmental matters will not have a material adverse effect on its future financial position or results of operations. The Company does not maintain a reserve for environmental liabilities. SUBSEQUENT EVENTS On March 5, 1998, the Company entered into a Stock Purchase Agreement with Sovereign Specialty Chemicals, Inc. ("Sovereign") and Mercer Products Company, Inc. ("Mercer") pursuant to which the Company will acquire from Sovereign all of the outstanding capital stock of Mercer for an aggregate price of $35,750,000, subject to working capital and other adjustments (the "Mercer Acquisition"). Founded in 1958, and headquartered in Eustis, Florida, Mercer is a leading manufacturer of extruded plastic and vinyl products such as vinyl and rubber cove base, transitional and finish moldings, corners, stair treads and other accessories. Mercer also sells a range of related adhesive products. Mercer's product and distribution lines strongly complement the Company's Flooring Products business. While the Company is the dominant producer of rubber cove base and floor covering accessories in the western United States, Mercer is a leading supplier to the vinyl cove base and moulding products markets and has a particularly strong presence in the eastern United States. Through the Mercer Acquisition the Company will significantly enhance its already strong flooring product offerings, distribution channels and product development capabilities. The Mercer Acquisition also presents the opportunity for cost savings through economies of scale and shared resources. Mercer has experienced consistently profitable historical financial results, with steady growth in sales and significant increases in EBITDA since 1995. Net sales increased 7.2% and 1.4%, respectively, in 1996 and 1997, while EBITDA increased 8.8% and 49.5%, respectively, over the same period. Under the Stock Purchase Agreement, the consummation of the Mercer Acquisition is subject to customary conditions, including the expiration of any applicable waiting periods under Hart-Scott-Rodino Antitrust Improvements Act of 1976. The Stock Purchase Agreement also contains customary representations and warranties from Sovereign to the Company. Certain of these representations and warranties, and related indemnification rights, will terminate after a limited time following the effectiveness of the Mercer Acquisition. In order to finance the Mercer Acquisition, the Company will need to raise additional funds, through an increase in its existing credit facility and/or the issuance of floating rate debt or other securities, which may necessitate the amendment of certain provisions of the indenture governing the Company's 10% Senior Notes due 2007 (the "Senior Notes"). ITEM 2. PROPERTIES FACILITIES San Jose, California serves as the corporate headquarters for Burke as well as the manufacturing site for the Flooring Products business and the organic rubber portion of the Commercial Products business. Santa Fe Springs, California is the manufacturing headquarters for Burke's silicone production activities and houses most of its Aerospace Products and all of its silicone Commercial Products businesses. Along 16 with the industrial hose production, the Aerospace Products business classified development and production areas are also located at the Santa Fe Springs facility. The Taunton, Massachusetts facility is the manufacturing site for Burke's Haskon aerospace operations. This location provides Burke with an alternative eastern United States manufacturing presence for its aerospace customers. As of February 28, 1998, Burke maintained operations at the following locations:
SQUARE LOCATION FOOTAGE OWNERSHIP FUNCTION - ---------------------------------- --------- ----------- ------------------------------------------------------- San Jose, CA...................... 123,000 Owned Manufacturing, Engineering, Distribution, Offices San Jose, CA...................... 82,000 Leased Manufacturing, Warehouse Santa Fe Springs, CA.............. 80,000 Leased Manufacturing, Engineering, Distribution, Offices Santa Fe Springs, CA.............. 25,000 Leased Mixing Santa Fe Springs, CA.............. 25,000 Leased Distribution Taunton, MA....................... 85,000 Leased Manufacturing, Engineering, Distribution, Offices Bensonville, IL................... 15,000 Leased Distribution
These facilities produce molded, extruded and calendered forms of organic rubber and silicone which are then fabricated by machine or by skilled labor into finished products. The Company's engineering, design and research and development departments play a significant role in the initial product design and compound formulation used in the production process. Burke has sophisticated laboratories in each of its manufacturing facilities which allow the Company to perform most of its necessary testing in-house. In addition to the facilities identified above, the Company leases a 113,000 square foot facility in Modesto, California, which is subleased to the purchaser of the Company's custom-molded products business in connection with the sale of that business in 1996. ITEM 3. LEGAL PROCEEDINGS The Company is routinely involved in legal proceedings related to the ordinary course of its business. Management does not believe any such matters will have a material adverse effect on the Company. The Company maintains property, general liability and product liability insurance in amounts which it believes are consistent with industry practices and adequate for its operations. On or about December 28, 1997, a former employee filed a complaint in the California Superior Court for the County of Santa Clara against the Company and certain of the Company's current and former officers and directors. On March 11, 1998, plaintiff filed an amended complaint against the same defendants. The former employee alleges that he was induced to sell his Company stock to the Company and/or to the officer and director defendants in August 1996 through the use of allegedly false and/or misleading statements. The amended complaint asserts claims for fraud and deceit, breach of fiduciary duty, violations of the certain provisions of the California Corporations Code, negligent misrepresentation, breach of contract, intentional infliction of emotional distress, and for declaratory relief. The Company denies the allegations that have been asserted by the former employee and intends vigorously to defend such claims. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 17 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS COMMON EQUITY DIVIDENDS The Company's Common Stock is not listed or traded on any exchange. At January 2, 1998, there were approximately 13 holders of the Company's Common Stock. The Company has not paid any cash dividends on its Common Stock to date. The Company intends to retain all future earnings for use in the development of its business and does not anticipate paying cash dividends in the foreseeable future. The payment of all dividends will be at the discretion of the Company's Board of Directors and will depend upon, among other things, future earnings, operations, capital requirements, the general financial condition of the Company and general business conditions. The ability of the Company and its subsidiaries to pay dividends is restricted by the indentures governing the Senior Notes and, with respect to the Common Stock, the Company's Articles of Incorporation. RECENT SALES OF UNREGISTERED SECURITIES On August 20, 1997, the Company issued $110,000,000 principal amount of 10% Senior Notes due 2007 of the Company (the "Senior Notes") to NationsBanc Capital Markets, Inc. (the "Initial Purchaser"). The aggregate price to the public of the Senior Notes was $110,000,000 and the aggregate initial purchaser's discounts and commissions were $3,300,000, resulting in aggregate proceeds to the Company of $106,700,000. The Initial Purchaser subsequently resold the Senior Notes in reliance on Rule 144A under the Securities Act of 1933, as amended. ITEM 6. SELECTED FINANCIAL DATA SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA The selected consolidated financial data below for the Company for the three years ended January 2, 1998 and as of January 3, 1997 and January 2, 1998 have been derived from the Consolidated Financial Statements of the Company which have been audited by Ernst & Young LLP, independent auditors, and are included elsewhere in this Report. The selected consolidated financial data below for the Company for the years ended December 31, 1993 and December 30, 1994 and as of December 31, 1993, December 30, 1994 and December 29, 1995, have been derived from the Consolidated Financial Statements of the Company which have also been audited by Ernst & Young LLP, but which are not included elsewhere herein. The information presented below is qualified in its entirety by, and should be read in conjunction with, "Management's Discussion and Analysis of Financial Condition and Results of Operations," the Consolidated Financial Statements of the Company and the related notes included elsewhere in this Report. The data below reflect the acquisition by the Company of certain assets of Purosil in March 1993; of Silicone Fabrication Specialists, Inc. ("SFS") in February 1995; of Haskon Corporation ("Haskon") in 18 June 1995; of Kentile Corporation ("Kentile") in April 1996; and the effect of the Recapitalization in August 1997.
FISCAL YEAR ----------------------------------------------------- 1993 1994 1995 1996 1997 --------- --------- --------- --------- --------- (DOLLARS IN THOUSANDS) OPERATING DATA: Net sales.................................................. $ 36,431 $ 44,370 $ 68,411 $ 72,466 $ 90,228 Cost of sales.............................................. 25,355 29,998 49,226 49,689 62,917 --------- --------- --------- --------- --------- Gross profit............................................... 11,076 14,372 19,185 22,777 27,311 Selling, general and administrative expenses(1)............ 9,215 8,152 10,212 11,610 12,238 Transaction expenses(2).................................... -- -- -- -- 1,321 Stock option purchase(3)................................... -- -- -- -- 14,105 --------- --------- --------- --------- --------- Income (loss) from operations.............................. 1,861 6,220 8,973 11,167 (353) Interest expense, net...................................... 2,897 2,812 3,007 2,668 5,408 --------- --------- --------- --------- --------- Income (loss) before income tax provision (benefit), cumulative effect of accounting change, extraordinary loss and discontinued operation(4)....................... (1,036) 3,408 5,966 8,499 (5,761) Income tax provision (benefit)............................. 146 1,395 3,393 3,466 (1,818) --------- --------- --------- --------- --------- Income (loss) from continuing operations before cumulative effect of accounting change, extraordinary loss and discontinued operation(4)................................ $ (1,182) $ 2,013 $ 2,573 $ 5,033 $ (3,943) --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Net income (loss)(4)....................................... $ (657) $ 1,502 $ 1,094 $ 4,101 $ (3,943) --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- OTHER DATA: EBITDA(5).................................................. $ 3,831 $ 7,490 $ 10,461 $ 12,586 $ 16,851(6) EBITDA margin(5)........................................... 10.5% 16.9% 15.3% 17.4% 18.7%(6) Depreciation and amortization.............................. 1,970 1,270 1,488 1,419 1,499 Capital expenditures(7).................................... 530 335 3,647 1,684 1,454 Cash interest expense...................................... 2,500 2,438 2,683 1,950 2,059 Ratio of earnings to fixed charges(8)...................... -- 2.1x 2.8x 3.7x --
AS OF FISCAL YEAR END ------------------------------------------------------ 1993 1994 1995 1996 1997 --------- --------- --------- ---------- --------- (DOLLARS IN THOUSANDS) BALANCE SHEET DATA: Working capital........................................... $ 4,932 $ 4,766 $ 5,402 $ 5,328 $ 21,678 Total assets.............................................. 30,535 28,551 39,729 40,673 62,837 Long-term obligations, less current portion............... 20,011 16,937 21,803 18,126 110,000 Shareholders' equity (deficit)............................ (654) 849 340 4,283 (86,490)
- ------------------------ (1) Selling, general and administrative expenses include amortization of acquisition costs of $850 in 1993. (2) Reflects $1,321 of expenses associated with the Recapitalization in August 1997. (3) Reflects the Company's cost to purchase options issued and outstanding under the Company's stock option plan in connection with the Recapitalization in August 1997. (4) Net income reflects (i) benefit of cumulative effect of change in accounting method for income taxes of $551 in 1993, (ii) extraordinary loss on debt settlement, net of income tax benefit, of $815 in 1995 and (iii) losses, net of income tax benefit, of $26, $511, $664 and $308 in 1993, 1994, 1995 and through June 28, 1996, respectively, incurred by the Company's custom-molded organic rubber products 19 manufacturing operations, the assets of which were disposed of in June 1996, and loss, net of income tax benefit, of $624 in 1996 on disposal of those assets. (5) EBITDA is the sum of income (loss) before cumulative effect of changes in accounting principles, extraordinary loss, discontinued operation, income tax provision (benefit) and interest, depreciation and amortization expense. EBITDA is presented because it is a widely accepted financial indicator of a company's ability to service indebtedness. However, EBITDA should not be considered as an alternative to income from operations or to cash flows from operating activities (as determined in accordance with generally accepted accounting principles) and should not be construed as an indication of a company's operating performance or as a measure of liquidity. (6) Reflects EBITDA excluding costs of stock option purchase, transaction expenses related to the Recapitalization and management fees paid to a former controlling shareholder. (7) Capital expenditures include the acquisition of assets of Purosil for $297 in 1993; of SFS for $1,578 and Haskon for $2,081 in 1995 and of Kentile for $854 in 1996. (8) In calculating the ratio of earnings to fixed charges, earnings consist of income (loss) before income tax provision (benefit), cumulative effect of accounting change, extraordinary loss and discontinued operation plus fixed charges (excluding capitalized interest). Fixed charges consist of interest incurred (which includes amortization of deferred financing costs) whether expensed or capitalized and a portion of rental expense estimated to be attributable to interest. Earnings were insufficient to cover fixed charges by $1.0 million and $5.8 million for fiscal years ended 1993 and 1997, respectively. 20 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Report contains certain forward-looking statements and information relating to the Company that are based on the beliefs of management as well as assumptions made by and information currently available to management. The words "anticipates," "believes," "estimates," "expects," "plans," "intends" and similar expressions, as they relate to the Company or its management, are intended to identify forward-looking statements. Such statements reflect the current views of the Company, with respect to future events and are subject to certain risks, uncertainties and assumptions, that could cause actual results to differ materially from those expressed in any forward-looking statement, including, without limitation: competition from other manufacturers in the Company's aerospace, flooring or commercial product lines, loss of key employees, general economic conditions and adverse factors impacting the aerospace industry such as changes in government procurement policies. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated or expected. The Company does not intend to update these forward-looking statements. INTRODUCTION The following discussion and analysis should be read in conjunction with "Selected Historical Consolidated Financial Data" and the audited Consolidated Financial Statements of the Company and the notes thereto included elsewhere in this Report. The Company operates within one industry segment, elastomer products, and is organized into three product groups: Aerospace Products, which produces precision silicone seals and other products used on commercial and military aircraft; Flooring Products, which produces and distributes rubber and vinyl cove base and other floor covering accessory products; and Commercial Products, which produces various intermediate and finished silicone and organic rubber products. Burke entered the Aerospace Products business through the acquisition of Purosil's assets in 1993. The Company subsequently expanded its Aerospace Products business by purchasing the assets of two of its largest competitors, SFS and Haskon, in 1995. These acquisitions were completed in order to broaden Burke's Aerospace Products line and to incorporate advanced military stealth capability into this product group. Subsequent to these acquisitions, in December 1995, the Company integrated all of its aerospace operations in anticipation of increased demand as communicated by aircraft OEMs. In general, Aerospace Products revenues are driven by both the building of new aircraft by OEM manufacturers and the repair and replacement of existing aircraft ("aftermarkets"). OEMs typically depend on a select group of suppliers to provide their seal requirements, working closely with them to design the customized tooling necessary to satisfy the industry's rigorous product testing standards. As a result of the Company's consolidation efforts throughout the mid-'90s, Burke is now positioned as the leading seals supplier for the domestic commercial aircraft industry and is OEM-specified on virtually every existing commercial and military aircraft platform in production. Aircraft seal revenues for 1997 were comprised of approximately two-thirds sales to OEM manufacturers and one-third sales to the aftermarket. In addition, commercial aircraft manufacturing has resulted in 73% of 1997 seal revenues being derived from the commercial market, compared with approximately 27% from the U.S. military. Aerospace Products revenues in 1995 were approximately $3.0 million higher than might otherwise have been expected due to the significant unfilled backlog created by the inability of SFS and Haskon to deliver product prior to Burke's ownership. Sales of precision silicone seals comprised approximately 92.6% of 1997 revenues for the Aerospace Products business. The remaining 7.4% was derived primarily from the sale of low-observable seals and tape to the military for use on stealth aircraft, cruise missiles, and armored vehicles. Revenues of low- observable seals and tape are derived from both the retrofit of existing aircraft, such as the B-1 bomber 21 and the initial installation and replacement of existing low-observable material on aircraft, such as the B-2 bomber. Historically, revenues in the Flooring Products business have been driven by both new commercial construction and the continuous repair and remodeling of existing commercial space. Until recently, operations have been concentrated in the western United States and Burke has sold primarily rubber cove base moulding. The Company has developed a well-known brand name (BurkeBase) in the western United States by targeting the architectural community and installers of commercial flooring. Growth in Flooring Products revenues was significant in 1997 due to improvement in the commercial construction market in the western United States. The Commercial Products business is comprised of: (i) Purosil brand high-performance silicone truck and bus engine hoses; (ii) roofing and other fluid barrier membrane products; and (iii) various intermediate and end use products based upon Burke's extensive elastomer manufacturing capabilities. Revenues generated by silicone hose sales are driven by both new truck and bus manufacturing as well as the replacement market. OEM and aftermarket customers specify and prefer silicone hoses due to their high performance and relatively minor absolute cost. In addition, silicone hoses are increasingly being specified on trucks and buses due to the higher performance requirements of new engine design. Burke roofing and fluid containment system sales have tended to be relatively steady over time. Roofing and fluid barrier membranes are used in numerous applications including new and replacement commercial roofs and reservoirs. The Hypalon product provides significant wear and durability advantages compared with less expensive products. Revenues from these products can be materially affected on a quarter-to-quarter basis by the size and timing of certain reservoir projects. 22 RESULTS OF OPERATIONS The following table sets forth certain income statement information for the Company for the fiscal years ended December 29, 1995, January 3, 1997 and January 2, 1998:
FISCAL YEAR ENDED -------------------------------------------------------------------------------- PERCENTAGE PERCENTAGE PERCENTAGE OF OF OF 1995 NET SALES 1996 NET SALES 1997 NET SALES --------- --------------- --------- --------------- --------- ------------- (DOLLARS IN THOUSANDS) Net sales: Aerospace Products................. $ 23,254 34.0% $ 24,622 34.0% $ 31,225 34.6% Flooring Products.................. 19,693 28.8 20,546 28.4 23,475 26.0 Commercial Products................ 25,464 37.2 27,298 37.6 35,528 39.4 --------- ----- --------- ----- --------- ------ Total net sales.................. 68,411 100.0 72,466 100.0 90,228 100.0 Cost of sales........................ 49,226 72.0 49,689 68.6 62,917 69.7 --------- ----- --------- ----- --------- ------ Gross profit......................... 19,185 28.0 22,777 31.4 27,311 30.3 Selling, general and administrative expenses........................... 10,212 14.9 11,610 16.0 12,238 13.6 Transaction costs.................... -- -- -- -- 1,321 1.5 Stock option purchase................ -- -- -- -- 14,105 15.6 --------- ----- --------- ----- --------- ------ Income (loss) from operations........ 8,973 13.1 11,167 15.4 (353) (0.4) Interest expense, net................ 3,007 4.4 2,668 3.7 5,408 6.0 --------- ----- --------- ----- --------- ------ Income before income tax provision (benefit), extraordinary loss and discontinued operation............. 5,966 8.7 8,499 11.7 (5,761) (6.4) Income tax (benefit) provision....... 3,393 5.0 3,466 4.8 (1,818) (2.0) --------- ----- --------- ----- --------- ------ Income from continuing operations before extraordinary loss and discontinued operation............. $ 2,573 3.7% $ 5,033 6.9% $ (3,943) (4.4)% --------- ----- --------- ----- --------- ------ --------- ----- --------- ----- --------- ------ Net (loss) income.................... $ 1,094 1.6% $ 4,101 5.7% $ (3,943) (4.4)% --------- ----- --------- ----- --------- ------ --------- ----- --------- ----- --------- ------
YEAR ENDED JANUARY 2, 1998 VERSUS YEAR ENDED JANUARY 3, 1997 NET SALES. Total net sales increased 24.5%, from $72.5 million in 1996 to $90.2 million in 1997. Aerospace Products sales grew 26.8%, due to strong expansion of commercial aircraft build rates. Despite this overall performance, revenue for low-observable materials decreased in the second half of the year due to material product design changes by major customers, which delayed shipments of these materials. Flooring Products sales grew 14.3% due to price increases and generally stronger demand for construction products in California and the introduction of vinyl cove base products. Commercial Products sales grew 30.1% due to a major sale of membrane products for a liner application and due to orders from a new customer. COST OF SALES. Cost of sales increased 26.6% from $49.7 million in 1996 to $62.9 million in 1997. The increase was primarily due to the increase in net sales over the same period. As a percentage of net sales, gross profit decreased from 31.4% in 1996 to 30.3% in 1997. The decrease was due primarily to the fact that membrane products, which have a lower gross profit margin than the Company's other product lines, constituted a larger portion of total net sales in 1997 compared with 1996. 23 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased 5.4%, from $11.6 million in 1996 to $12.2 million in 1997. The increase included the addition of Flooring and Commercial sales personnel. However, as a percentage of net sales, these costs declined from 16.0% to 13.6% over the same period. TRANSACTION EXPENSES. Transaction expenses were incurred in connection with the Recapitalization. STOCK OPTION PURCHASE. The stock option purchase charge in 1997 represents the compensation component of payments made for the cancellation of stock options in connection with the Recapitalization. INCOME FROM OPERATIONS. As a result of the above factors, income from operations decreased 103.2%, from $11.2 million in 1996 to a loss of $(0.4) million in 1997. INTEREST EXPENSE. Interest expense increased 102.7%, from $2.7 million in 1996 to $5.4 million in 1997. The increase was due to the issuance of the Senior Notes on August 20, 1997. INCOME FROM CONTINUING OPERATIONS. As a result of the above factors, income from continuing operations decreased 178.3%, from $5.0 million in 1996 to a loss of $(3.9) million in 1997. YEAR ENDED JANUARY 3, 1997 VERSUS YEAR ENDED DECEMBER 29, 1995 NET SALES. Total net sales increased 5.9%, from $68.4 million in 1995 to $72.5 million in 1996. Aerospace Products sales grew 5.9%, reflecting the positive effect of a full year of the deployment of the assets of Haskon acquired in June 1995, which was partially offset by the expiration of a significant supply contract in 1995. Flooring Products sales grew 4.3% as the result of the introduction of new products, price increases of 2.6% and volume increases of 1.0%. Commercial Products sales grew 7.2% due to orders from a new customer and to increased sales of the Company's silicone Custom Products, offset by a decrease in Membrane Products sales due to a customer's deferral of a major liner project. COST OF SALES. Cost of sales increased 0.9%, from $49.2 million in 1995 to $49.7 million in 1996. The increase was primarily due to the increase in net sales over the same period. As a percentage of net sales, gross profit increased from 28.0% in 1995 to 31.4% in 1996. The increase of 3.4% was due to the full integration of assets acquired from SFS and Haskon of 1.6%; to decreases in the cost of raw materials used in the Company's Flooring Products of 0.9% and to general pricing, operational, and overhead absorption improvements of 0.9%. The Flooring Products raw material prices returned to normal levels. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased 13.7%, from $10.2 million in 1995 to $11.6 million in 1996. The increase was due to general cost increases to selling expenses associated with expanding Flooring Products into markets in the eastern United States and a full year of selling expenses associated with the assets of Haskon acquired in 1995. As a percentage of sales, these costs increased from 14.9% in 1995 to 16.0% in 1996, because of the time lag between the Flooring expansion spending and the realization of the resultant sales. INCOME FROM OPERATIONS. As a result of the above factors, income from operations increased 24.5%, from $9.0 million in 1995 to $11.2 million in 1996. INTEREST EXPENSE. Interest expense decreased 11.3%, from $3.0 million in 1995 to $2.7 million in 1996. The decrease was due to lower total debt outstanding. INCOME FROM CONTINUING OPERATIONS. As a result of the above factors, income from continuing operations increased 95.6%, from $2.6 million in 1995 to $5.0 million in 1996. 24 INCOME TAX PROVISION For 1996 and 1997, the Company recorded an income tax provision (benefit) of 40.8% and (31.6)%, respectively, which differs from the federal statutory rate primarily due to state income taxes (net of federal benefit) and in 1997 due to additional provision for federal and state audits. In 1996, the Company settled with the Internal Revenue Service ("IRS") certain issues relating to the Company's income tax returns for 1988 through 1990. As of January 3, 1997, the Company had fully provided for the taxes and interest which are payable as a result of the settlement. In addition to the above settlement, in 1997, the Company settled with the IRS certain issues related to the Company's income tax returns for 1992 and 1993. The Company fully provided for the taxes and interest which are payable as a result of the settlement. For 1995, the Company recorded an income tax provision of 56.9%, which differed from the federal statutory rate primarily due to state income taxes (net of federal benefit) and due to an additional provision for potential IRS audit adjustments. LIQUIDITY AND CAPITAL RESOURCES CASH FLOW. The Company's principal uses of cash are to finance working capital and capital expenditures related to asset acquisitions and internal growth. Burke's net cash used in operating activities was $8.5 million in 1997. Excluding the charge related to the stock option purchase, Burke's net cash provided by operating activities would have been $5.6 million in 1997. CAPITAL REQUIREMENTS. The Company, including Mercer post-acquisition, expects to spend approximately $2.0 million during 1998 on capital expenditures not directly related to acquisitions. Cash flow from operations, to the extent available, may also be used to fund a portion of any acquisition expenditures. The Company is actively seeking acquisition opportunities. The Company intends to seek additional capital as necessary to fund potential acquisitions through one or more funding sources that may include borrowings under the Credit Facility described below. SOURCES OF CAPITAL. The Company currently has a $15.0 million senior secured credit facility (the "Credit Facility"). The Credit Facility will mature in August 2002. Interest on loans under the Credit Facility bear interest at rates based upon either, at the Company's option, Eurodollar Rates plus a margin of 2.50% or upon the Prime Rate plus a margin of .50%. Loans under the Credit Facility are secured by security interests in substantially all of the assets of the Company and are guaranteed by any and all current or future subsidiaries of the Company, which guarantees are secured by substantially all of the assets of the subsidiaries. The Credit Agreement contains customary covenants restricting the Company's ability to, among other things, incur additional indebtedness, create liens or other encumbrances, pay dividends or make other restricted payments, make investments, loans and guarantees or sell or otherwise dispose of a substantial portion of assets to, or merge or consolidate with, another entity. The Credit Agreement also contains a number of financial covenants that require the Company to meet certain financial ratios and tests and provides that a "change of control" constitutes an event of default. The Company anticipates that its principal use of cash during 1998 will be working capital requirements, debt service requirements and capital expenditures as well as expenditures relating to acquisitions and integrating acquired businesses. Based upon current and anticipated levels of operations, the Company believes that its cash flow from operations, together with amounts available under the Credit Facility, will be adequate to meet its anticipated requirements for the foreseeable future for working capital, capital expenditures and interest payments. In order to finance the Mercer Acquisition, the Company will need to raise additional funds, through an increase in the Credit Facility and/or the issuance of floating rate debt and/or other securities, which may necessitate the amendment of certain provisions of the indenture governing the Senior Notes. 25 In June 1997, the Financial Accounting Standards Board ("FASB") released Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("FAS 130"). FAS 130 establishes standards for the reporting and display of comprehensive income and its components in a full set of general purpose financial statements and is effective for fiscal years beginning after December 15, 1997. The Company believes that adoption of FAS 130 will not have a material impact on the Company's consolidated financial statements. In June 1997, the FASB released Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("FAS 131"). FAS 131 will change the way companies report selected segment information in annual financial statements and also requires companies to report selected segment information in financial statements and selected segment information in interim financial reports to stockholders. FAS 131 is effective for fiscal years beginning after December 15, 1997. The Company is currently evaluating the impact of application of the new rules on the Company's consolidated financial statements. IMPACT OF THE YEAR 2000 Based on a recent assessment, the Company determined that it will be required to modify or replace significant portions of its software so that its computer systems will function properly with respect to dates in the Year 2000 and thereafter. The Company presently believes that with modifications to existing software and conversions to new software, the Year 2000 issue will not pose significant operational problems for its computer systems. The Company anticipates completing the Year 2000 project within one year which is prior to any anticipated impact on its operating systems. Although the Company is not aware of any material operational issues associated with preparing its internal systems for the Year 2000, there can be no assurance that the company will not experience serious unanticipated negative consequences and/or material costs caused by undetected errors or defects in the technology used in its internal systems, which include third party software and hardware technology. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Consolidated Financial Statements required in response to this Item are listed under Item 14(a) of Part IV of this Report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 26 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth the name, age and position of each person who is a director or executive officer of the Company as of March 15, 1998. Each director will hold office until the next annual meeting of the shareholders or until his successor has been elected and qualified. Officers will be elected by the Board of Directors and will serve at the discretion of the Board.
NAME AGE POSITIONS - ------------------------------------ --------- -------------------------------------------------------------------- Rocco C. Genovese................... 61 Vice Chairman of the Board, President and Chief Executive Officer Reed C. Wolthausen.................. 50 Director, Senior Vice President and General Manager-- Silicone Products David E. Worthington................ 44 Treasurer, Vice President--Finance Robert F. Pitman.................... 43 Vice President and Technical Director--San Jose Craig A. Carnes..................... 38 Vice President--Sales and Marketing--Flooring Products Ronald A. Stieben................... 50 Vice President--Sales and Marketing--Silicone Products Robert G. Engle..................... 56 Vice President--Operations--Santa Fe Springs Hisham Alameddine................... 39 Vice President--Operations--San Jose George Sawyer....................... 66 Chairman of the Board Oliver C. Boileau, Jr............... 71 Director Donald Glickman..................... 64 Director Bruce D. Gorchow.................... 44 Director John F. Lehman...................... 55 Director Keith Oster......................... 36 Director Thomas G. Pownall................... 76 Director Joseph A. Stroud.................... 42 Director
ROCCO C. GENOVESE, Vice Chairman, President and Chief Executive Officer, has been with the Company for 42 years. Mr. Genovese joined Burke in 1955 and has held a number of operations and sales positions within the Company since that time. Mr. Genovese assumed his current role as Chairman, President and Chief Executive Officer in 1989. He is active in all aspects of Burke's business and is a participant in several industry associations. REED C. WOLTHAUSEN, Senior Vice President and General Manager--Silicone Products, has been with the Company for nine years. Initially serving as the Company's Chief Financial Officer, Mr. Wolthausen now manages Burke's silicone businesses. Prior to joining Burke, he served as Chief Financial Officer for Micronix Corp. and as Controller for Velo-Bind, Inc. DAVID E. WORTHINGTON, Treasurer and Vice President--Finance, has been with the Company for seven years. Mr. Worthington joined Burke as Corporate Controller in 1990 and served in that capacity until 1997 when he was promoted to his current position. Prior to joining the Company, he served as Chief Financial Officer for Electro-Technology Corporation. ROBERT F. PITMAN, Vice President and Technical Director--San Jose, has been with the Company since 1979 and currently oversees all technical and product development for the San Jose-based businesses as well as sales and marketing for the San Jose portion of the Commercial Products business. During his tenure with Burke, Mr. Pitman has held a number of positions including Director of Technical Services and Material/Process Development Engineer. He has served in his current position since 1994. CRAIG A. CARNES, Vice President--Sales and Marketing--Flooring Products, joined the Company in 1996. Prior to joining the Company, Mr. Carnes was Vice President of Sales and Marketing for Color Spot, Inc., a subsidiary of Pacificorp and a consumer perishable product company that is the nation's 27 largest producer of garden bedding flowers. For five years prior to joining Color Spot, Inc., Mr. Carnes held senior sales and marketing positions with Levolor Corporation, an industry leader and manufacturer of hard window coverings. RONALD A. STIEBEN, Vice President--Sales and Marketing--Silicone Products, has worked for the Company for two years. Prior to joining Burke, Mr. Stieben worked for 16 years at Kirkhill Rubber Company, one of Burke's competitors. He served as Vice President of Sales for Kirkhill for five years before joining Burke in 1995. ROBERT G. ENGLE, Vice President--Operations--Santa Fe Springs, joined Burke as Industrial Engineering Manager in 1986 and has since held the positions of Engineering Manager and Vice President of Manufacturing. Before joining Burke, Mr. Engle served as Manager of Engineering Services and Chief Industrial Engineer for Norton Company. HISHAM ALAMEDDINE, Vice President--Operations--San Jose, has been with the Company for six years. Before serving in his current position, Mr. Alameddine served as Director of Engineering Services for the Company. Prior to joining Burke, Mr. Alameddine was the Vice President of Manufacturing for Sonfarrel, Inc. and has held senior operations positions with two other companies. GEORGE SAWYER, Chairman of the Board of Directors of the Company and a Managing Principal of Lehman, has been affiliated with Lehman for the past five years. From 1993-1995, Mr. Sawyer served as the President and Chief Executive Officer of Sperry Marine Inc. Prior to that, Mr. Sawyer held a number of prominent positions in private industry and in the U.S. government, including serving as the President of John J. McMullen Associates, the President and Chief Operating Officer of TRE Corporation, the Vice President of International Operations for Bechtel Corporation and the Assistant Secretary of the Navy for Shipbuilding and Logistics under Mr. Lehman. OLIVER C. BOILEAU, JR., became a director of the Company upon consummation of the Recapitalization. He joined The Boeing Company in 1953 as a research engineer and progressed through several technical and management positions and was named Vice President in 1968 and then President of Boeing Aerospace in 1973. In 1980, he joined General Dynamics Corporation as President and a member of the Board of Directors. In January 1988, Mr. Boileau was promoted to Vice Chairman and then retired in May 1988. Mr. Boileau joined Northrop Grumman Corporation in December 1989 as Vice President and President and General Manager of the B-2 Division. He also served as President and Chief Operating Officer of the Grumman Corporation, a subsidiary of Northrop Grumman, and as a member of the Board of Directors of Northrop Grumman. Mr. Boileau retired from Northrop Grumman in 1995. He is an Honorary Fellow of the American Institute of Aeronautics and Astronautics, a member of the National Academy of Engineering, the Board of Trustees of St. Louis University, and Chairman of the Massachusetts Institute of Technology-Lincoln Laboratory Advisory Board. DONALD GLICKMAN, became a director of the Company upon consummation of the Recapitalization and is a Managing Principal of Lehman. For the past five years, Mr. Glickman has also been the President of Donald Glickman Company, Inc., which together with Lehman, acquires as principal significant corporations in aerospace, marine and defense industries. Prior to forming Donald Glickman Company, Inc., Mr. Glickman was a principal of the Peter J. Solomon Company, a Managing Director of Shearson Lehman Brothers Merchant Banking Group and Senior Vice President and Regional Head of The First National Bank of Chicago. Mr. Glickman served as an armored cavalry officer in the Seventh U.S. Army. Mr. Glickman is currently a director of Cal-Tex Industries, Inc. and Monro Muffler Brake, Inc. and is a trustee of MassMutual Corporate Investors, MassMutual Participation Investors and Wolf Trap Foundation for the Performing Arts. BRUCE D. GORCHOW, became a director of the Company upon consummation of the Recapitalization and is a member of the investment advisory board of Lehman. Since 1991, Mr. Gorchow has been Executive Vice President and head of the Private Finance Group of PPM America, Inc. Mr. Gorchow is 28 also a Director of Global Imaging Systems, Inc., Leiner Health Products, Inc., Tomah Products, Inc. and is an investment director of several investment limited partnerships. Mr. Gorchow also represents PPM America, Inc. on the boards of ten of its portfolio companies. Prior to his position at PPM America, Mr. Gorchow was a Vice President at Equitable Capital Management, Inc. JOHN F. LEHMAN, became a director of the Company upon consummation of the Recapitalization and is a Managing Principal of Lehman. Prior to founding Lehman in 1990, Dr. Lehman was an investment banker with Paine Webber, Inc. from 1988 to 1990, and served as a Managing Director in Corporate Finance. Dr. Lehman served for six years as Secretary of the Navy, was a member of the National Security Council Staff, served as a delegate to the Mutual Balanced Force Reductions negotiations and was the Deputy Director of the Arms Control and Disarmament Agency. Dr. Lehman served as Chairman of the Board of Directors of Sperry Marine, Inc., and is a member of the Board of Directors of Sedgwick Group plc, Ball Corporation and ISO Inc., and is currently Vice Chairman of the Princess Grace Foundation, a director of OpiSail Foundation and a trustee of Spence School. KEITH OSTER, became a director of the Company upon consummation of the Recapitalization and is a Principal of Lehman and has been affiliated with Lehman for the past five years. Mr. Oster joined Lehman in 1992 and is principally responsible for financial structuring and analysis. Prior to joining Lehman, Mr. Oster was with the Carlyle Group, where he was responsible for analyzing acquisition opportunities and arranging debt financing, and was a Senior Financial Analyst with Prudential-Bache Capital Funding, working in the Mergers, Acquisitions and Leveraged Buyout Department. THOMAS G. POWNALL, became a director of the Company upon consummation of the Recapitalization and is a member of the investment advisory board of Lehman. Mr. Pownall was Chairman of the Board of Directors from 1983 until 1992 and Chief Executive Officer of Martin Marietta Corporation from 1982 until his retirement in 1988. Mr. Pownall joined Martin Marietta Corporation in 1963 as President of its Aerospace Advanced Planning unit, became President of Aerospace Operations and, in succession, Vice President and President and Chief Operating Officer of the corporation. Mr. Pownall is also a director of the Titan Corporation and Director Emeritus of Sundstrand Corporation, serves as a member of the advisory boards of Ferris, Baker Watts Incorporated and Sedgwich New York Metropolitan and as a director of the U.S. Naval Academy Foundation and a trustee of Salem-Teikyo University. JOSEPH STROUD, became a director of the Company in February 1998 and is a Principal of Lehman. Mr. Stroud joined Lehman in 1996 and is responsible for managing the financial and operational aspects of portfolio company value-enhancement. Prior to joining Lehman, Mr. Stroud was the Chief Financial Officer of Sperry Marine, Inc. from 1993 until the company was purchased by Litton Industries, Inc. in 1996. From 1989 to 1993, Mr. Stroud was Chief Financial Officer of the Accudyne and Kilgore Corporations. CERTAIN RIGHTS OF HOLDERS OF REDEEMABLE PREFERRED STOCK Under certain circumstances, the holders of the Redeemable Preferred Stock may have the right to elect a majority of the directors of Company. COMMITTEES OF THE BOARD OF DIRECTORS The Board of Directors has established a Compensation Committee, consisting of Messrs. Glickman, Oster and Pownall. The Compensation Committee makes recommendations concerning the salaries and incentive compensation of employees of, and consultants to, the Company, and oversees and administers the Company's stock option plans. 29 ITEM 11. EXECUTIVE COMPENSATION The information set forth in this section relates to the Chief Executive Officer of the Company and the four most highly compensated executive officers of the Company as of January 2, 1998. COMPENSATION SUMMARY The following summary compensation table sets forth for the fiscal years ended January 2, 1998, January 3, 1997 and December 29, 1995, the historical compensation for services to the Company of the Chief Executive Officer and the four most highly compensated executive officers (the "Named Executive Officers") as of January 2, 1998:
LONG-TERM COMPENSATION ANNUAL COMPENSATION(1) ------------- -------------------------------- SECURITIES SALARY BONUS OTHER UNDERLYING NAME AND PRINCIPAL POSITION FISCAL YEAR ($) ($)(2) ($)(3) OPTIONS - -------------------------------------------------------- ----------- --------- --------- ---------- ------------- Rocco C. Genovese....................................... 1997 196,925 317,500 5,579,314 150,000 President and Chief 1996 180,050 150,000 -- 336,000 Executive Officer 1995 189,614 120,000 -- 0 Reed C. Wolthausen...................................... 1997 148,800 237,000 3,201,004 100,000 Senior Vice President and 1996 141,378 100,000 -- 224,000 General Manager--Silicone Products 1995 133,664 60,000 -- 0 Robert F. Pitman........................................ 1997 103,808 77,500 584,815 7,500 Vice President and 1996 90,750 27,500 -- 0 Technical Director--San Jose 1995 84,273 22,500 -- 0 David E. Worthington.................................... 1997 95,166 100,000 393,766 10,000 Vice President--Finance 1996 90,794 25,000 -- 0 1995 87,791 20,000 -- 0 Robert Engle............................................ 1997 94,231 67,500 373,834 7,500 Vice President--Operations--Silicone 1996 89,342 25,000 -- 0 Products 1995 91,020 17,500 -- 0
- ------------------------ (1) Perquisites and other personal benefits paid in 1997 for the Named Executive Officers aggregated less than the lesser of $50,000 and 10% of the total annual salary and bonus set forth in the columns entitled "Salary" and "Bonus" for each named executive officer and, accordingly, are omitted from the table. (2) Annual bonuses are indicated for the year in which they were earned and accrued. Annual bonuses for any year are generally paid in the following fiscal year. (3) Represents the compensation component of the consideration paid to the executives for their stock options in the Company in connection with the Recapitalization. 30 The following table summarizes options granted in 1997 to the Named Executive Officers. OPTIONS GRANTED IN 1997
INDIVIDUAL GRANTS(1) --------------------------------------------------------- PERCENTAGE OF SHARES TOTAL OPTIONS UNDERLYING GRANTED TO EXERCISE PRICE EXPIRATION NAME OPTIONS EMPLOYEES PER SHARE DATE - --------------------------------------------------------- ----------- ------------- --------------- ------------ Rocco C. Genovese........................................ 150,000 40.5% $ 6.50 12/19/2007 Reed C. Wolthausen....................................... 100,000 27.0% $ 6.50 12/19/2007 Robert F. Pitman......................................... 7,500 2.0% $ 6.50 12/19/2007 David E. Worthington..................................... 10,000 2.7% $ 6.50 12/19/2007 Robert G. Engle.......................................... 7,500 2.0% $ 6.50 12/19/2007
- ------------------------ (1) All vested options outstanding immediately prior to the Recapitalization were cancelled and converted into the right to receive approximately $9.33 per share (the "Recapitalization Consideration") less the applicable exercise price. The following table summarizes information with respect to the year-end values of all options held by Named Executive Officers. AGGREGATE OPTION PURCHASES IN LAST FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES UNDERLYING UNEXERCISED VALUE OF OPTIONS AT FISCAL UNEXERCISED YEAR-END (#) IN-THE-MONEY SHARES ACQUIRED VALUE REALIZED EXERCISABLE/ OPTIONS AT FISCAL NAME ON EXERCISE $ UNEXERCISABLE YEAR-END ($)(1) - ------------------------------------------ ----------------- --------------- ------------------------ ------------------- Rocco C. Genovese......................... 0 0 0/150,000 $ 0 Reed C. Wolthausen........................ 0 0 0/100,000 $ 0 Robert F. Pitman.......................... 0 0 0/7,500 $ 0 David E. Worthington...................... 0 0 0/10,000 $ 0 Robert G. Engle........................... 0 0 0/7,500 $ 0
- ------------------------ (1) There is no public market for the Company's Common Stock. The Company estimates that the market value for its Common Stock is $6.50 per share. COMPENSATION OF DIRECTORS None of the directors who are officers of the Company receives any compensation directly for their service on the Company's Board of Directors. All other directors receive customary directors' fees for their services. In addition, the Company pays Lehman certain fees for various management, consulting and financial planning services, including assistance in strategic planning, providing market and financial analyses, negotiating and structuring financing and exploring expansion opportunities. See "Certain Relationships and Related Transactions." EMPLOYMENT AGREEMENTS In connection with the Recapitalization, the Company entered into employment agreements (each, an "Employment Agreement") with two key executives. Generally, each Employment Agreement provides for the executive's continued employment with the Company in his position prior to the execution of the Employment Agreement for a period of two years from the date of the Employment Agreement, renewable by mutual agreement for successive one-year terms, at an annual salary, bonus and with such other employment-related benefits comparable to those received by such executive immediately before the execution of the Employment Agreement. 31 If the executive is terminated for Cause (as defined in the Employment Agreement) or voluntarily terminates his employment prior to the expiration of the then-current term, the executive will be entitled to receive unpaid compensation through the date of his termination or the date that is 30 days after notice of termination is given by the Company, whichever occurs later. If the executive's employment is terminated by the Company for any reason other than for Cause or the executive dies or is unable to perform his duties due to disability for a period of 90 consecutive days, the executive will be entitled to receive all compensation that would be due through the end of the then-current term, to the extent unpaid on the date of termination. Each Employment Agreement contains provisions prohibiting the executive, during the period of his employment with the Company and, for two years thereafter, from owning, managing, operating, financing, joining or controlling, directly or indirectly, any business entity that is, at the time of the executive's initial involvement, in competition with the Company in any business then or thereafter conducted by the Company. Each Employment Agreement also contains provisions requiring the executive to maintain the confidentiality of certain information related to the Company during the period of his employment with the Company and, under certain circumstances, for two years thereafter. Each Employment Agreement further provides that any proposals or ideas developed by the executive or that are submitted by the executive to the Company during the term of the Employment Agreement, whether or not exploited or accepted by the Company, are the property of the Company and may not be exploited by the executive except in compliance with the Company's policy on conflicts of interest. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information regarding the ownership of the Company's Common Stock as of March 15, 1998 by (i) each director, (ii) each of the executive officers of the Company, (iii) all executive officers and directors as a group and (iv) each person who is the beneficial owner of more than 5% of the outstanding Common Stock of the Company.
NUMBER PERCENTAGE OF OF SHARES NAME OF INDIVIDUAL OR ENTITY(1) SHARES(2) OUTSTANDING(3) - ---------------------------------------------------------------- ----------- -------------- JFLEI(4)........................................................ 3,134,298 65.0% John F. Lehman(5)............................................... 3,134,298 65.0 George Sawyer(5)................................................ 3,134,298 65.0 Donald Glickman(5).............................................. 3,134,298 65.0 Keith Oster(5).................................................. 3,134,298 65.0 Joseph A. Stroud(5)............................................. 3,134,298 65.0 Rocco C. Genovese............................................... 241,000 5.0 Reed C. Wolthausen.............................................. 193,602 4.0 David E. Worthington............................................ 14,500 * Robert F. Pitman................................................ 8,600 * Craig A. Carnes................................................. 5,300 * Ronald A. Stieben............................................... 1,100 * Robert F. Engle................................................. 5,300 * Hisham Alameddine............................................... 4,300 * Oliver C. Boileau, Jr.(6)....................................... -- -- Thomas G. Pownall(7)............................................ -- -- Bruce D. Gorchow(8)............................................. -- -- Jackson National(9)............................................. 428,444 8.9 MassMutual(9)................................................... 428,444 8.9 Paribas(9)...................................................... 107,112 2.2 All directors and executive officers as a group (16 persons)....................................... 3,608,000 74.9%
- ------------------------ * Less than 1% 32 (1) The address of JFLEI and Messrs. Lehman, Sawyer, Glickman, Oster and Stroud is 2001 Jefferson Davis Highway, Suite 607, Arlington, Virginia 22202. The address of Jackson National and Mr. Gorchow is 225 West Wacker Drive, Chicago, Illinois 60606. The address of MassMutual is 1295 State Street, Springfield, Massachusetts 01111. The address of Paribas is 787 Seventh Avenue, New York, New York 10019. (2) As used in this table, beneficial ownership means the sole or shared power to vote, or to direct the voting of a security, or the sole or shared power to dispose, or direct the disposition of, a security. (3) Based on 3,857,000 shares of the Company's Common Stock outstanding and 964,000 shares of the Company's Common Stock underlying options or warrants held by that person exercisable within 60 days after March 15, 1998. The calculations do not include shares issuable upon exercise of certain options granted to management of the Company that are not exercisable within 60 days after March 15, 1998. (4) JFLEI is a Delaware limited partnership managed by Lehman, which is an affiliate of the general partner of JFLEI. Each of Messrs. Lehman, Glickman, Sawyer, Oster and Stroud, either directly (whether through ownership interest or position) or through one or more intermediaries, may be deemed to control Lehman and such general partner. Lehman and such general partner may be deemed to control the voting and disposition of the shares of the Company Common Stock owned by JFLEI. Accordingly, for certain purposes, Messrs. Lehman, Glickman, Sawyer, Oster and Stroud may be deemed to be beneficial owners of the shares of the Company's Common Stock owned by JFLEI. (5) Includes the shares beneficially owned by JFLEI, of which Messrs. Lehman, Glickman, Sawyer, Oster and Stroud are affiliates. (6) Mr. Boileau is a limited partner of JFLEI. (7) Mr. Pownall is a limited partner of JFLEI and is on the investment advisory board of Lehman. (8) Mr. Gorchow is on the investment advisory board of Lehman. (9) All shares are obtainable upon the exercise of warrants. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS MANAGEMENT AGREEMENT Pursuant to the terms of the ten-year Management Agreement (the "Management Agreement") entered into between Lehman and the Company, (i) upon consummation of the Recapitalization, the Company paid Lehman fees in the amount of $1.5 million and (ii) the Company agreed to pay Lehman an annual management fee equal to $500,000, as may be adjusted from time to time subject to necessary board approval, that will commence accruing on October 1, 1998 and be payable in arrears on a quarterly basis commencing on January 1, 1999. SHAREHOLDERS AGREEMENT In connection with the Recapitalization, the Company, JFLEI, the Continuing Shareholders and, in their capacity as holders of the Warrants, Jackson National Life Insurance Company ("Jackson National"), Paribas North America, Inc. ("Paribas"), MassMutual Corporate Value Partners Limited, Massachusetts Mutual Life Insurance Company, MassMutual High Yield Partners LLC (collectively, "MassMutual") (collectively, the "Shareholders") entered into a Shareholders Agreement (the "Shareholders Agreement"), the principal terms of which are summarized below: CERTAIN VOTING RIGHTS OF HOLDERS OF REDEEMABLE PREFERRED STOCK. If at any time after October 15, 2000, any amount of cash dividends payable on the Redeemable Preferred Stock shall have been in arrears and unpaid for four or more successive Dividend Payment Dates, then the number of directors constituting the 33 Board of Directors shall, without further action, be increased by the Dividend Arrears Number (as defined below) and, in addition to any other rights to elect directors which the holders of Redeemable Preferred Stock may have, the holders of all outstanding shares of Redeemable Preferred Stock, voting separately as a class and to the exclusion of the holders of all other classes and series of stock of the Company, shall be entitled to elect the directors of the Company to fill such newly created directorships. If the Company shall fail to redeem shares of Redeemable Preferred Stock in accordance with the mandatory redemption provisions described above, then the number of directors constituting the Board of Directors shall, without further action, be increased by the Control Number (as defined below) and, in addition to any other rights to elect directors which the holders of Redeemable Preferred Stock may have, the holders of all outstanding shares of Redeemable Preferred Stock, voting separately as a class and to the exclusion of the holders of all other classes and series of stock of the Company, shall be entitled to elect the directors of the Company to fill such newly created directorships. "Dividend Arrears Number" shall mean such number of additional directors of the Company which, when added to the number of directors otherwise nominated by the holders of Redeemable Preferred Stock, shall result in the number of directors elected by or at the direction of the holders of Redeemable Preferred Stock constituting one-third of the members of the Board of Directors of the Company. "Control Number" shall mean such number of additional directors of the Company which, when added to the number of directors otherwise nominated and elected by the holders of Redeemable Preferred Stock, shall result in the number of directors nominated and elected by or at the direction of the holders of Redeemable Preferred Stock constituting a majority of the members of the Board of Directors of the Company. Any additional directors elected by the Redeemable Preferred Stock pursuant to the provisions described above shall remain in office until such time as (i) all such dividends in arrears are paid in full or (ii) all shares of Redeemable Preferred Stock shall have been redeemed pursuant to the mandatory redemption provisions described above, as the case may be. RESTRICTIONS ON TRANSFER. The shares of the Company's Common Stock held by each of the parties to the Shareholders Agreement, and certain of their transferees, are subject to restrictions on transfer. The shares of Common Stock may be transferred only to certain related transferees, including, (i) in the case of individual Shareholders, family members or their legal representatives or guardians, heirs and legatees and trusts, partnerships and corporations the sole beneficiaries, partners or shareholders, as the case may be, of which are family members, (ii) in the case of partnership Shareholders, the partners of such partnership, (iii) in the case of corporate Shareholders, affiliates of such corporation and (iv) transferees of shares sold in transactions complying with the applicable provisions of the Shareholder or Company Right of First Refusal or the Tag-along or Drag-Along Rights (as each term is defined below.) RIGHTS OF FIRST OFFER. If any Shareholder desires to transfer any shares of the Company's Common Stock or Warrants (other than pursuant to certain permitted transfers) and if such Shareholder has not received a bona fide offer from an unrelated third-party that such shareholder wishes to accept (a "Third-Party Offer"), all other Shareholders have a right of first offer (the "Right of First Offer") to purchase the shares or warrants (the "Subject Shares") upon such terms and subject to such conditions as are set forth in a notice (a "First Offer Notice") sent by the selling Shareholder to such other Shareholders. If the Shareholders elect to exercise their Rights of First Offer with respect to less than all of the Subject Shares, the Company has a right to purchase all of the Subject Shares that the Shareholders have not elected to purchase. If the Shareholders receiving the First Offer Notice and the Company will exercise their respective rights of first offer with respect to less than all of the Subject Shares, the selling Shareholder may solicit Third-Party Offers to purchase all (but not less than all) of the Subject Shares upon such terms and subject to such conditions as are, in the aggregate, no less favorable to the selling Shareholder than those set forth in the First Offer Notice. 34 SUBSCRIPTION OFFER WITH RESPECT TO PRIMARY ISSUANCES. The Company will not be permitted to issue equity securities, or securities convertible into equity securities to JFLEI or to any of its affiliates unless the Company has offered to issue to each of the other Shareholders, on a pro rata basis, an opportunity to purchase such securities on the same terms, including price, and subject to the same conditions as those applicable to JFLEI and/or its affiliate. TAG-ALONG RIGHTS. The Shareholders Agreement provides that, if the Shareholders and the Company fail to exercise their respective rights of first refusal with respect to all of the Subject Shares, the Shareholders have the right to "tag along" (the "Tag-Along Right") upon the sale of the Company's Common Stock by JFLEI pursuant to a Third-Party Offer. DRAG-ALONG RIGHTS. The Shareholders Agreement provides that if one or more Shareholders holding a majority of the Company's Common Stock (the "Majority Shareholders") propose to sell all of the Common Stock owned by the Majority Shareholders, the Majority Shareholders have the right (the "Drag-Along Right") to compel the other Shareholders to sell all of the shares of Common Stock held by such other Shareholders upon the same terms and subject to the same conditions as the terms and conditions applicable to the sale by the Majority Shareholders. MERGER. The Shareholders Agreement provides that the Company may not enter into any merger, consolidation or similar business combination unless the terms of such merger provide for all Shareholders to receive the same consideration for their shares of Common Stock. REGISTERED OFFERINGS. The shares of Common Stock may be transferred in a bona fide public offering for cash pursuant to an effective registration statement (a "Registered Offering") without compliance with the provisions of the Shareholders Agreement related to the Right of First Refusal or the Tag-Along or Drag-Along Rights. LEGENDS. The shares of Common Stock subject to the Shareholders Agreement bear a legend related to the Right of First Refusal and the Tag-Along and Drag-Along Rights, which legends will be removed when the shares of Common Stock are, pursuant to the terms of the Shareholders Agreement, no longer subject to the restrictions on transfer imposed by the Shareholders Agreement. REGISTRATION RIGHTS. JFLEI and certain other shareholders are entitled to one "demand" and unlimited piggyback registration rights, subject to additional customary rights and limitations. The term of the Shareholders Agreement is the earlier of (i) August 20, 2007, (ii) the date on which none of the Shareholders nor any of their permitted transferees are subject to the terms of the Shareholders Agreement, (iii) the date on which none of the shares of Common Stock are subject to the restrictions on transfer imposed by the Shareholders Agreement or (iv) the consummation of a Registered Offering for an aggregate offering price of $25.0 million or more. INDEMNIFICATION OF OFFICERS AND DIRECTORS The Articles of Incorporation of the Company contain provisions eliminating the personal liability of directors for monetary damages for breaches of their duty of care, except in certain prescribed circumstances. The Bylaws of the Company also provide that directors and officers will be indemnified to the fullest extent authorized by California law, as it now stands or may in the future be amended, against all expenses and liabilities reasonably incurred in connection with service for or on behalf of the Company. The Bylaws of the Company provide that the rights of directors and officers to indemnification is not exclusive of any other right now possessed or hereinafter acquired under any statute, agreement or otherwise. 35 MANAGEMENT PARTICIPATION IN THE RECAPITALIZATION The executive officers and directors of the Company received a total of approximately $13.8 million, representing the Recapitalization Consideration. Certain executive officers and directors of the Company also retained shares of the Company's common stock and did not convert such shares into the right to receive the Recapitalization Consideration. Certain of the directors and executive officers of the Company held options to purchase the Company's Common Stock that were terminated upon the effectiveness of the Merger and, as to a portion of which, such persons received cash pursuant to the terms of the Merger Agreement. See "Executive Compensation" and "Security Ownership of Certain Beneficial Owners and Management." PART IV ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(1) Consolidated Financial Statements: The following consolidated financial statements of the Company are included in response to Item 8 of this report.
PAGE REFERENCE FORM 10-K -------------- Report of Ernst & Young LLP, Independent Auditors................................................. F-2 Consolidated Statements of Operations for the three fiscal years ended January 2, 1998............ F-3 Consolidated Balance Sheets at January 3, 1997 and January 2, 1998................................ F-4 Consolidated Statements of Shareholders' Equity (Deficit) for the three fiscal years ended January 2, 1998......................................................................................... F-5 Consolidated Statements of Cash Flows for the three years ended January 2, 1998................... F-6 Notes to Consolidated Financial Statements........................................................ F-7 (a)(2) Consolidated Financial Statement Schedules: Report of Ernst & Young LLP, Independent Auditors................................................. S-2 Schedule II--Valuation and Qualifying Accounts.................................................... S-3
Schedules other than those listed above have been omitted since they are either not required, not applicable or the information is otherwise included. (b) Reports on Form 8-K. None. (c) Exhibits 3.1 Articles of Incorporation of the Company (1) 3.2 Bylaws of the Company (1) 3.3 Articles of Incorporation of Burke Flooring Products, Inc. (1) 3.4 Bylaws of Burke Flooring Products, Inc. (1) 3.5 Articles of Incorporation of Burke Rubber Company, Inc. (1) 3.6 Bylaws of Burke Rubber Company, Inc. (1) 3.7 Articles of Incorporation of Burke Custom Processing, Inc. (1)
36 3.8 Bylaws of Burke Custom Processing, Inc. (1) 4.1 Indenture among the Company, the Subsidiary Guarantors and United States Trust Company of New York, dated as of August 20, 1997. 4.2 Form of Note (included in Exhibit 4.1). 4.3 Registration Rights Agreement among the Company and the Holders, dated as of August 20, 1997. 10.1 Loan and Security Agreement between the Company, the Lenders and NationsBank, N.A., dated as of August 20, 1997. 10.2 Revolving Notes from the Company to each of the Lenders. 10.3 Subsidiary Guaranty between the Subsidiaries and NationsBank, N.A., dated as of August 20, 1997. 10.4 Subsidiary Security Agreement between the Subsidiaries and NationsBank, N.A., dated as of August 20, 1997. 10.5 Stock Pledge Agreement between the Company and NationsBank, N.A., dated as of August 20, 1997. 10.6 Investment Agreement among the Company and the preferred shareholders, dated as of August 20, 1997. 10.7 Shareholders' Agreement among the Company, the warrantholders and the shareholders, dated as of August 20, 1997. 10.8 Shareholders' Registration Rights Agreement among the Company and the shareholders, dated as of August 20, 1997. (1) 10.9 Warrantholders' Registration Rights Agreement among the Company and the warrantholders dated as of August 20, 1997. 10.10 Warrant Certificates between the Company and each of the warrantholders. 10.11 Management Agreement between the Company and J.F. Lehman & Company. 10.12 Lease Agreement between the Company and Senter Properties, LLC for the premises at 2049 Senter Road, San Jose, California, dated April 30, 1997. 10.13 Lease Agreement between the Company and SSMRT Bensenville Industrial Park (3), Inc. for the premises at 870 Thomas Drive, Bensenville, Illinois, dated May 1, 1996. (1) 10.14 Lease Agreement between the Company and Lincoln Property Company for the premises at 13767 Freeway Drive, Santa Fe Springs, California, dated October 20, 1995. (1) 10.15 Lease Agreement between the Company and Donald M. Hypes for the premises at 14910 Carmenita Boulevard, Norwalk, California, dated April 25, 1983. (1) 10.16 Lease Agreement between S & M Development Co., a general partnership, for the premises at 13615 Excelsior Drive, Santa Fe Springs, California, dated March 29, 1996. (1) 10.17 Lease Agreement between the Company and Stephen S. Gray, the duly appointed Chapter 7 trustee of the Estate of Haskon Corporation, for the premises at 336 Weir Street, Taunton, Massachusetts, dated June 5, 1995. (1) 10.18 Sublease Agreement between Burke Rubber Company, Inc. and Westland Technologies, Inc. for the premises at 107 South Riverside Drive, Modesto, California, dated February 20, 1992. (1) 10.19 Service Agreement between the Company and Westland Technologies, Inc., dated June 27, 1996. 10.20 Stock Purchase Agreement between the Company, Mercer Products Company, Inc. and Sovereign Specialty Chemicals, Inc., dated March 5, 1998.
37 12.1 Computation of Ratios of Earnings to Fixed Charges and Combined Fixed Charges and Preferred Stock Dividends. 21. Subsidiaries of the Company. (1) 27. Financial Data Schedules.
- ------------------------ (1) Incorporated by reference to registrant's Registration Statement on Form S-4, File No. 333-36675. SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT. No annual report or proxy material covering the Company's last fiscal year has been or will be sent to security holders of the Company. 38 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE --------- BURKE INDUSTRIES, INC. AND SUBSIDIARIES Report of Ernst & Young LLP, Independent Auditors.......................................................... F-2 Consolidated Statements of Operations for the three fiscal years ended January 2, 1998..................... F-3 Consolidated Balance Sheets at January 3, 1997 and January 2, 1998......................................... F-4 Consolidated Statements of Shareholders' Equity (Deficit) for the three fiscal years ended January 2, 1998..................................................................................................... F-5 Consolidated Statements of Cash Flows for the three fiscal years ended January 2, 1998..................... F-6 Notes to Consolidated Financial Statements................................................................. F-7
F-1 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors and Shareholders Burke Industries, Inc. and Subsidiaries We have audited the accompanying consolidated balance sheets of Burke Industries, Inc. and subsidiaries as of January 2, 1998 and January 3, 1997, and the related consolidated statements of operations, shareholders' equity (deficit), and cash flows for each of the three fiscal years in the period ended January 2, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Burke Industries, Inc. and subsidiaries at January 2, 1998 and January 3, 1997, and the consolidated results of their operations and their cash flows for each of the three fiscal years in the period ended January 2, 1998, in conformity with generally accepted accounting principles. San Jose, California ERNST & YOUNG LLP February 26, 1998 F-2 BURKE INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
FISCAL YEARS ENDED ------------------------------- 1997 1996 1995 --------- --------- --------- (IN THOUSANDS) Net sales........................................................................ $ 90,228 $ 72,466 $ 68,411 Costs and expenses: Cost of sales.................................................................. 62,917 49,689 49,226 Selling, general and administrative............................................ 12,238 11,610 10,212 Transaction expenses........................................................... 1,321 -- -- Stock option purchase.......................................................... 14,105 -- -- --------- --------- --------- (Loss) income from operations.................................................... (353) 11,167 8,973 Interest expense, net............................................................ 5,408 2,668 3,007 --------- --------- --------- (Loss) income before income tax (benefit) provision, discontinued operation, and extraordinary loss............................................................. (5,761) 8,499 5,966 Income tax (benefit) provision................................................... (1,818) 3,466 3,393 --------- --------- --------- (Loss) income from continuing operations before discontinued operation and extraordinary loss............................................... (3,943) 5,033 2,573 Loss from discontinued operation, net of income tax benefit of $205 in 1996, and $443 in 1995.............................................. -- (308) (664) Loss on disposal of discontinued operation, net of income tax benefit of $356............................................................ -- (624) -- Extraordinary loss on debt settlement, net of income tax benefit of $547............................................................ -- -- (815) --------- --------- --------- Net (loss) income................................................................ $ (3,943) $ 4,101 $ 1,094 --------- --------- --------- --------- --------- ---------
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. F-3 BURKE INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
FISCAL YEAR -------------------- 1997 1996 --------- --------- (DOLLARS IN THOUSANDS) ASSETS Current assets: Cash and cash equivalents................................................................. $ 11,563 $ -- Restricted cash........................................................................... 1,070 -- Trade accounts receivable, less allowance of $334 in 1997 and $189 in 1996................ 11,186 9,155 Inventories............................................................................... 11,187 8,616 Prepaid expenses and other current assets................................................. 1,056 630 Deferred income tax assets................................................................ 2,845 1,014 Refundable income taxes................................................................... 1,639 -- --------- --------- Total current assets.................................................................. 40,546 19,415 Property, plant, and equipment: Land and improvements..................................................................... 1,884 1,884 Buildings and improvements................................................................ 9,151 9,151 Equipment................................................................................. 13,007 12,329 Leasehold improvements.................................................................... 606 555 --------- --------- 24,648 23,919 Accumulated depreciation and amortization................................................. 10,536 9,101 --------- --------- 14,112 14,818 Construction-in-process................................................................... 908 183 --------- --------- 15,020 15,001 Other assets: Prepaid pension cost...................................................................... 501 542 Goodwill, net............................................................................. 1,465 1,529 Note receivable from an affiliate of the principal shareholders........................... -- 4,066 Deferred financing costs, net............................................................. 5,210 -- Other assets.............................................................................. 95 120 --------- --------- 7,271 6,257 --------- --------- Total assets.......................................................................... $ 62,837 $ 40,673 --------- --------- --------- --------- LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Current liabilities: Checks outstanding in excess of funds deposited........................................... $ -- $ 828 Trade accounts payable and accrued expenses............................................... 5,489 5,656 Accrued compensation and related liabilities.............................................. 2,086 1,937 Accrued interest.......................................................................... 4,347 798 Payable to shareholders................................................................... 5,882 -- Income taxes payable...................................................................... 1,064 2,468 Current portion of long-term obligations.................................................. -- 2,400 --------- --------- Total current liabilities............................................................. 18,868 14,087 Senior notes................................................................................ 110,000 -- Long-term obligations, less current portion................................................. -- 16,469 Other noncurrent liabilities................................................................ 420 720 Deferred income tax liabilities............................................................. 3,891 3,457 Subordinated debt........................................................................... -- 1,657 Preferred stock, no par value; 50,000 shares authorized; 30,000 Series A Redeemable shares designated; 16,000 Series A shares issued and outstanding; 5,000 Series B Redeemable shares designated; 2,000 Series B shares issued and outstanding........................... 16,148 -- Shareholders' equity (deficit): Class A common stock, no par value: Authorized shares--20,000,000 Issued and outstanding shares--3,857,000 in 1997 and 9,377,000 in 1996.................. 25,464 6,716 Accumulated deficit....................................................................... (111,954) (2,433) --------- --------- Total shareholders' equity (deficit).................................................. (86,490) 4,283 --------- --------- Total liabilities and shareholders' equity (deficit)........................................ $ 62,837 $ 40,673 --------- --------- --------- ---------
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. F-4 BURKE INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
CLASS A TOTAL COMMON STOCK SHAREHOLDERS' ---------------------- ACCUMULATED EQUITY SHARES AMOUNT DEFICIT (DEFICIT) --------- ----------- ------------ ------------- (IN THOUSANDS) Balance at fiscal year end 1994............................... 10,019 $ 6,649 $ (5,800) $ 849 Net income.................................................. -- -- 1,094 1,094 Increase in value of shareholder warrants................... -- 587 (587) -- Repurchase of stock......................................... (588) (453) -- (453) Repurchase of warrants...................................... -- (1,150) -- (1,150) --------- ----------- ------------ ------------- Balance at fiscal year end 1995............................... 9,431 5,633 (5,293) 340 Net income.................................................. -- -- 4,101 4,101 Proceeds from sales of shares through employee stock plans..................................................... 181 77 -- 77 Increase in value of shareholder warrants................... -- 1,241 (1,241) -- Repurchase of stock......................................... (235) (235) -- (235) --------- ----------- ------------ ------------- Balance at fiscal year end 1996............................... 9,377 6,716 (2,433) 4,283 Net loss.................................................... -- -- (3,943) (3,943) Proceeds from sales of shares through employee stock plans..................................................... 22 10 -- 10 Increase in value of shareholder warrants................... -- 5,100 (5,100) -- Accretion of preferred stock discount....................... -- -- (89) (89) Preferred stock dividend in kind............................ -- -- (665) (665) Common stock warrant issued on sale of preferred stock...... -- -- 2,500 2,500 Proceeds from sale of common stock, net of issuance costs... 3,134 18,724 -- 18,724 Recapitalization of company................................. (8,676) (5,086) (102,224) (107,310) --------- ----------- ------------ ------------- Balance at fiscal year end 1997............................... 3,857 $ 25,464 $ (111,954) $ (86,490) --------- ----------- ------------ ------------- --------- ----------- ------------ -------------
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. F-5 BURKE INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEARS ENDED ------------------------------- 1997 1996 1995 --------- --------- --------- (IN THOUSANDS) OPERATING ACTIVITIES Net (loss) income................................................................. $ (3,943) $ 4,101 $ 1,094 Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities: Depreciation and amortization: Property, plant, and equipment................................................ 1,435 1,378 1,354 Goodwill...................................................................... 64 41 134 Debt discounts arising from warrants.......................................... 93 37 259 Interest on shareholder note.................................................. (240) -- -- Deferred financing costs...................................................... 229 -- -- Loss on disposal of discontinued operation...................................... -- 624 -- Extraordinary loss on debt settlement, noncash portion.......................... -- -- 1,362 Changes in net assets of discontinued operation................................. -- 1,401 (680) Changes in operating assets and liabilities: Trade accounts receivable..................................................... (2,031) 701 (4,326) Inventories................................................................... (2,571) (1,398) (2,539) Prepaid expenses and other current assets..................................... (436) (78) (68) Prepaid pension cost.......................................................... 41 83 66 Other assets.................................................................. 25 12 (31) Trade accounts payable and accrued expenses................................... 3,382 1,940 1,853 Accrued compensation and related liabilities.................................. 149 124 536 Deferred income taxes......................................................... (1,397) 241 (462) Income taxes payable.......................................................... (3,043) (103) 1,798 Other noncurrent liabilities.................................................. (300) 36 (142) --------- --------- --------- Net cash (used in) provided by operating activities............................... (8,543) 9,140 208 INVESTING ACTIVITIES Purchases of property, plant, and equipment....................................... (1,454) (1,684) (3,647) Proceeds from disposal of discontinued operation.................................. -- 1,818 -- Note receivable from affiliate of the principal shareholders...................... -- (4,066) -- Repayment of note receivable from affiliate of the principal shareholders......... 4,306 -- -- Proceeds from sale of equipment................................................... -- -- 123 --------- --------- --------- Net cash provided by (used in) investing activities............................... 2,852 (3,932) (3,524) FINANCING ACTIVITIES Restricted cash................................................................... (1,070) -- -- Checks outstanding in excess of funds deposited................................... (828) (888) 1,228 Borrowings of long-term debt...................................................... -- 79,516 101,393 Repayments and settlement of long-term debt and capital lease obligations......... (18,869) (83,678) (97,702) Payable to shareholders........................................................... 5,882 -- -- Repurchase of common stock and warrants........................................... -- (235) (1,603) Proceeds from sales of shares through employee stock plans........................ 10 77 -- Deferred financing costs.......................................................... (5,430) -- -- Repayment of subordinated debt.................................................... (1,750) -- -- Net recapitalization consideration................................................ (107,310) -- -- Issuance of senior notes.......................................................... 110,000 -- -- Issuance of preferred stock, net of issuance costs................................ 17,895 -- -- Issuance of common stock, net of issuance costs................................... 18,724 -- -- --------- --------- --------- Net cash provided by (used in) financing activities............................... 17,254 (5,208) 3,316 --------- --------- --------- Change in cash.................................................................... 11,563 -- -- Cash at beginning of year......................................................... -- -- -- --------- --------- --------- Cash at end of year............................................................... $ 11,563 $ -- $ -- --------- --------- --------- --------- --------- ---------
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. F-6 BURKE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION Burke Industries, Inc. and subsidiaries (the Company) develop, manufacture, and market various elastomer products for use in commercial and military applications. The Company operates within one industry segment, which includes the developing, manufacturing, and marketing of various elastomer products for use in commercial and military applications. The Company sells its products through a network of distributors or directly to customers in the construction, defense, and aerospace industries and other commercial markets, primarily in North America. The Company performs ongoing credit evaluations of its customers' financial condition and generally does not require collateral. One customer accounted for approximately 13% of net sales in fiscal year 1997 and 11% of net sales in fiscal year 1996. No other customers constituted 10% or more of net sales in any of the three fiscal years ended in 1997. Substantially all of the Company's hourly workers in San Jose, California are represented by the International Association of Machinists and Aerospace Workers through a collective bargaining agreement that expires October 2, 2000. The Company has renewed its collective bargaining agreement with United Electrical Radio and Machine Workers of America, who represent the Company's hourly workers in Tanton, Massachusetts through June 5, 2000. RECAPITALIZATION In August 1997, the Company entered into an Agreement and Plan of Merger (the Merger Agreement) pursuant to which the Company was recapitalized (the Recapitalization). Pursuant to the Merger Agreement, all shares of the Company's common stock, other than those retained by certain members of management and certain other shareholders (Continuing Shareholders), were converted into the right to receive cash based upon a formula. The Continuing Shareholders agreed to retain approximately 15% of the common equity of the Company. In order to finance the transactions contemplated by the Recapitalization, the Company (i) issued $110 million of senior notes in a debt offering (NOTE 4); (ii) received $20 million in cash from an investor group for common stock, and (iii) received $18 million in cash for the issuance of redeemable preferred stock (the Transactions). Pursuant to the terms of a ten-year Management Agreement entered into between the Company and its principal shareholder after completion of the Recapitalization transaction, the Company paid the shareholder a transaction fee of $1.0 million and the Company agreed to pay an annual management fee equal to $500,000 commencing October 1, 1997. The Company has four wholly owned subsidiaries, consisting of Burke Flooring Products, Inc., Burke Rubber Company, Inc., Burke Custom Processing, Inc., (the Guarantor Subsidiaries) and Burkeline Construction Company, Inc. (the Non-Guarantor Subsidiary). Each of the Guarantor Subsidiaries' guarantees of the Company's $110 million senior notes, is full, unconditional and joint and several. The Company's subsidiaries have no operations or assets and liabilities and therefore no separate financial statements of the Company's subsidiaries are presented. In connection with the above August 1997 transactions, the tax benefit the Company will receive associated with the cost to purchase options issued and outstanding under the Company's stock option plan, in addition to other tax savings associated with the transaction, will be distributed to the Company's F-7 BURKE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) continuing and former shareholders when realized by the Company. Accordingly, as part of the recapitalization the Company recognized a liability of $5,882,000 for the total estimated benefit to be realized. A lawsuit was filed by a former shareholder against the Company and certain of its current and former officers and directors. The former shareholder is asserting various claims in connection with the Company's repurchase of the former shareholders' shares prior to the Recapitalization. The Company believes that such claims are without merit and intends to vigorously defend such claims. Management believes the resolution of this matter will not have a material adverse effect on the financial position of the Company. ACCOUNTING PERIODS The Company's fiscal year ends on the Friday closest to December 31. The Company maintains a fifty-two/fifty-three week fiscal year cycle, which resulted in a fifty-two week year in fiscal 1995, a fifty-three week year in fiscal 1996, and a fifty-two week year in fiscal 1997. For convenience, the accompanying financial statements have been referred to as fiscal years ended 1995, 1996, and 1997 for the periods ended December 29, 1995 and January 3, 1997 and January 2, 1998, respectively. CONSOLIDATION The accompanying consolidated financial statements include the accounts of Burke Industries, Inc. and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS Cash and cash equivalents consist of demand deposit accounts with five banks. Restricted cash consists of a three month U.S. treasury bill held as security for an outstanding letter of credit. REVENUE RECOGNITION Revenue from sales of products is generally recognized upon shipment to customers. For contracts relating to certain products, a portion of the revenue is recognized upon completion of a part of the manufacturing process and upon customer acceptance. The remaining revenue is recognized upon completion of the manufacturing process and shipment. WARRANTY The Company generally warrants its roofing products for two years, for which the related costs are not significant. In addition, the Company sells extended warranties for ten to twenty years. Revenues received for extended warranties are deferred and amortized over the period in which warranty costs are expected F-8 BURKE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) to be incurred. Warranty reserves and deferred warranty revenues are included in accrued expenses and other noncurrent liabilities on the accompanying consolidated balance sheets. INVENTORIES Inventories are stated at the lower of cost (first-in, first-out method) or market. PROPERTY, PLANT, AND EQUIPMENT Property, plant, and equipment are stated at cost. Depreciation is computed over the estimated useful lives (three to forty years) of the assets using the straight-line method. Leasehold improvements are amortized by the straight-line method over the shorter of the estimated useful life of the asset or the term of the related lease. Amortization of assets under capital leases is included in depreciation expense. FINANCIAL INSTRUMENTS The carrying value of accounts receivable and payable and accrued liabilities approximates fair value due to the short-term maturities of these assets and liabilities. RECLASSIFICATIONS Certain amounts in the 1996 and 1995 financial statements have been reclassified to conform with the 1997 statement presentation. COMPREHENSIVE INCOME In June 1997, the Financial Accounting Standards Board (FASB) released Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (FAS 130). FAS 130 establishes standards for the reporting and display of comprehensive income and its components in a full set of general purpose financial statements and is effective for fiscal years beginning after December 15, 1997. SEGMENT INFORMATION In June 1997, the FASB released Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" (FAS 131). FAS 131 will change the way companies report selected segment information in annual financial statements and also requires those companies to report selected segment information in interim financial reports to stockholders. FAS 131 is effective for fiscal years beginning after December 15, 1997. The Company is currently evaluating the impact of the application of the new rules on the Company's consolidated financial statements. F-9 BURKE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. INVENTORIES Inventories consist of the following at the fiscal year ended:
1997 1996 --------- --------- (IN THOUSANDS) Raw materials............................................................ $ 4,626 $ 3,260 Work-in-process.......................................................... 1,593 1,433 Finished goods........................................................... 4,968 3,923 --------- --------- $ 11,187 $ 8,616 --------- --------- --------- ---------
3. GOODWILL AND LONG-LIVED ASSETS Goodwill represents the excess of the purchase price of acquired companies over the estimated fair value of the tangible and specifically identified intangible net assets acquired. In accordance with Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for the Long-Lived Assets to Be Disposed Of" (FAS 121), the carrying value of long-lived assets and related goodwill is reviewed if the facts and circumstances suggest that they may be impaired. If this review indicates that the carrying value of these assets will not be recoverable, as determined based on the undiscounted net cash flows of the entity acquired over the remaining amortization period, the Company's carrying value is reduced to its estimated fair value (based on an estimate of discounted future net cash flows). Goodwill is being amortized on a straight-line basis over forty years. Accumulated amortization totaled $367,000 and $303,000 at fiscal years ended 1997 and 1996, respectively. 4. LONG-TERM DEBT AND LEASE OBLIGATIONS In connection with the Recapitalization of the Company (NOTE 1), all outstanding borrowings under the existing bank line of credit agreement, term loans payable to bank, and subordinated notes were repaid and the Company issued $110 million of Senior Notes and entered into a new credit facility with a bank. SENIOR NOTES DUE 2007 The Senior Notes bear interest at a rate of 10% per annum. Interest on the Senior Notes is payable semiannually, commencing February 15, 1998. The Senior Notes mature on August 15, 2007. At any time on or before August 15, 2000, the Company may redeem up to 35% in aggregate principal amount of (i) the initial aggregate principal amount of the Senior Notes and (ii) the initial principal amount of any additional notes, on one or more occasions, with the net cash proceeds of one or more public equity offerings at a redemption price of 110% of the principal amount thereof, plus accrued and unpaid interest thereon to the redemption date, provided that at least 65% of the sum of (i) the initial aggregate principal amount of the Senior Notes and (ii) the initial aggregate principal amount of additional notes remain outstanding immediately after redemption. The Senior Notes are redeemable by the Company at stated redemption prices beginning in August 2002. The Senior Notes are general unsecured obligations of the Company and senior to all existing and future subordinated indebtedness of the Company. The obligations of the Company under the bank credit F-10 BURKE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. LONG-TERM DEBT AND LEASE OBLIGATIONS (CONTINUED) facility are secured by substantially all of the assets of the Company. Accordingly, such secured indebtedness will effectively rank senior to the Senior Notes to the extent of such assets. The Senior Notes restrict, among other things, the Company's ability to incur additional indebtedness, pay dividends or make certain other restricted payments, incur liens, sell preferred stock of subsidiaries, apply net proceeds from certain asset sales, merge or consolidate with any other person, sell, assign, transfer, lease, convey or otherwise dispose of substantially all of the assets of the Company or enter into certain transactions with affiliates. Since the Senior Notes were issued in August 1997, the Company believes the fair value of the Senior Notes at fiscal year ended 1997 approximates the carrying value of such debt at fiscal year ended 1997. BANK CREDIT FACILITY In connection with recapitalization, the Company entered into a Loan and Security Agreement with a bank to provide the Company with a $15.0 million revolving credit facility expiring August 20, 2002. No amounts are outstanding at fiscal year end 1997. Indebtedness of the Company under the agreement is secured by a first priority security interest in substantially all of the Company's assets. Indebtedness under the agreement bears interest at a floating rate of interest equal to, at the Company's option, the eurodollar rate for one, two, three or six months, plus 2.50% or the bank's prime rate. Advances under the agreement are limited to the lesser of (a) $15.0 million and (b)(i) 85% of eligible accounts receivable plus (ii) 50% of eligible inventory minus (iii) the aggregate amount of all undrawn letters of credit issued plus the aggregate amount of any unreimbursed drawings under any outstanding letters of credit. Letters of credit up to a maximum of $1.0 million may be issued under the bank credit facility. The credit agreement contains restrictions on the incurrence of debt, the sale of assets, mergers, acquisitions and other business combinations, voluntary prepayment of other debt of the Company, transactions with affiliates, investments, as well as prohibitions on the payment of dividends to, or the repurchase or redemption of stock from, shareholders, and various financial covenants, including covenants requiring the maintenance of fixed charge coverage. INTEREST EXPENSE Interest expense consists of the following:
FISCAL YEAR ENDED ------------------------------- 1997 1996 1995 --------- --------- --------- (IN THOUSANDS) Interest incurred................................................ $ 5,900 $ 2,771 $ 3,039 Capitalized...................................................... (29) (19) (30) Interest income.................................................. (463) (84) (2) --------- --------- --------- Interest expense, net............................................ $ 5,408 $ 2,668 $ 3,007 --------- --------- --------- --------- --------- ---------
F-11 BURKE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. LONG-TERM DEBT AND LEASE OBLIGATIONS (CONTINUED) Included in interest expense is $142,000, $212,000, and $1,108,000 of interest incurred on subordinated shareholder notes in fiscal years 1997, 1996, and 1995, respectively. There was no interest payable to these shareholders at fiscal years ended 1997 and 1996, respectively, and such subordinated notes were repaid in connection with the Recapitalization of the Company. DEFERRED FINANCING COSTS In connection with the issuance of the Senior Notes and bank credit facility agreement, the Company incurred debt issuance costs of $5,429,000 that are being amortized to interest expense over the term of the related debt. Accumulated amortization at fiscal year end 1997 is $219,000. LEASE OBLIGATIONS The Company also leases certain manufacturing, warehousing, and administrative space under noncancelable operating leases. At fiscal year ended 1997, future minimum payments under noncancelable operating leases are as follows: 1998................................................................ $ 1,040 1999................................................................ 937 2000................................................................ 847 2001................................................................ 387 2002................................................................ 295 Beyond 2002......................................................... 1,771 --------- $ 5,277 --------- ---------
Rental expense approximated $1,404,000, $1,143,000, and $1,006,000 in fiscal years 1997, 1996, and 1995, respectively. Rental expense is before sublease income of $316,000 in 1997 and $206,000 in 1996. Future sublease rental income commitments aggregated $1,301,000 at fiscal year ended 1997. PURCHASE OBLIGATIONS As of year end 1997, the Company had an agreement with a vendor to purchase inventory for approximately $900,000. The Company set up a letter of credit as collateral for the purchase. 5. REDEEMABLE PREFERRED STOCK In connection with the Recapitalization transaction, the Company issued 16,000 shares of redeemable preferred stock designated as Series A 11.5% Cumulative Redeemable Preferred Stock and 2,000 shares of redeemable preferred stock designated as Series B 11.5% Cumulative Redeemable Preferred Stock for cash proceeds of $18 million, less issuance costs of $106,000, less the $2.5 million value assigned to warrants to purchase common shares issued to holders of preferred stock. The excess of redemption value over the carrying value is being accreted by periodic charges to retained earnings (accumulated deficit) through February 2008. Dividends will be payable to holders of the redeemable preferred stock, at the annual rate per share of 11.5% times the sum of $1,000 and accrued but unpaid dividends. Dividends shall be payable at the annual F-12 BURKE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. REDEEMABLE PREFERRED STOCK (CONTINUED) rate per share of 0.115 shares of redeemable preferred stock through July 15, 2000, and in cash after July 15, 2000. Dividends will be payable quarterly on January 15, April 15, July 15, and October 15 of each year, commencing October 15, 1997. Dividends shall be fully cumulative and shall accrue on a quarterly basis. If at any time after July 15, 2000, the cash dividends payable on the redeemable preferred stock shall have been in arrears and unpaid for four or more successive dividend payment dates, then until the date on which all such dividends in arrears are paid in full, dividends shall accrue and be payable to the holders at the annual rate of 13.5% times the sum of $1,000 per share and accrued but unpaid dividends thereon. Upon payment in full of all dividends in arrears, cash dividends will thereafter be payable at the 11.5% annual rate set forth above. There were no dividends in arrears as of fiscal year ended 1997. Holders of shares of redeemable preferred stock shall be entitled to receive the stated liquidation value of $1,000 per share, plus an amount per share equal to any dividends accrued but unpaid, in the event of any liquidation, dissolution or winding up of the Company. After payment of the full amount of the liquidation preference, holders of shares of redeemable preferred stock will not be entitled to any further participation in any distribution of assets of the Company. The Company may, at its option, redeem at any time, all or any portion of the shares of the redeemable preferred stock, at a redemption price per share equal to 100% of the liquidation preference on the date of redemption. On February 20, 2008, the Company shall redeem any and all outstanding shares of redeemable preferred stock, at a redemption price per share equal to 100% of the liquidation preference. Upon the occurrence of a change of control (as defined), the redeemable preferred stock shall be redeemable at the option of the holders, at a redemption price per share equal to 100% of the liquidation preference. The holders of shares of redeemable preferred stock shall not be entitled to any voting rights. However, without the consent of the holders of at least two-thirds of the outstanding shares of redeemable preferred stock, the Company may not change the powers or preferences of the redeemable preferred stock, create, authorize or issue any shares of capital stock ranking senior or on a parity with the redeemable preferred stock or create, authorize or issue any shares of capital stock constituting junior securities, unless such junior securities are subordinate in right of payment to the redeemable preferred stock. If at any time after October 15, 2000, any amount of cash dividends payable on the Series A Redeemable Preferred Stock shall have been in arrears and unpaid for four or more successive dividend payment dates, then the holders of the Series A Redeemable Preferred Stock, shall have the right to elect the smallest number of directors constituting one-third of the authorized number of directors, and the holders of the common stock shall have the right to elect the remaining directors. If the Company fails to redeem shares of Series A Redeemable Preferred Stock in accordance with the mandatory redemption provisions described above, then the holders of the Series A Redeemable Preferred Stock shall have the right to elect the smallest number of directors constituting a majority of the authorized number of directors, and the holders of the common stock shall have the right to elect the remaining directors. F-13 BURKE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. REDEEMABLE PREFERRED STOCK (CONTINUED) The right of the holders of Series A Redeemable Preferred Stock to elect directors pursuant to the provisions described above shall continue until such time as all such dividends in arrears are paid in full or all shares of Series A Redeemable Preferred Stock shall have been redeemed pursuant to the mandatory redemption provisions. 6. SHAREHOLDERS' EQUITY COMMON STOCK At fiscal year ended 1997 a total of 964,000 shares of Class A common stock are reserved for the exercise of warrants and 500,000 shares are reserved under the 1997 Stock Option Plan. On October 10, 1995, the Company and a bank owning the warrants entered into a settlement agreement whereby the Company repurchased the outstanding warrants and shares held by the bank and repaid the senior subordinated debt owed to the bank. As a result of these transactions, an unamortized debt discount of $950,000 and settlement fees of $412,000 have been expensed. These amounts are shown as an extraordinary item in the 1995 income statement, net of tax. For shareholder warrants issued in connection with debt, the aggregate increase in the difference between the fair value of the Class A common stock and the exercise price of the shareholder warrants ($587,000 in 1995 and $1,241,000 in 1996) has been charged to accumulated deficit. In connection with the Recapitalization transaction, these shareholder warrants were repurchased and the resulting $5,100,000 increase in value was charged to accumulated deficit. On October 25, 1996, the Company loaned $4,000,000 to an affiliate of a then principal shareholder and such amount was repaid in connection with the Recapitalization transaction. The Company was charged an annual management fee by an affiliate of the then principal shareholders of $250,000 in fiscal years 1995 and 1996. F-14 BURKE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. SHAREHOLDERS' EQUITY (CONTINUED) STOCK OPTIONS Prior to the Recapitalization, the Company maintained the 1989 Stock Option Plan and granted nonqualified options not pursuant to a formal plan. In connection with the Recapitalization, all vested option holders received cash payment in cancellation of their options totalling $14.1 million and the Company recorded $14.1 million in compensation expense. All unvested options were canceled in connection with the Recapitalization. Under the 1997 Stock Option Plan (the Plan), incentive stock options to purchase up to a total of 500,000 shares of common stock may be granted to officers, directors, executives, and employees at the discretion of the Board of Directors. Incentive stock options must be granted at not less than one hundred percent of the fair market value of the shares of stock on the date of the granting of the option if the optionee is not a ten percent shareholder, or one hundred and ten percent of the fair market value of the shares of stock on the date of the granting of the option if the optionee is a ten percent shareholder. Options vest as determined by the Board of Directors. During December 1997, the Company granted incentive stock options to purchase 370,000 shares of common stock at $6.50 per share. These options vest over four years. A summary of all stock option activity is as follows:
WEIGHTED AVERAGE OPTIONS PRICE PER OUTSTANDING SHARE ------------- ----------- (IN THOUSANDS, EXCEPT PER SHARE PRICE) Balance at fiscal year ended 1994..................................... 1,378 $ 0.425 Granted............................................................. 25 $ 0.425 Exercised........................................................... -- $ -- Canceled............................................................ (144) $ 0.425 ------ Balance at fiscal year ended 1995..................................... 1,259 $ 0.425 Granted............................................................. 618 $ 1.500 Exercised........................................................... (181) $ 0.425 Canceled............................................................ (96) $ 0.425 ------ Balance at fiscal year ended 1996..................................... 1,600 $ 0.840 Granted............................................................. 370 $ 6.50 Exercised........................................................... (22) $ 0.425 Canceled............................................................ (1,578) $ 0.846 ------ Balance at fiscal year ended 1997..................................... 370 $ 6.50 ------ ------
The Company accounts for its stock option plan in accordance with the provisions of the Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB Opinion No. 25). In 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (FAS 123), that provides an alternative to APB Opinion No. 25. The Company will continue to account for its employee stock plans in accordance with the F-15 BURKE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. SHAREHOLDERS' EQUITY (CONTINUED) provisions of APB Opinion No. 25 with footnote disclosures of the material impact of FAS 123. The number of shares granted in fiscal years ended 1997, 1996, and 1995 is not material, therefore, the effect of applying the FAS 123 minimum value method to the Company's stock option grants would not result in pro forma net income materially different from historical amounts reported. Therefore, such pro forma information and weighted average assumptions specified in FAS 123 are not separately presented herein. Future pro forma net income results may be materially different from actual amounts reported. WARRANTS Warrants to purchase 964,000 shares of common stock of the Company at the initial exercise price of $4.67 per share were issued to the holders of the preferred stock. The warrants are immediately exercisable until February 20, 2008. The exercise price and number of Warrant Shares are both subject to adjustment in certain events. 7. DISCONTINUED OPERATION On June 28, 1996, the Company disposed of certain of the assets related to its custom-molded organic rubber products manufacturing operation for cash and future consideration. The assets were sold to a newly formed corporation that is not related to the Company. The 1996 loss from the discontinued operation includes results through June 28, 1996. Net sales of the discontinued operation were $4,279,000 and $8,984,000 in 1996 and 1995, respectively. 8. PENSION AND RETIREMENT PLANS The Company maintains a defined benefit pension plan covering substantially all of its hourly employees in San Jose, California. The benefits are based on years of service and the benefit credit rates stated in the provisions of the plan. The Company funds the plan at the minimum amount required to be paid under the provisions of the Employee Retirement and Income Security Act of 1976 (ERISA). Contributions are intended to provide for benefits attributed to service to date as well as for those expected to be earned in the future. The following table sets forth the plan's funded status and amounts recognized in the Company's consolidated balance sheets at fiscal year end:
1997 1996 --------- --------- (IN THOUSANDS) Actuarial present value of benefit obligations: Vested benefit obligation................................................ $ 2,894 $ 2,713 Nonvested benefit obligation............................................. 124 183 --------- --------- Accumulated benefit obligation............................................. $ 3,018 $ 2,896 --------- --------- --------- ---------
F-16 BURKE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. PENSION AND RETIREMENT PLANS (CONTINUED)
DECEMBER -------------------- 1997 1996 --------- --------- (IN THOUSANDS) Plan assets at fair value, primarily listed stocks and U.S. bonds.......... $ 3,066 $ 2,920 Projected benefit obligation............................................... 3,018 2,896 --------- --------- Plan assets in excess of projected benefit obligation...................... 48 24 Unrecognized net loss from past experience different from that assumed and effects of changes in assumptions........................................ 116 352 Prior service cost not yet recognized in net periodic pension cost......... 337 166 --------- --------- Prepaid pension cost....................................................... $ 501 $ 542 --------- --------- --------- ---------
Net periodic pension expense for the fiscal years ended 1997, 1996, and 1995 included the following components:
1997 1996 1995 --------- --------- --------- (IN THOUSANDS) Service cost--benefits earned during the year....................... $ 58 $ 65 $ 57 Interest cost on projected benefit obligation....................... 220 193 183 Actual return on plan assets........................................ (254) (233) (342) Net amortization and deferral....................................... 44 58 168 --------- --------- --------- Net periodic pension cost........................................... $ 68 $ 83 $ 66 --------- --------- --------- --------- --------- ---------
The weighted average discount rate used in determining the actuarial present value of the projected benefit obligation was 8.25% in 1997, 7.75% in 1996, and 7.00% in 1995. The expected long-term rate of return on plan assets was 9.0% for 1997, 8.5% for 1996, and 8.5% for 1995. The Company also maintains a defined contribution 401(k) plan covering substantially all of its other regular employees. The employees become eligible for participation after 1,000 hours of service. Participants may elect to contribute up to 20% of their compensation to this plan, subject to Internal Revenue Service (IRS) limits. The Company matches a portion of the employees' contribution. The Company contributed approximately $156,000, $113,000, and $105,000 to this plan in 1997, 1996, and 1995, respectively. F-17 BURKE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. INCOME TAXES The income tax provision (benefit) recognized in the consolidated statements of operations consists of the following:
1997 1996 1995 --------- --------- --------- (IN THOUSANDS) Current: Federal....................................................... $ (383) $ 2,171 $ 2,527 State......................................................... (38) 493 338 --------- --------- --------- (421) 2,664 2,865 Deferred: Federal....................................................... (1,211) 150 (407) State......................................................... (186) 91 (55) --------- --------- --------- (1,397) 241 (462) --------- --------- --------- $ (1,818) $ 2,905 $ 2,403 --------- --------- --------- --------- --------- ---------
In 1996 and 1997, the Company settled with the IRS certain issues relating to the Company's income tax returns for 1988 through 1990 and 1992 through 1993, respectively. As of fiscal year ended 1997, the Company had fully provided for the taxes and interest which are payable as a result of the settlements. A reconciliation of the income tax (benefit) provision at the U. S. federal statutory rate (34%) to the income tax (benefit) provision at the effective tax rate is as follows:
1997 1996 1995 --------- --------- --------- (IN THOUSANDS) Income taxes computed at the U.S. federal statutory rate........ $ (1,958) $ 2,382 $ 1,189 State taxes (net of federal effect)............................. (148) 385 187 Federal and state audit provision............................... 200 -- 1,000 Other individually immaterial items............................. 88 138 27 --------- --------- --------- Income tax (benefit) provision.................................. $ (1,818) $ 2,905 $ 2,403 --------- --------- --------- --------- --------- ---------
F-18 BURKE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. INCOME TAXES (CONTINUED) Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities at fiscal years ended 1997 and 1996 are as follows:
1997 1996 --------- --------- (IN THOUSANDS) Deferred tax liabilities: Increase in assets as a result of acquisition in 1988.................. $ (2,964) $ (3,064) Depreciation........................................................... (900) (380) Other.................................................................. (117) (115) --------- --------- Total deferred tax liabilities......................................... (3,981) (3,559) Deferred tax assets: Net operating loss carryforwards....................................... 1,853 -- Receivable allowances and inventory reserves........................... 433 387 State taxes............................................................ 1 199 Warranty reserve....................................................... 166 196 Accrued vacation....................................................... 291 255 Other.................................................................. 191 79 --------- --------- Total deferred tax assets................................................ 2,935 1,116 Valuation allowance...................................................... -- -- --------- --------- Net deferred tax liability............................................... $ (1,046) $ (2,443) --------- --------- --------- ---------
As of the end of fiscal 1997, the Company has federal and state net operating loss carryforwards of approximately $5.1 million and $2.3 million, respectively. The net operating loss carryforwards will expire in the years 2002 through 2012, if not utilized. Utilization of the net operating losses and credits may be subject to an annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986 and similar state provisions. The annual limitation may result in the expiration of net operating losses and credits before utilization. 10. SUPPLEMENTAL CASH FLOW INFORMATION
1997 1996 1995 --------- --------- --------- (IN THOUSANDS) Cash paid for interest.......................................... $ 2,059 $ 1,950 $ 2,683 Cash paid for income taxes...................................... $ 3,047 $ 2,771 $ 1,315 Note payable incurred in connection with asset acquisition...... $ -- $ -- $ 1,000
11. SUBSEQUENT EVENT (UNAUDITED) On March 5, 1998, the Company entered into a Stock Purchase Agreement with Sovereign Specialty Chemicals, Inc. (Sovereign), pursuant to which the Company will acquire from Sovereign all of the outstanding capital stock of its subsidiary Mercer Products Company, Inc., for a purchase price of $35.75 million to be paid in cash subject to working capital and other adjustments to exclude certain assets not acquired and liabilities not assumed. This transaction is expected to be accounted for under the purchase method of accounting. The expected sources of funds for this acquisition include the issuance of $30 million in Senior Notes and the issuance of $3 million in Convertible Preferred Stock, with the remainder of the funds from the Company's existing cash on hand. F-19 INDEX TO FINANCIAL STATEMENT SCHEDULES
PAGE ----- Report of Ernst & Young, LLP, Independent Auditors......................................................... S-2 Schedule II--Valuation and Qualifying Accounts............................................................. S-3
S-1 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We have audited the consolidated financial statements of Burke Industries, Inc. as of January 2, 1998 and January 3, 1997, and for each of the three years in the period ended January 2, 1998, and have issued our report thereon dated February 26, 1998. Our audits also included the financial statement schedule listed in the index at Item 14(a)(2). This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. ERNST & YOUNG LLP San Jose, California February 26, 1998 S-2 SCHEDULE II VALUATION & QUALIFYING ACCOUNTS BURKE INDUSTRIES INC. (IN THOUSANDS)
ADDITIONS BALANCE AT CHARGED TO BEGINNING OF COSTS AND (A) BALANCE AT DESCRIPTION PERIOD EXPENSES DEDUCTIONS END OF PERIOD - ------------------------------------------------------------ --------------- ------------- ------------- --------------- Allowance for doubtful accounts (deducted from accounts receivable) Year ended January 2, 1998................................ $ 189 $ 240 $ 95 $ 334 Year ended January 3, 1997................................ 336 225 372 189 Year ended December 29, 1995.............................. 95 367 126 336
- ------------------------ (a) Includes write-offs and reversals. S-3 EXHIBIT INDEX 3.1 Articles of Incorporation of the Company (1) 3.2 Bylaws of the Company (1) 3.3 Articles of Incorporation of Burke Flooring Products, Inc. (1) 3.4 Bylaws of Burke Flooring Products, Inc. (1) 3.5 Articles of Incorporation of Burke Rubber Company, Inc. (1) 3.6 Bylaws of Burke Rubber Company, Inc. (1) 3.7 Articles of Incorporation of Burke Custom Processing, Inc. (1) 3.8 Bylaws of Burke Custom Processing, Inc. (1) 4.1 Indenture among the Company, the Subsidiary Guarantors and United States Trust Company of New York, dated as of August 20, 1997. 4.2 Form of Note (included in Exhibit 4.1). 4.3 Registration Rights Agreement among the Company and the Holders, dated as of August 20, 1997. 10.1 Loan and Security Agreement between the Company, the Lenders and NationsBank, N.A., dated as of August 20, 1997. 10.2 Revolving Notes from the Company to each of the Lenders. 10.3 Subsidiary Guaranty between the Subsidiaries and NationsBank, N.A., dated as of August 20, 1997. 10.4 Subsidiary Security Agreement between the Subsidiaries and NationsBank, N.A., dated as of August 20, 1997. 10.5 Stock Pledge Agreement between the Company and NationsBank, N.A., dated as of August 20, 1997. 10.6 Investment Agreement among the Company and the preferred shareholders, dated as of August 20, 1997. 10.7 Shareholders' Agreement among the Company, the warrantholders and the shareholders, dated as of August 20, 1997. 10.8 Shareholders' Registration Rights Agreement among the Company and the shareholders, dated as of August 20, 1997. (1) 10.9 Warrantholders' Registration Rights Agreement among the Company and the warrantholders dated as of August 20, 1997. 10.10 Warrant Certificates between the Company and each of the warrantholders. 10.11 Management Agreement between the Company and J.F. Lehman & Company. 10.12 Lease Agreement between the Company and Senter Properties, LLC for the premises at 2049 Senter Road, San Jose, California, dated April 30, 1997. 10.13 Lease Agreement between the Company and SSMRT Bensenville Industrial Park (3), Inc. for the premises at 870 Thomas Drive, Bensenville, Illinois, dated May 1, 1996. (1) 10.14 Lease Agreement between the Company and Lincoln Property Company for the premises at 13767 Freeway Drive, Santa Fe Springs, California, dated October 20, 1995. (1) 10.15 Lease Agreement between the Company and Donald M. Hypes for the premises at 14910 Carmenita Boulevard, Norwalk, California, dated April 25, 1983. (1) 10.16 Lease Agreement between S & M Development Co., a general partnership, for the premises at 13615 Excelsior Drive, Santa Fe Springs, California, dated March 29, 1996. (1)
10.17 Lease Agreement between the Company and Stephen S. Gray, the duly appointed Chapter 7 trustee of the Estate of Haskon Corporation, for the premises at 336 Weir Street, Taunton, Massachusetts, dated June 5, 1995. (1) 10.18 Sublease Agreement between Burke Rubber Company, Inc. and Westland Technologies, Inc. for the premises at 107 South Riverside Drive, Modesto, California, dated February 20, 1992. (1) 10.19 Servicing Agreement between the Company and Westland Technologies, Inc., dated June 27, 1996. 10.20 Stock Purchase Agreement between the Company, Mercer Products Company, Inc. and Sovereign Specialty Chemicals, Inc., dated March 5, 1998. 12.1 Computation of Ratios of Earnings to Fixed Charges and Combined Fixed Charges and Preferred Stock Dividends. 21. Subsidiaries of the Company. (1) 27. Financial Data Schedules.
- ------------------------ (1) Incorporated by reference to registrant's Registration Statement on Form S-4, File No. 333-36675. EX-4.1 2 EXH 4.1 FORM OF INDENTURE EXHIBIT 4.1 EXECUTION COPY ____________________________________________________________________________ BURKE INDUSTRIES, INC., Issuer, THE SUBSIDIARY GUARANTORS NAMED HEREIN Subsidiary Guarantors and UNITED STATES TRUST COMPANY OF NEW YORK Trustee ____________________ INDENTURE Dated as of August 20, 1997 _____________________ $110,000,000 10% Senior Notes Due 2007 ____________________________________________________________________________ D-2 BURKE INDUSTRIES, INC. RECONCILIATION AND TIE BETWEEN TRUST INDENTURE ACT OF 1939 AND INDENTURE, DATED AS OF AUGUST 20, 1997 TRUST INDENTURE ACT SECTION INDENTURE SECTION Section 310(a)(1) ................................. 607 (a)(2) ................................. 607 (b) ................................. 608 Section 312(c) ................................. 701 Section 314(a) ................................. 703 (a)(4) ................................. 1008(a) (c)(1) ................................. 103 (c)(2) ................................. 103 (e) ................................. 103 Section 315(b) ................................. 601 Section 316(a)(last sentence) ................................. 101 ("Outstanding") (a)(1)(A) ................................. 502, 512 (a)(1)(B) ................................. 513 (b) ................................. 508 (c) ................................. 105(d) Section 317(a)(1) ................................. 503 (a)(2) ................................. 504 (b) ................................. 1003 Section 318(a) ................................. 111 TABLE OF CONTENTS PAGE PARTIES .............................................................. 1 RECITALS OF THE COMPANY ............................................... 1 ARTICLE ONE DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION SECTION 101. Definitions ....................................... 2 Acquired Indebtedness ........................................... 2 Act ............................................................. 2 Additional Notes ................................................ 2 Affiliate ....................................................... 2 Applicable Premium .............................................. 3 Asset Sale ...................................................... 3 Attributable Debt ............................................... 3 Average Life .................................................... 3 Bank Credit Agreement ........................................... 4 Banks ........................................................... 4 Board of Directors .............................................. 4 Board Resolution ................................................ 4 Borrowing Base .................................................. 4 Business Day .................................................... 4 Capital Stock ................................................... 4 Capitalized Lease Obligation .................................... 5 Change of Control ............................................... 5 Closing Date .................................................... 6 Commission ...................................................... 6 Common Stock .................................................... 6 Company ......................................................... 6 Company Request or Company Order ................................ 6 Consolidated Adjusted Net Income ................................ 6 Consolidated EBITDA ............................................. 7 Consolidated Net Worth .......................................... 7 Corporate Trust Office .......................................... 7 ____________________ Note: This table of contents shall not, for any purpose, be deemed to be a part of the Indenture. ii PAGE corporation ..................................................... 8 Default ......................................................... 8 Defaulted Interest .............................................. 8 Depositary ...................................................... 8 Disinterested Director .......................................... 8 Disqualified Stock .............................................. 8 Event of Default ................................................ 8 Exchange Act .................................................... 8 Exchange Offer .................................................. 8 Exchange Offer Registration Statement ........................... 9 Exchange Notes .................................................. 9 Federal Bankruptcy Code ......................................... 9 Fixed Charge Coverage Ratio ..................................... 9 Fixed Charges ................................................... 9 Generally Accepted Accounting Principles or GAAP ................ 9 Hedging Obligations ............................................. 9 Holder .......................................................... 9 Indebtedness .................................................... 9 Indenture ....................................................... 10 Indenture Obligations ........................................... 10 Initial Notes ................................................... 10 Interest Payment Date ........................................... 10 Investment ...................................................... 10 Lien ............................................................ 11 Maturity ........................................................ 11 Moody's ......................................................... 11 Net Cash Proceeds ............................................... 11 Non-U.S. Person ................................................. 12 Non-U.S. Restricted Subsidiary .................................. 12 Note Guarantee .................................................. 12 Notes ........................................................... 12 Offering ........................................................ 12 Officers' Certificate ........................................... 12 Opinion of Counsel .............................................. 12 Outstanding ..................................................... 12 Paying Agent .................................................... 13 Permitted Business .............................................. 13 Permitted Investments ........................................... 13 Person .......................................................... 14 Predecessor Note ................................................ 14 iii PAGE Preferred Stock ................................................. 15 Principals ...................................................... 15 Purchase Date ................................................... 15 Public Equity Offering .......................................... 15 Qualified Equity Interest ....................................... 15 QIB ............................................................. 15 Qualified Stock ................................................. 15 Redemption Date ................................................. 15 Redemption Price ................................................ 15 Register and Note Registrar ..................................... 15 Registrar ....................................................... 16 Registration Rights Agreement ................................... 16 Registration Statement .......................................... 16 Regular Record Date ............................................. 16 Regulation S .................................................... 16 Related Party ................................................... 16 Restricted Subsidiary ........................................... 16 Rule 144A ....................................................... 16 Sale and Leaseback Transaction .................................. 16 Securities Act .................................................. 16 Series A Preferred Stock ........................................ 16 Shelf Registration Statement .................................... 16 Significant Subsidiary .......................................... 17 S&P ............................................................. 17 Special Record Date ............................................. 17 Stated Maturity ................................................. 17 Subordinated Indebtedness ....................................... 17 Subsidiary ...................................................... 17 Subsidiary Guarantor ............................................ 17 Treasury Rate ................................................... 17 Trust Indenture Act or TIA ...................................... 18 Unrestricted Subsidiary ......................................... 18 Trustee ......................................................... 18 U.S. Restricted Subsidiary ...................................... 18 Voting Stock .................................................... 18 Wholly Owned Restricted Subsidiary .............................. 18 SECTION 102. Incorporation by Reference of Trust Indenture Act .. 18 SECTION 103. Compliance Certificates and Opinions ............... 19 SECTION 104. Form of Documents Delivered to Trustee ............. 20 SECTION 105. Acts of Holders .................................... 20 iv PAGE SECTION 106. Notices, Etc., to Trustee, Company and Subsidiary Guarantors .................................... 22 SECTION 107. Notice to Holders; Waiver .......................... 22 SECTION 108. Effect of Headings and Table of Contents ........... 23 SECTION 109. Successors and Assigns ............................. 23 SECTION 110. Separability Clause ................................ 23 SECTION 111. Benefits of Indenture .............................. 23 SECTION 112. Governing Law ...................................... 23 SECTION 113. Legal Holidays ..................................... 24 SECTION 114. No Recourse Against Others ......................... 24 ARTICLE TWO NOTE FORMS SECTION 201. Forms Generally .................................... 24 SECTION 202. Restrictive Legends ................................ 25 ARTICLE THREE THE NOTES SECTION 301. Title and Terms .................................... 27 SECTION 302. Denominations ...................................... 28 SECTION 303. Execution, Authentication, Delivery and Dating ..... 28 SECTION 304. Temporary Notes .................................... 29 SECTION 305. Registration, Registration of Transfer and Exchange .......................................... 30 SECTION 306. Book-Entry Provisions for Global Note .............. 31 SECTION 307. Special Transfer Provisions ........................ 32 SECTION 308. Mutilated, Destroyed, Lost and Stolen Notes ........ 34 SECTION 309. Payment of Interest; Interest Rights Preserved ..... 35 SECTION 310. Persons Deemed Owners .............................. 37 SECTION 311. Cancellation ....................................... 37 SECTION 312. Issuance of Additional Notes ....................... 37 SECTION 313. Computation of Interest ............................ 37 v PAGE ARTICLE FOUR SATISFACTION AND DISCHARGE SECTION 401. Satisfaction and Discharge of Indenture ............ 38 SECTION 402. Application of Trust Money ......................... 39 ARTICLE FIVE REMEDIES SECTION 501. Events of Default ................................... 39 SECTION 502. Acceleration of Maturity; Rescission and Annulment .. 41 SECTION 503. Collection of Indebtedness and Suits for Enforcement by Trustee ........................................ 42 SECTION 504. Trustee May File Proofs of Claim .................... 43 SECTION 505. Trustee May Enforce Claims Without Possession of Notes ............................................. 44 SECTION 506. Application of Money Collected ...................... 44 SECTION 507. Limitation on Suits ................................. 44 SECTION 508. Unconditional Right of Holders to Receive Principal, Premium and Interest .............................. 45 SECTION 509. Restoration of Rights and Remedies .................. 45 SECTION 510. Rights and Remedies Cumulative ...................... 45 SECTION 511. Delay or Omission Not Waiver ........................ 45 SECTION 512. Control by Holders .................................. 46 SECTION 513. Waiver of Past Defaults ............................. 46 SECTION 514. Waiver of Stay or Extension Laws .................... 46 ARTICLE SIX THE TRUSTEE SECTION 601. Notice of Defaults .................................. 47 SECTION 602. Certain Rights of Trustee ........................... 47 SECTION 603. Trustee Not Responsible for Recitals or Issuance of Notes .......................................... 48 SECTION 604. May Hold Notes ...................................... 49 SECTION 605. Money Held in Trust ................................. 49 SECTION 606. Compensation and Reimbursement ...................... 49 SECTION 607. Corporate Trustee Required; Eligibility ............. 50 SECTION 608. Resignation and Removal; Appointment of Successor ... 50 vi PAGE SECTION 609. Acceptance of Appointment by Successor .............. 52 SECTION 610. Merger, Conversion, Consolidation or Succession to Business .......................................... 52 ARTICLE SEVEN HOLDERS LISTS AND REPORTS BY TRUSTEE, COMPANY AND SUBSIDIARY GUARANTORS SECTION 701. Disclosure of Names and Addresses of Holders ........ 53 SECTION 702. Reports by Trustee .................................. 53 ARTICLE EIGHT CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE SECTION 801. Company May Consolidate, Etc., Only on Certain Terms ............................................. 53 SECTION 802. Successor Substituted ............................... 55 ARTICLE NINE SUPPLEMENTS AND AMENDMENTS TO INDENTURE AND NOTE GUARANTEES SECTION 901. Without Consent of Holders .......................... 55 SECTION 902. With Consent of Holders ............................. 56 SECTION 903. Execution of Supplemental Indentures ................ 57 SECTION 904. Effect of Supplemental Indentures ................... 58 SECTION 905. Conformity with Trust Indenture Act ................. 58 SECTION 906. Reference in Notes to Supplemental Indentures ....... 58 SECTION 907. Notice of Supplemental Indentures ................... 58 ARTICLE TEN COVENANTS SECTION 1001. Payment of Principal, Premium, if any, and Interest ......................................... 59 SECTION 1002. Maintenance of Office or Agency .................... 59 SECTION 1003. Money for Note Payments to Be Held in Trust ........ 59 SECTION 1004. Corporate Existence ................................ 61 vii PAGE SECTION 1005. Payment of Taxes and Other Claims .................. 61 SECTION 1006. Maintenance of Properties .......................... 61 SECTION 1007. Insurance .......................................... 62 SECTION 1008. Statement by Officers As to Default ................ 62 SECTION 1009. [INTENTIONALLY OMITTED] ............................ 62 SECTION 1010. Limitation on Indebtedness of Issuance of Disqualified Stock ............................... 62 SECTION 1011. Limitation on Restricted Payments .................. 65 SECTION 1012. Limitation on Issuances and Sales of Preferred Stock of Restricted Subsidiaries ................. 70 SECTION 1013. Limitation on Transactions with Affiliates ......... 70 SECTION 1014. Limitation on Liens ................................ 71 SECTION 1015. Purchase of Notes upon a Change of Control ......... 73 SECTION 1016. Limitation on Certain Asset Sales .................. 75 SECTION 1017. Unrestricted Subsidiaries .......................... 78 SECTION 1018. Limitation on Dividends and Other Payment Restrictions Affecting Restricted Subsidiaries ... 79 SECTION 1019. Waiver of Certain Covenants ........................ 80 SECTION 1020. Payment for Consent ................................ 80 SECTION 1021. Limitation on Guarantees of Indebtedness by Restricted Subsidiaries .......................... 80 SECTION 1022. Line of Business ................................... 81 SECTION 1023. Reports ............................................ 81 ARTICLE ELEVEN REDEMPTION OF NOTES SECTION 1101. Right of Redemption ................................. 82 SECTION 1102. Applicability of Article ............................ 82 SECTION 1103. Election to Redeem; Notice to Trustee ............... 82 SECTION 1104. Selection by Trustee of Notes to Be Redeemed ........ 83 SECTION 1105. Notice of Redemption ................................ 83 SECTION 1106. Deposit of Redemption Price ......................... 84 SECTION 1107. Notes Payable on Redemption Date .................... 84 SECTION 1108. Notes Redeemed in Part .............................. 85 viii PAGE ARTICLE TWELVE DEFEASANCE AND COVENANT DEFEASANCE SECTION 1201. Company Option to Effect Defeasance or Covenant Defeasance ............................... 85 SECTION 1202. Defeasance and Discharge ............................ 85 SECTION 1203. Covenant Defeasance ................................. 86 SECTION 1204. Conditions to Defeasance or Covenant Defeasance ..... 86 SECTION 1205. Deposited Money and U.S. Government Obligations to Be Held in Trust; Other Miscellaneous Provisions .. 87 SECTION 1206. Reinstatement ....................................... 88 ARTICLE THIRTEEN GUARANTEES SECTION 1301. Note Guarantees ..................................... 88 SECTION 1302. Execution and Delivery of Note Guarantee ............ 90 SECTION 1303. Severability ........................................ 90 SECTION 1304. Seniority of Guarantees ............................. 90 SECTION 1305. Limitation of Subsidiary Guarantor's Liability ...... 91 SECTION 1306. Contribution ........................................ 91 SECTION 1307. Release of a Subsidiary Guarantor ................... 92 SECTION 1308. Subsidiary Guarantors May Consolidate, Etc. on Certain Terms .................................. 92 SECTION 1309. Benefits Acknowledged ............................... 93 SECTION 1310. Issuance of Guarantees by Certain New Restricted Subsidiaries ...................................... 93 Exhibit A - Form of Note...............................................A-1 Exhibit B - Form of Note Guarantee Exhibit Exhibit C - Form of Letter to Be Delivered By Institutional Accredited Investors INDENTURE, dated as of August 20, 1997 among Burke Industries, Inc., a corporation duly organized and existing under the laws of the State of California (herein called the "Company"), the Subsidiary Guarantors (as hereinafter defined) and United States Trust Company of New York, a New York banking corporation (herein called the "Trustee"). RECITALS OF THE COMPANY The Company has duly authorized the creation of and issue of 10% Senior Notes Due 2007 (herein called the "Initial Notes"), and 10% Series B Senior Notes Due 2007 (the "Exchange Notes" and, together with the Initial Notes, the "Notes") of substantially the tenor and amount hereinafter set forth, and to provide therefor the Company has duly authorized the execution and delivery of this Indenture. Each of the Subsidiary Guarantors has duly authorized its guarantee of the Notes, and to provide therefor each of them has duly authorized the execution and delivery of this Indenture. Upon the issuance of the Exchange Notes, if any, or the effectiveness of the Shelf Registration Statement (as defined herein), this Indenture will be subject to the provisions of the Trust Indenture Act of 1939, as amended, that are required to be part of this Indenture and shall, to the extent applicable, be governed by such provisions. The Company has also duly authorized the creation of up to $75,000,000 aggregate principal amount of additional Notes to be issued from time to time having identical terms and conditions to the Notes offered hereby. All things necessary have been done to make the Notes, when executed by the Company and authenticated and delivered hereunder and duly issued by the Company, the valid obligations of the Company and to make this Indenture a valid agreement of the Company and the Subsidiary Guarantors, each in accordance with their respective terms. NOW, THEREFORE, THIS INDENTURE WITNESSETH: For and in consideration of the premises and the purchase of the Notes by the Holders thereof, it is mutually covenanted and agreed, for the equal and proportionate benefit of all Holders of the Notes, as follows: 2 ARTICLE ONE DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION SECTION 101. DEFINITIONS. For all purposes of this Indenture, except as otherwise expressly provided or unless the context otherwise requires: (a) the terms defined in this Article have the meanings assigned to them in this Article, and include the plural as well as the singular; (b) all other terms used herein which are defined in the Trust Indenture Act, either directly or by reference therein, have the meanings assigned to them therein, and the terms "cash transaction" and "self-liquidating paper", as used in TIA Section 311, shall have the meanings assigned to them in the rules of the Commission adopted under the Trust Indenture Act; (c) all accounting terms not otherwise defined herein have the meanings assigned to them in accordance with generally accepted accounting principles; and (d) the words "herein", "hereof" and "hereunder" and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision. Certain terms, used principally in Article Two, Eight, Ten and Twelve are defined in that Article. "Acquired Indebtedness" means Indebtedness of a person (a) existing at the time such person is merged with or into the Company or becomes a Subsidiary or (b) assumed in connection with the acquisition of assets from such person. "Act", when used with respect to any Holder, has the meaning specified in Section 105. "Additional Notes" has the meaning set forth in Section 312. "Affiliate" means, with respect to any specified person, any other person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified person or (b) any other person that owns, directly or indirectly, 10% or more of such specified person's Capital Stock or any executive officer or director of any 3 such specified person or other person or, with respect to any natural person, any person having a relationship with such person by blood, marriage or adoption not more remote than first cousin. For the purposes of this definition, "control", when used with respect to any specified person, means the power to direct the management and policies of such person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Applicable Premium" will be defined, with respect to a Note, as the greater of (i) 5% of the then outstanding principal amount of such Note and (ii) the excess of (A) the present value of the remaining required interest and principal payments due on such Note (exclusive of accrued and unpaid interest), computed using a discount rate equal to the Treasury Rate plus 100 basis points, over (B) the then outstanding principal amount of such Note. "Asset Sale" means (i) the sale, lease, conveyance or other disposition of any assets (including, without limitation, by way of merger, consolidation or Sale and Leaseback Transaction or similar arrangement) (collectively, a "transfer") by the Company or any Restricted Subsidiary other than in the ordinary course of business, whether in a single transaction or a series of related transactions (a) that have a fair market value in excess of $1.0 million or (b) for aggregate net proceeds in excess of $1.0 million. For the purposes of this definition, the term "Asset Sale" does not include (i) any transfer of properties or assets that is governed by Article Eight, (ii) any transfer of properties or assets between or among the Company and its Restricted Subsidiaries pursuant to transactions that do not violate any other provision of the Indenture, (iii) any transfer of properties or assets representing obsolete or permanently retired equipment and facilities, (iv) a Restricted Payment or Permitted Investment that is permitted by Section 1011 (including, without limitation, any formation of or contribution of assets to a joint venture), (v) leases or subleases, in the ordinary course of business, to third parties of real property owned in fee or leased by the Company or its Subsidiaries, (vi) the sale of Permitted Investments referred to in clause (a) of the definition thereof or (vii) any exchange of like kind property pursuant to Section 1031 of the Internal Revenue of 1986, as amended. "Attributable Debt" in respect of a sale and leaseback transaction means, at the time of determination, the present value (discounted at the rate of interest implicit in such transaction, determined in accordance with GAAP) of the obligation of the lessee for net rental payments during the remainder of the lease included in such sale and leaseback transaction (including any period for which such lease has been extended or may, at the option of the lessor, be extended). "Average Life" means, as of the date of determination with respect to any Indebtedness or Disqualified Stock, the quotient obtained by dividing (a) the sum of the 4 products of (i) the number of years from the date of determination to the date or dates of each successive scheduled principal or liquidation value payment of such Indebtedness or Disqualified Stock, respectively, multiplied by (ii) the amount of each such principal or liquidation value payment by (b) the sum of all such principal or liquidation value payments. "Bank Credit Agreement" means the loan and security agreement to be entered into among the Company, the Banks and NationsBank, N.A., as agent, on or prior to August 20, 1997 as such agreement may be amended, restated, supplemented, refinanced, replaced or otherwise modified from time to time (including any such refinancing or replacement agent by a different institution). "Banks" means the banks and other financial institutions that from time to time are lenders under the Bank Credit Agreement. "Board of Directors" means either the board of directors of the Company or any duly authorized committee of that board. "Board Resolution" means a copy of a resolution certified by the Secretary or an Assistant Secretary of the Company or a Subsidiary Guarantor, if the context so requires, to have been duly adopted by the Board of Directors and to be in full force and effect on the date of such certification, and delivered to the Trustee. "Borrowing Base" means, as of any date, an amount equal to the sum of (a) 85% of the face amount of all accounts receivable owned by the Company and its Restricted Subsidiaries as of such date that are not more than 90 days past due, and (b) 60% of the book value of all inventory owned by the Company and its Subsidiaries as of such date, all calculated on a consolidated basis and in accordance with GAAP. To the extent that information is not available as to the amount of accounts receivable or inventory as of a specific date, the Company may utilize the most recent available information provided to the Banks under the Bank Credit Agreement for purpose of calculating the Borrowing Base. "Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which banking institutions in The City of New York are authorized or obligated by law or executive order to close. "Capital Stock" of any person means any and all shares, interests, partnership interests, participations, rights in or other equivalents (however designated) of such person's equity interest (however designated), whether now outstanding or issued after the Closing Date. 5 "Capitalized Lease Obligation" means, with respect to any person, an obligation incurred or assumed under or in connection with any capital lease of real or personal property that, in accordance with GAAP, has been recorded as a capitalized lease. "Change of Control" means the occurrence of any of the following events: (a) the consummation of any transaction (including, without limitation, any merger or consolidation) (i) prior to a Public Equity Offering by the Company, the result of which is that the Principals and their Related Parties become the "beneficial owner" (as such term is defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act, except that a person shall be deemed to have "beneficial ownership" of all securities that such person has the right to acquire, whether such right is currently exercisable or is exercisable only upon the occurrence of a subsequent condition) of less than 50% of the Voting Stock of the Company (measured by voting power rather than the number of shares) or (ii) after a Public Equity Offering of the Company, any "person" (as such term is used in Section 13(d)(3) of the Exchange Act), other than the Principals and their Related Parties, becomes the beneficial owner (as defined above), directly or indirectly, of 35% or more of the Voting Stock of the Company and such person is or becomes, directly or indirectly, the beneficial owner of a greater percentage of the voting power of the Voting Stock of the Company, calculated on a fully diluted basis, than the percentage beneficially owned by the Principals and their Related Parties; (b) the Company, either individually or in conjunction with one or more Subsidiaries, sells, assigns, conveys, transfers, leases or otherwise disposes of, or the Subsidiaries sell, assign, convey, transfer, lease or otherwise dispose of, all or substantially all of the properties of the Company and the Subsidiaries, taken as a whole (either in one transaction or a series of related transactions), including Capital Stock of the Subsidiaries, to any person (other than the Company or a Restricted Subsidiary); (c) during any consecutive two-year period, individuals who at the beginning of such period constituted the Board of Directors of the Company (together with any new directors whose election by such Board of Directors or whose nomination for election by the stockholders of the Company was approved by a vote of a majority of the directors then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the Board of Directors of the Company then in office; or (d) the Company is liquidated or dissolved or adopts a plan of liquidation or dissolution, other than in a transaction that complies with the Article Eight. 6 "Closing Date" means the date on which the Notes are originally issued under this Indenture. "Commission" means the Securities and Exchange Commission, as from time to time constituted, created under the Notes Exchange Act of 1934, or, if at any time after the execution of this Indenture such Commission is not existing and performing the duties now assigned to it under the Trust Indenture Act, then the body performing such duties at such time. "Common Stock" means, with respect to any Person, any and all shares, interests, participations and other equivalents (however designated, whether voting or non-voting) of such Person's common stock, whether now outstanding or issued after the date of this Indenture, and includes, without limitation, all series and classes of such common stock. "Company" means the Person named as the "Company" in the first paragraph of this Indenture, until a successor Person shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "Company" shall mean such successor Person. "Company Request" or "Company Order" means a written request or order signed in the name of the Company by its Chairman, its President, any Vice President, its Treasurer or an Assistant Treasurer, and delivered to the Trustee. "Consolidated Adjusted Net Income" means, for any period, the net income (or net loss) of the Company and its Restricted Subsidiaries for such period as determined on a consolidated basis in accordance with GAAP, adjusted to the extent included in calculating such net income or loss by excluding (a) any net after-tax extraordinary or non-recurring gains or losses (less all fees and expenses relating thereto), (b) any net after-tax gains or losses (less all fees and expenses relating thereto) attributable to Asset Sales, (c) the portion of net income (or loss) of any person (other than the Company or a Restricted Subsidiary), including Unrestricted Subsidiaries, in which the Company or any Restricted Subsidiary has an ownership interest, except to the extent of the amount of dividends or other distributions actually paid to the Company or any Restricted Subsidiary in cash during such period, (d) solely for purposes of Section 1011, the net income (or loss) of any person combined with the Company or any Restricted Subsidiary on a "pooling of interests" basis attributable to any period prior to the date of combination, and (e) the net income (but not the net loss) of any Restricted Subsidiary to the extent that the declaration or payment of dividends or similar distributions by such Restricted Subsidiary is at the date of determination restricted, directly or indirectly, except to the extent that such net income is actually paid to the Company or a Restricted Subsidiary thereof by loans, advances, intercompany transfers, principal repayments or otherwise; PROVIDED that, if any Restricted Subsidiary is not a Wholly Owned Restricted Subsidiary, Consolidated Adjusted Net Income will be reduced (to the 7 extent not otherwise reduced in accordance with GAAP) by an amount equal to (A) the amount of the Consolidated Adjusted Net Income otherwise attributable to such Restricted Subsidiary multiplied by (B) the quotient of (1) the number of shares of outstanding common stock of such Restricted Subsidiary not owned on the last day of such period by the Company or any of its Restricted Subsidiaries divided by (2) the total number of shares of outstanding common stock of such Restricted Subsidiary on the last day of such period. "Consolidated EBITDA" means, for any period, the sum of, without duplication, Consolidated Adjusted Net Income for such period, plus (or, in the case of clause (d) below, plus or minus) the following items to the extent included in computing Consolidated Adjusted Net Income for such period (a) Fixed Charges for such period, plus (b) the provision for federal, state, local and foreign taxes based on income or profits of the Company and its Restricted Subsidiaries for such period, plus (c) the aggregate depreciation and amortization expense of the Company and its Restricted Subsidiaries for such period, plus (d) any other non-cash charges for such period, and minus non-cash credits for such period, other than non-cash charges or credits resulting from changes in prepaid assets or accrued liabilities in the ordinary course of business; provided that fixed charges, income tax expense, depreciation and amortization expense and non-cash charges and credits of a Restricted Subsidiary will be included in Consolidated EBITDA only to the extent (and in the same proportion) that the net income of such Subsidiary was included in calculating Consolidated Adjusted Net Income for such period. "Consolidated Net Worth" means, at any date of determination, stockholders' equity of the Company and its Restricted Subsidiaries as set forth on the most recently available quarterly or annual consolidated balance sheet of the Company and its Restricted Subsidiaries, less any amounts attributable to Disqualified Stock or any equity security convertible into or exchangeable for Indebtedness, the cost of treasury stock and the principal amount of any promissory notes receivable from the sale of the Capital Stock of the Company or any of its Restricted Subsidiaries and less to the extent included in calculating such stockholders' equity of the Company and its Restricted Subsidiaries, the stockholders' equity attributable to Unrestricted Subsidiaries, each item to be determined in conformity with GAAP (excluding the effects of foreign currency adjustments under Financial Accounting Standards Board Statement of Financial Accounting Standards No. 52). "Corporate Trust Office" means the principal corporate trust office of the Trustee, at which at any particular time its corporate trust business shall be administered, which office at the date of execution of this Indenture is located at 114 West 47th St., New York, N.Y. 10036-1532, Attention: Corporate Trust, except that with respect to presentation of Notes for payment or for registration of transfer or exchange, such term shall mean the office or agency of the Trustee at which, at any particular time, its corporate trust and agency business shall be conducted. 8 "corporation" includes corporations, associations, companies and business trusts. "Default" means any event that is, or after notice or passage of time or both would be, an Event of Default. "Defaulted Interest" has the meaning specified in Section 309. "Depositary" means The Depository Trust Company, its nominees and successors. "Disinterested Director" means, with respect to any transaction or series of transactions in respect of which the Board of Directors is required to deliver a resolution of the Board of Directors, to make a finding or otherwise take action under the Indenture, a member of the Board of Directors who does not derive any material direct or indirect financial benefit from such transaction or series of transactions. "Disqualified Stock" means any class or series of Capital Stock that, either by its terms, by the terms of any security into which it is convertible or exchangeable or by contract or otherwise (i) is or upon the happening of an event or passage of time would be, required to be redeemed prior to the final Stated Maturity of the Notes, (ii) is redeemable at the option of the holder thereof, at any time prior to such final Stated Maturity or (iii) at the option of the holder thereof is convertible into or exchangeable for debt securities at any time prior to such final Stated Maturity; provided that any Capital Stock that would not constitute Disqualified Stock but for provisions therein giving holders thereof the right to cause the issuer thereof to repurchase or redeem such Capital Stock upon the occurrence of an "asset sale" or "change of control" occurring prior to the Stated Maturity of the Notes will not constitute Disqualified Stock if the "asset sale" or "change of control" provisions applicable to such Capital Stock are no more favorable to the holders of such Capital Stock than the provisions contained in Sections 1015 and 1016 and such Capital Stock specifically provides that the issuer will not repurchase or redeem any such stock pursuant to such provision prior to the Company's repurchase of such Notes as are required to be repurchased pursuant to Sections 1015 and 1016. "Event of Default" has the meaning specified in Section 501. "Exchange Act" means the Securities and Exchange Act of 1934, as amended. "Exchange Offer" means the exchange offer that may be effected pursuant to the Registration Rights Agreement. 9 "Exchange Offer Registration Statement" means the Exchange Offer Registration Statement as defined in the Registration Rights Agreement. "Exchange Notes" has the meaning stated in the first recital of this Indenture and refers to any Exchange Notes containing terms substantially identical to the Initial Notes (except that such Exchange Notes shall not contain terms with respect to the interest rate step-up provision and transfer restrictions) that are issued and exchanged for the Initial Notes pursuant to the Registration Right Agreement and this Indenture. "Federal Bankruptcy Code" means the Bankruptcy Act of Title 11 of the United States Code, as amended from time to time. "Fixed Charge Coverage Ratio" means, for any period, the ratio of Consolidated EBITDA for such period to Fixed Charges for such period. "Fixed Charges" means, for any period, without duplication, the sum of (a) the amount that, in conformity with GAAP, would be set forth opposite the caption "interest expense" (or any like caption) on a consolidated statement of operations of the Company and its Restricted Subsidiaries for such period, including, without limitation, (i) amortization of debt discount, (ii) the net cost of interest rate contracts (including amortization of discounts), (iii) the interest portion of any deferred payment obligation, (iv) amortization of debt issuance costs and (v) the interest component of Capitalized Lease Obligations, plus (b) cash dividends paid on Preferred Stock and Disqualified Stock by the Company and any Restricted Subsidiary (to any person other than the Company and its Restricted Subsidiaries), computed on a tax effected basis, plus (c) all interest on any Indebtedness of any person guaranteed by the Company or any of its Restricted Subsidiaries or secured by a lien on the assets of the Company or any of its Restricted Subsidiaries; PROVIDED, HOWEVER, that Fixed Charges will not include any gain or loss from extinguishment of debt, including the write-off of debt issuance costs. "Generally Accepted Accounting Principles" or "GAAP" means generally accepted accounting principles in the United States, as in effect on the date of the Indenture. "Hedging Obligations" means the obligations of any person under (i) interest rate swap agreements, interest rate cap agreements and interest rate collar agreements and (ii) other agreements or arrangements designed to protect such person against fluctuations in interest rates or the value of foreign currencies. "Holder" means a Person in whose name a Note is registered in the Register. "Indebtedness" means (without duplication), with respect to any person, whether recourse is to all or a portion of the assets of such person and whether or not 10 contingent, (a) every obligation of such person for money borrowed, (b) every obligation of such person evidenced by bonds, debentures, notes or other similar instruments, (c) every reimbursement obligation of such person with respect to letters of credit, bankers' acceptances or similar facilities issued for the account of such person, (d) every obligation of such person issued or assumed as the deferred purchase price of property or services, (e) the Attributable Debt in respect of every Capitalized Lease Obligation of such person, (f) all Disqualified Stock of such person valued at its maximum fixed repurchase price, plus accrued and unpaid dividends, (g) all obligations of such person under or in respect of Hedging Obligations and (h) every obligation of the type referred to in clauses (a) through (g) of another person and all dividends of another person the payment of which, in either case, such person has guaranteed. For purposes of this definition, the "maximum fixed repurchase price" of any Disqualified Stock that does not have a fixed repurchase price will be calculated in accordance with the terms of such Disqualified Stock as if such Disqualified Stock were purchased on any date on which Indebtedness is required to be determined pursuant to the Indenture, and if such price is based upon, or measured by, the fair market value of such Disqualified Stock, such fair market value will be determined in good faith by the board of directors of the issuer of such Disqualified Stock. Notwithstanding the foregoing, (i) trade accounts payable and accrued liabilities arising in the ordinary course of business, (ii) any liability for federal, state or local taxes or other taxes owed by such person and (iii) obligations with respect to performance and surety bonds and completion guarantees in the ordinary course of business will not be considered Indebtedness for purposes of this definition. "Indenture" means this instrument as originally executed and as it may from time to time be supplemented or amended by one or more indentures supplemental hereto entered into pursuant to the applicable provisions hereof. "Indenture Obligations" means the obligations of the Company and any other obligor hereunder or under the Notes, including the Subsidiary Guarantors to pay principal of (and premium, if any) and interest on the Notes when due and payable at Maturity, and all other amounts due or to become due under or in connection with this Indenture, the Notes and the performance of all other obligations to the Trustee (including all amounts due to the Trustee under Section 606 hereof) and the Holders under this Indenture and the Notes, according to the terms hereof and thereof. "Initial Notes" has the meaning stated in the first recital of this Indenture. "Interest Payment Date" means the Stated Maturity of an installment of interest on the Notes. "Investment" in any person means, (i) directly or indirectly, any advance, loan or other extension of credit (including, without limitation, by way of guarantee or similar 11 arrangement) or capital contribution to such person, the purchase or other acquisition of any stock, bonds, notes, debentures or other securities issued by such person, the acquisition (by purchase or otherwise) of all or substantially all of the business or assets of such person, or the making of any investment in such person, (ii) the designation of any Restricted Subsidiary as an Unrestricted Subsidiary and (iii) the fair market value of the Capital Stock (or any other Investment), held by the Company or any of its Restricted Subsidiaries, of (or in) any person that has ceased to be a Restricted Subsidiary. Investments exclude extensions of trade credit on commercially reasonable terms in accordance with normal trade practices. "Lien" means any mortgage, charge, pledge, lien (statutory or otherwise), privilege, security interest, hypothecation, assignment for security, claim, or preference or priority or other encumbrance upon or with respect to any property of any kind, real or personal, movable or immovable, now owned or hereafter acquired. A person will be deemed to own subject to a Lien any property that such person has acquired or holds subject to the interest of a vendor or lessor under any conditional sale agreement, capital lease or other title retention agreement, PROVIDED that an operating lease shall not constitute a Lien. "Liquidated Damages" means all liquidated damages then owing pursuant to Section 5(b) of the Registration Rights Agreement. "Maturity", when used with respect to any Note, means the date on which the principal of such Note or an installment of principal becomes due and payable as therein or herein provided, whether at the Stated Maturity or by declaration of acceleration, notice of redemption or otherwise. "Moody's" means Moody's Investors Service, Inc. and its successors. "Net Cash Proceeds" means, with respect to any Asset Sale, the proceeds thereof in the form of cash or cash equivalents, including payments in respect of deferred payment obligations when received in the form of, or stock or other assets when disposed for, cash or cash equivalents (except to the extent that such obligations are financed or sold with recourse to the Company or any Restricted Subsidiary), net of (a) brokerage commissions and other fees and expenses (including fees and expenses of legal counsel and investment banks) related to such Asset Sale, (b) provisions for all taxes payable as a result of such Asset Sale, (c) payments made to retire or otherwise prepay Indebtedness where such Indebtedness is secured by the assets that are the subject of such Asset Sale or otherwise required to be prepaid in connection therewith, (d) amounts required to be paid to any person (other than the Company or any Restricted Subsidiary) owning a beneficial interest (by way of Capital Stock of the Person owning such assets or otherwise) in the assets that are subject to the Asset Sale and (e) appropriate amounts to be provided by the Company or any Restricted Subsidiary, as the case may be, as a reserve required in accordance with GAAP against any liabilities associated with such Asset Sale and retained by the seller 12 after such Asset Sale, including pension and other post-employment benefit liabilities, liabilities related to environmental matters and liabilities under any indemnification obligations associated with such Asset Sale. "Non-U.S. Person" means a Person that is not a "U.S. Person" as defined in Regulation S. "Non-U.S. Restricted Subsidiary" means a Restricted Subsidiary that is not a U.S. Restricted Subsidiary. "Note Guarantee" means with respect to each Subsidiary Guarantor, the unconditional guarantee by such Subsidiary Guarantor, pursuant to Article Thirteen. "Notes" has the meaning stated in the first recital of this Indenture and more particularly means any Notes authenticated and delivered under this Indenture. For all purposes of this Indenture, the term "Notes" shall include any Exchange Notes to be issued and exchanged for any Notes pursuant to the Registration Rights Agreement and this Indenture. From and after the issuance of any Additional Notes pursuant to Section 312 (but, not for purposes of determining whether such issuance is permitted hereunder), "Notes" shall include such Additional Notes for purposes of this Indenture and all Initial Notes, Exchange Notes and any such Additional Note, shall vote together as one series of Notes under this Indenture. "Offering" means the offering of the 10% Senior Notes due 2007 by the Company. "Officers' Certificate" means a certificate signed by the Chairman, the President or a Vice President, and by the Treasurer, an Assistant Treasurer, the Secretary or an Assistant Secretary of the Company, and delivered to the Trustee. "Opinion of Counsel" means a written opinion of counsel, who may be counsel for the Company, including an employee of the Company, and who shall be reasonably acceptable to the Trustee. "Outstanding", when used with respect to Notes, means, as of the date of determination, all Notes theretofore authenticated and delivered under this Indenture, except: (a) Notes theretofore cancelled by the Trustee or delivered to the Trustee for cancellation; (b) Notes, or portions thereof, for whose payment or redemption money in the necessary amount has been theretofore deposited with the Trustee or any Paying 13 Agent (other than the Company) in trust or set aside and segregated in trust by the Company (if the Company shall act as its own Paying Agent) for the Holders of such Notes; PROVIDED that, if such Notes are to be redeemed, notice of such redemption has been duly given pursuant to this Indenture or provision therefor satisfactory to the Trustee has been made; and (c) Notes, except to the extent provided in Sections 1202 and 1203, with respect to which the Company has effected defeasance and/or covenant defeasance as provided in Article Twelve; and (d) Notes which have been paid pursuant to Section 308 or in exchange for or in lieu of which other Notes have been authenticated and delivered pursuant to this Indenture, other than any such Notes in respect of which there shall have been presented to the Trustee proof satisfactory to it that such Notes are held by a bona fide purchaser in whose hands the Notes are valid obligations of the Company; PROVIDED, HOWEVER, that in determining whether the Holders of the requisite principal amount of Outstanding Notes have given any request, demand, authorization, direction, consent, notice or waiver hereunder, and for the purpose of making the calculations required by TIA Section 313, Notes owned by the Company or any other obligor upon the Notes or any Affiliate of the Company or such other obligor shall be disregarded and deemed not to be Outstanding, except that, in determining whether the Trustee shall be protected in making such calculation or in relying upon any such request, demand, authorization, direction, notice, consent or waiver, only Notes which the Trustee knows to be so owned shall be so disregarded. Notes so owned which have been pledged in good faith may be regarded as Outstanding if the pledgee establishes to the satisfaction of the Trustee the pledgee's right so to act with respect to such Notes and that the pledgee is not the Company or any other obligor upon the Notes or any Affiliate of the Company or such other obligor. "Paying Agent" means United States Trust Company of New York and any successor (including the Company acting as Paying Agent) authorized by the Company to pay the principal of (and premium, if any) or interest on any Notes on behalf of the Company. "Permitted Business" means any business in which the Company or a Restricted Subsidiary is permitted to engage under Section 1022. "Permitted Investments" means any of the following: (a)Investments in (i) securities with a maturity at the time of acquisition of one year or less issued or directly and fully guaranteed or insured by the United States or any agency or instrumentality thereof (provided that the full faith and credit of the United States is pledged in support thereof); (ii) certificates of deposit, 14 Eurodollar deposits or bankers' acceptances with a maturity at the time of acquisition of one year or less of any financial institution that is a member of the Federal Reserve System having combined capital and surplus of not less than $500,000,000; (iii) any shares of money market mutual or similar funds having assets in excess of $500,000,000; and (iv) commercial paper with a maturity at the time of acquisition of one year or less issued by a corporation that is not an Affiliate of the Company and is organized under the laws of any state of the United States or the District of Columbia and having a rating (A) from Moody's Investors Service, Inc. of at least P-1 or (B) from Standard & Poor's Ratings Services of at least A-1; (b) Investments by the Company or any Restricted Subsidiary in another person, if as a result of such Investment (i) such other person becomes a Wholly Owned Restricted Subsidiary that is a Subsidiary Guarantor or (ii) such other person is merged or consolidated with or into, or transfers or conveys all or substantially all of its assets to, the Company or a Restricted Subsidiary; (c) Investments by the Company or a Restricted Subsidiary in the Company or a Restricted Subsidiary that is a Subsidiary Guarantor; (d) Investments in existence on the Closing Date; (e) promissory notes received as a result of Asset Sales permitted under Section 1016; (f) any acquisition of assets solely in exchange for the issuance of Qualified Equity Interests of the Company; (g) stock, obligations or securities received in satisfaction of judgments, in bankruptcy proceedings or in settlement of debts; (h) Hedging Obligations otherwise permitted under the Indenture; (i) loans or advances to officers or employees of the Company or any of its Restricted Subsidiaries in the ordinary course of business not to exceed $250,000 in the aggregate at any one time outstanding; and (j) other Investments that do not exceed $4 million in the aggregate at any time outstanding. "Person" means any individual, corporation, partnership, joint venture, association, joint-stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. 15 "Predecessor Note" of any particular Note means every previous Note evidencing all or a portion of the same debt as that evidenced by such particular Note; and, for the purposes of this definition, any Note authenticated and delivered under Section 308 in exchange for a mutilated security or in lieu of a lost, destroyed or stolen Note shall be deemed to evidence the same debt as the mutilated, lost, destroyed or stolen Note. "Preferred Stock" means, with respect to any person, any and all shares, interests, partnership interests, participations, rights in or other equivalents (however designated) of such person's preferred or preference stock, whether now outstanding or issued after the Closing Date, and including, without limitation, all classes and series of preferred or preference stock of such person. "Principals" means (i) Lehman, (ii) each Affiliate of Lehman as of the Closing Date, (iii) JFLEI, and (iv) each officer or employee (including their respective immediate family members) of Lehman as of the Closing Date. "Purchase Date" means any Change of Control Payment Date or Excess Proceeds Payment Date. "Public Equity Offering" means an offer and sale of common stock (which is Qualified Stock) of the Company pursuant to a registration statement that has been declared effective by the Commission pursuant to the Securities Act (other than a registration statement on Form S-8 or otherwise relating to equity securities issuable under any employee benefit plan of the Company). "Qualified Equity Interest" means any Qualified Stock and all warrants, options or other rights to acquire Qualified Stock (but excluding any debt security that is convertible into or exchangeable for Capital Stock). "QIB" means a "Qualified Institutional Buyer" under Rule 144A. "Qualified Stock" of any person means any and all Capital Stock of such person, other than Disqualified Stock. "Redemption Date", when used with respect to any Note to be redeemed, in whole or in part, means the date fixed for such redemption by or pursuant to this Indenture. "Redemption Price", when used with respect to any Note to be redeemed, means the price at which it is to be redeemed pursuant to this Indenture. "Register" and "Note Registrar" have the respective meanings specified in Section 305. 16 "Registrar" means The United States Trust Company of New York and any successor authorized by the Company to act as Registrar. "Registration Rights Agreement" means the Registration Rights Agreement between the Company, the Subsidiary Guarantors and the Initial Purchasers named therein, dated as of August 20, 1997 relating to the Notes. "Registration Statement" means the Registration Statement as defined in the Registration Rights Agreement. "Regular Record Date" for the interest payable on any Interest Payment Date means the February 1 or August 1 (whether or not a Business Day), as the case may be, next preceding such Interest Payment Date. "Regulation S" means Regulation S under the Securities Act. "Related Party" with respect to any Principal means (A) any controlling stockholder or 80% (or more) owned Subsidiary of such Principal or (B) trust, corporation, partnership or other entity, the beneficiaries, stockholders, partners, owners or Persons beneficially holding an 80% or more controlling interest of which consist of such Principal and/or such other Persons referred to in the immediately preceding clause (A). "Restricted Subsidiary" means any Subsidiary other than an Unrestricted Subsidiary. "Rule 144A" means Rule 144A under the Securities Act. "Sale and Leaseback Transaction" means any transaction or series of related transactions pursuant to which a person sells or transfers any property or asset in connection with the leasing, or the resale against installment payments, of such property or asset to the seller or transferor. "Securities Act" means the Securities Act of 1933, as amended from time to time, and the rules and regulations thereunder. "Series A Preferred Stock" means the Series A Cumulative Redeemable Preferred Stock of the Company, par value $0.01 per share. "Shelf Registration Statement" means the Shelf Registration Statement as defined in the Registration Rights Agreement. 17 "Significant Subsidiary" means any Restricted Subsidiary of the Company that together with its subsidiaries, (a) for the most recent fiscal year of the Company, accounted for more than 10% of the consolidated net sales of the Company and its Subsidiaries or (b) as of the end of such fiscal year, was the owner of more than 10% of the consolidated assets of the Company and its Restricted Subsidiaries, in the case of either (a) or (b), as set forth on the most recently available consolidated financial statements of the Company for such fiscal year or (c) was organized or acquired after the beginning of such fiscal year and would have been a Significant Subsidiary if it had been owned during such entire fiscal year. "S&P" means Standard & Poor's Ratings Services, a division of The McGraw-Hill Companies, and its successors. "Special Record Date" for the payment of any Defaulted Interest means a date fixed by the Trustee pursuant to Section 309. "Stated Maturity" means, when used with respect to any Note or any installment of interest thereon, the date specified in such Note as the fixed date on which the principal of such Note or such installment of interest is due and payable and, when used with respect to any other Indebtedness, means the date specified in the instrument governing such Indebtedness as the fixed date on which the principal of such Indebtedness or any installment of interest thereon is due and payable. "Subordinated Indebtedness" means Indebtedness of the Company or a Subsidiary Guarantor that is subordinated in right of payment to the Notes or the Note Guarantee issued by such Subsidiary Guarantor, as the case may be. "Subsidiary" means any person a majority of the equity ownership or Voting Stock of which is at the time owned, directly or indirectly, by the Company and/or one or more other Subsidiaries of the Company. "Subsidiary Guarantor" means any Restricted Subsidiary that is a party to a Note Guarantee pursuant to the terms of this Indenture. "Treasury Rate" will be defined as the yield to maturity at the time of computation of United States Treasury securities with a constant maturity (as compiled and published in the most recent Federal Reserve Statistical Release H.15 (519) which has become publicly available at least two Business Days prior to the date fixed for prepayment (or, if such Statistical Release is no longer published, any publicly available source of similar market data)) most nearly equal to the then remaining Average Life to Stated Maturity of the Notes; PROVIDED, HOWEVER, that if the Average Life to Stated Maturity of the Notes is not equal to the constant maturity of a United States Treasury security for which a weekly average yield is given, the Treasury Rate shall be obtained by linear interpolation (calculated 18 to the nearest one-twelfth of a year) from the weekly average yields of United States Treasury securities for which such yields are given, except that if the Average Life to Stated Maturity of the Notes is less than one year, the weekly average yield on actually traded United States Treasury securities adjusted to a constant maturity of one year shall be used. "Trust Indenture Act" or "TIA" means the Trust Indenture Act of 1939 as in force at the date as of which this Indenture was executed, except as provided in Section 905. "Trustee" means the Person named as the "Trustee" in the first paragraph of this Indenture until a successor Trustee shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "Trustee" shall mean such successor Trustee. "Unrestricted Subsidiary" means (a) any Subsidiary that is designated by the Board of Directors of the Company as an Unrestricted Subsidiary in accordance with Section 1017 and (b) any Subsidiary of an Unrestricted Subsidiary. "U.S. Government Obligations" means direct obligations of, obligations fully guaranteed by, or participations in pools consisting of or obligations guaranteed by, the United States of America for the payment of which guarantee or obligations the full faith and credit of the United States of America is pledged and which are not callable or redeemable at the option of the issuer thereof. "U.S. Restricted Subsidiary" means a Restricted Subsidiary organized under the laws of the United States of America or any State thereof or the District of Columbia. "Voting Stock" means any class or classes of Capital Stock pursuant to which the holders thereof have the general voting power under ordinary circumstances to elect at least a majority of the board of directors, managers or trustees of any person (irrespective of whether or not, at the time, stock of any other class or classes has, or might have, voting power by reason of the happening of any contingency). "Wholly Owned Restricted Subsidiary" means any Restricted Subsidiary, all of the outstanding voting securities (other than directors' qualifying shares or shares of foreign Restricted Subsidiaries required to be owned by foreign nationals pursuant to applicable law) of which are owned, directly or indirectly, by the Company. SECTION 102. INCORPORATION BY REFERENCE OF TRUST INDENTURE ACT. Whenever this Indenture refers to a provision of the Trust Indenture Act, the provision is incorporated by reference in and made a part of this Indenture. The following Trust Indenture Act terms used in this Indenture have the following meanings: 19 "indenture securities" means the Notes; "indenture security holder" means a Holder; "indenture to be qualified" means this Indenture; "indenture trustee" or "institutional trustee" means the Trustee; and "obligor" on the indenture securities means the Company or any other obligor on the Notes. All other Trust Indenture Act terms used in this Indenture that are defined by the Trust Indenture Act, defined by reference in the Trust Indenture Act to another statute or defined by a rule of the Commission and not otherwise defined herein shall have the meanings assigned to them therein. SECTION 103. COMPLIANCE CERTIFICATES AND OPINIONS. Upon any application or request by the Company and the Subsidiary Guarantors to the Trustee to take any action under any provision of this Indenture, the Company and the Subsidiary Guarantors shall furnish to the Trustee an Officers' Certificate stating that all conditions precedent, if any, provided for in this Indenture (including any covenant compliance with which constitutes a condition precedent) relating to the proposed action have been complied with and an Opinion of Counsel stating that in the opinion of such counsel all such conditions precedent, if any, have been complied with, except that in the case of any such application or request as to which the furnishing of such documents is specifically required by any provision of this Indenture relating to such particular application or request, no additional certificate or opinion need be furnished. Every certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture (other than pursuant to Section 1008(a)) shall include: (a) a statement that each individual signing such certificate or opinion has read such covenant or condition and the definitions herein relating thereto; (b) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (c) a statement that, in the opinion of each such individual, he has made such examination or investigation as is necessary to enable him to express an 20 informed opinion as to whether or not such covenant or condition has been complied with; and (d) a statement as to whether, in the opinion of each such individual, such condition or covenant has been complied with. The Company shall furnish to the Trustee from time to time an Officers' Certificate listing all Significant Subsidiaries of the Company. The Trustee may conclusively rely upon such Officers' Certificate until another is provided. SECTION 104. FORM OF DOCUMENTS DELIVERED TO TRUSTEE. In any case where several matters are required to be certified by, or covered by an opinion of, any specified Person, it is not necessary that all such matters be certified by, or covered by the opinion of, only one such Person, or that they be so certified or covered by only one document, but one such Person may certify or give an opinion with respect to some matters and one or more other such Persons as to other matters, and any such Person may certify or give an opinion as to such matters in one or several documents. Any certificate or opinion of an officer of the Company and/or the Subsidiary Guarantors may be based, insofar as it relates to legal matters, upon a certificate or opinion of, or representations by, counsel, unless such officer knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to the matters upon which his certificate or opinion is based are erroneous. Any such certificate or Opinion of Counsel may be based, insofar as it relates to factual matters, upon a certificate or opinion of, or representations by, an officer or officers of the Company stating that the information with respect to such factual matters is in the possession of the Company, unless such counsel knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to such matters are erroneous. Where any Person is required to make, give or execute two or more applications, requests, consents, certificates, statements, opinions or other instruments under this Indenture, they may, but need not, be consolidated and form one instrument. SECTION 105. ACTS OF HOLDERS. (a) Any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Indenture to be given or taken by Holders may be embodied in and evidenced by one or more instruments of substantially similar tenor signed by such Holders in Person or by agents duly appointed in writing; and, except as herein otherwise expressly provided, such action shall become effective when such instrument or instruments are delivered to the Trustee and, where it is hereby expressly required, to the Company. 21 Such instrument or instruments (and the action embodied therein and evidenced thereby) are herein sometimes referred to as the "Act" of the Holders signing such instrument or instruments. Proof of execution of any such instrument or of a writing appointing any such agent shall be sufficient for any purpose of this Indenture and conclusive in favor of the Trustee and the Company, if made in the manner provided in this Section. (b) The fact and date of the execution by any Person of any such instrument or writing may be proved by the affidavit of a witness of such execution or by a certificate of a notary public or other officer authorized by law to take acknowledgments of deeds, certifying that the individual signing such instrument or writing acknowledged to him the execution thereof. Where such execution is by a signer acting in a capacity other than his individual capacity, such certificate or affidavit shall also constitute sufficient proof of authority. The fact and date of the execution of any such instrument or writing, or the authority of the Person executing the same, may also be proved in any other manner that the Trustee deems sufficient. (c) The principal amount and serial numbers of Notes held by any Person, and the date of holding the same, shall be proved by the Register. (d) If the Company or any Subsidiary Guarantor shall solicit from the Holders of Notes any request, demand, authorization, direction, notice, consent, waiver or other Act, the Company or any such Subsidiary Guarantor (as the case may be) may, at its option, by or pursuant to a Board Resolution, fix in advance a record date for the determination of Holders entitled to give such request, demand, authorization, direction, notice, consent, waiver or other Act, but the Company or any such Subsidiary Guarantor (as the case may be) shall have no obligation to do so. Notwithstanding TIA Section 316(c), such record date shall be the record date specified in or pursuant to such Board Resolution, which shall be a date not earlier than the date 30 days prior to the first solicitation of Holders generally in connection therewith and not later than the date such solicitation is completed. If such a record date is fixed, such request, demand, authorization, direction, notice, consent, waiver or other Act may be given before or after such record date, but only the Holders of record at the close of business on such record date shall be deemed to be Holders for the purposes of determining whether Holders of the requisite proportion of Outstanding Notes have authorized or agreed or consented to such request, demand, authorization, direction, notice, consent, waiver or other Act, and for that purpose the Outstanding Notes shall be computed as of such record date; PROVIDED that no such authorization, agreement or consent by the Holders on such record date shall be deemed effective unless it shall become effective pursuant to the provisions of this Indenture not later than eleven months after the record date. (e) Any request, demand, authorization, direction, notice, consent, waiver or other Act of the Holder of any Note shall bind every future Holder of the same Note and 22 the Holder of every Note issued upon the registration of transfer thereof or in exchange therefor or in lieu thereof in respect of anything done, omitted or suffered to be done by the Trustee or the Company and/or the Subsidiary Guarantors in reliance thereon, whether or not notation of such action is made upon such Note. SECTION 106. NOTICES, ETC., TO TRUSTEE, COMPANY AND SUBSIDIARY GUARANTORS. Any request, demand, authorization, direction, notice, consent, waiver or Act of Holders or other document provided or permitted by this Indenture to be made upon, given or furnished to, or filed with, (a) the Trustee by any Holder, the Company or any Subsidiary Guarantor shall be sufficient for every purpose hereunder if made, given, furnished or filed in writing to or with the Trustee at its Corporate Trust Office, Attention: Corporate Trust, or (b) the Company by the Trustee, any Holder or any Subsidiary Guarantor shall be sufficient for every purpose hereunder (unless otherwise herein expressly provided) if in writing and mailed, first-class postage prepaid, to the Company addressed to it at 2250 South Tenth Street, San Jose, California 95112, or at any other address previously furnished in writing to the Trustee or such Subsidiary Guarantor (as the case may be) by the Company. SECTION 107. NOTICE TO HOLDERS; WAIVER. Where this Indenture provides for notice of any event to Holders by the Company or the Trustee, such notice shall be sufficiently given (unless otherwise herein expressly provided) if in writing and mailed, first-class postage prepaid, to each Holder affected by such event, at his address as it appears in the Register, not later than the latest date, and not earlier than the earliest date, prescribed for the giving of such notice. In any case where notice to Holders is given by mail, neither the failure to mail such notice, nor any defect in any notice so mailed, to any particular Holder shall affect the sufficiency of such notice with respect to other Holders. Any notice mailed to a Holder in the manner herein prescribed shall be conclusively deemed to have been received by such Holder, whether or not such Holder actually receives such notice. Where this Indenture provides for notice in any manner, such notice may be waived in writing by the Person entitled to receive such notice, either before or after the event, and such waiver shall be the equivalent of such notice. Waivers of notice by Holders shall be filed with the Trustee, but such filing shall not be a condition precedent to the validity of any action taken in reliance upon such waiver. 23 In case by reason of the suspension of or irregularities in regular mail service or by reason of any other cause, it shall be impracticable to mail notice of any event to Holders when such notice is required to be given pursuant to any provision of this Indenture, then any manner of giving such notice as shall be satisfactory to the Trustee shall be deemed to be a sufficient giving of such notice for every purpose hereunder. SECTION 108. EFFECT OF HEADINGS AND TABLE OF CONTENTS. The Article and Section headings herein and the Table of Contents are for convenience only and shall not affect the construction hereof. SECTION 109. SUCCESSORS AND ASSIGNS. All covenants and agreements in this Indenture by the Company and the Subsidiary Guarantors shall bind their respective successors and assigns, whether so expressed or not. SECTION 110. SEPARABILITY CLAUSE. In case any provision in this Indenture or in the Notes shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. SECTION 111. BENEFITS OF INDENTURE. Nothing in this Indenture or in the Notes, express or implied, shall give to any Person, other than the parties hereto, any Paying Agent, any Note Registrar and their successors hereunder and the Holders any benefit or any legal or equitable right, remedy or claim under this Indenture. SECTION 112. GOVERNING LAW. This Indenture and the Notes shall be governed by, and construed in accordance with, the law of the State of New York. Upon the issuance of the Exchange Notes, if any, or the effectiveness of the Shelf Registration Statement, this Indenture shall be subject to the provisions of the Trust Indenture Act of 1939, as amended, that are required to be part of this Indenture and shall, to the extent applicable, be governed by such provisions. 24 SECTION 113. LEGAL HOLIDAYS. In any case where any Interest Payment Date, Redemption Date, Purchase Date, date established for payment of Defaulted Interest pursuant to Section 309, Stated Maturity or Maturity with respect to any Note shall not be a Business Day, then (notwithstanding any other provision of this Indenture or of the Notes) payment of principal (or premium, if any) or interest need not be made on such date, but may be made on the next succeeding Business Day with the same force and effect as if made on the Interest Payment Date, Redemption Date, Purchase Date, date established for payment of Defaulted Interest pursuant to Section 309, Stated Maturity or Maturity; PROVIDED that no interest shall accrue for the period from and after such Interest Payment Date, Redemption Date, Purchase Date, date established for payment of Defaulted Interest pursuant to Section 309, Stated Maturity or Maturity, as the case may be, to the next succeeding Business Day. SECTION 114. NO RECOURSE AGAINST OTHERS. A director, officer, employee, incorporator or stockholder of the Company, as such, shall not have any liability for any obligations of the Company under the Notes, the Indenture or the Note Guarantees or for any claim based on, in respect of, or by reason of, such obligations of their creation. Each Holder by accepting a Note waives and releases all such liability. The waiver and release are part of the consideration for the issuance of the Notes. ARTICLE TWO NOTE FORMS SECTION 201. FORMS GENERALLY. The Initial Notes shall be known as the "10% Senior Notes due 2007" and the Exchange Notes shall be known as the "10% Series B Senior Notes due 2007", in each case, of the Company. The Notes and the Trustee's certificate of authentication shall be in substantially the form annexed hereto as Exhibit A. The Notes may have such appropriate insertions, omissions, substitutions and other variations as are required or permitted by the Indenture and may have letters, notations or other marks of identification and such notations, legends or endorsements required by law, stock exchange agreements to which the Company is subject or usage. Any portion of the text of any Note may be set forth on the reverse thereof, with an appropriate reference thereto on the face of the Note. The Company shall approve the form of the Notes and any notation, legend or endorsement on the Notes. Each Note shall be dated the date of its authentication. 25 The definitive Notes shall be printed, lithographed or engraved on steel-engraved borders or may be produced in any other manner, all as determined by the officers of the Company executing such Notes, as evidenced by their execution of such Notes. The terms and provisions contained in the form of the Notes annexed hereto as Exhibit A shall constitute, and are hereby expressly made, a part of this Indenture. To the extent applicable, the Company and the Trustee, by their execution and delivery of this Indenture, expressly agree to such terms and provisions and to be bound thereby. Initial Notes offered and sold in reliance on Rule 144A shall be issued initially in the form of a permanent global Note substantially in the form set forth in Exhibit A (the "Global Note") deposited with, or on behalf of, the Depositary or with the Trustee, as custodian for the Depositary, duly executed by the Company and authenticated by the Trustee as hereinafter provided. The aggregate principal amount of the Global Note may from time to time be increased or decreased by adjustments made on the records of the Trustee, as custodian for the Depositary or its nominee, as hereinafter provided. Initial Notes offered and sold to "accredited investors" (as defined in Rule 501(a)(1), (2), (3) and (7) under the Securities Act) who are not qualified Institutional Buyers shall initially be issued in the form of permanent certificated Notes ("Certificated Notes") in registered form in substantially the form of Exhibit A hereto. SECTION 202. RESTRICTIVE LEGENDS. Unless and until (i) an Initial Note is sold under an effective Registration Statement or (ii) an Initial Note is exchanged for an Exchange Note in connection with an effective Registration Statement, in each case pursuant to the Registration Rights Agreement, each certificate representing a Note shall contain a legend substantially to the following effect (the "Private Placement Legend") on the face thereof: THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS. NEITHER THIS NOTE NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, THE HOLDER OF THIS NOTE BY ITS ACCEPTANCE HEREOF AGREES TO OFFER, SELL OR OTHERWISE TRANSFER SUCH NOTE, PRIOR TO THE DATE WHICH IS TWO YEARS AFTER THE LATER OF THE ORIGINAL ISSUE DATE HEREOF AND THE LAST DATE ON WHICH 26 BURKE INDUSTRIES, INC. (THE "COMPANY") OR ANY AFFILIATE OF THE COMPANY WAS THE OWNER OF THIS NOTE (OR ANY PREDECESSOR OF THIS NOTE) (THE "RESALE RESTRICTION TERMINATION DATE") ONLY (A) TO THE COMPANY, (B) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, (C) FOR SO LONG AS THE SECURITIES ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT ("RULE 144A"), TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (D) PURSUANT TO OFFERS AND SALES TO NON-U.S. PERSONS THAT OCCUR OUTSIDE THE UNITED STATES WITHIN THE MEANING OF REGULATION S UNDER THE SECURITIES ACT, (E) TO AN INSTITUTIONAL "ACCREDITED INVESTOR" WITHIN THE MEANING OF SUBPARAGRAPH (A)(1), (2), (3) OR (7) OF RULE 501 UNDER THE SECURITIES ACT THAT IS ACQUIRING THE NOTE FOR ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF SUCH AN INSTITUTIONAL "ACCREDITED INVESTOR", FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO, OR FOR OFFER OR SALE IN CONNECTION WITH, ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, (F) PURSUANT TO THE EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT PROVIDED BY RULE 144 THEREUNDER (IF AVAILABLE) OR (G) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO THE COMPANY'S AND THE TRUSTEE'S RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER (i) PURSUANT TO CLAUSES (E), (F) OR (G) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM, AND (ii) IN EACH OF THE FOREGOING CASES, TO REQUIRE THAT A CERTIFICATE OF TRANSFER IN THE FORM APPEARING ON THIS NOTE IS COMPLETED AND DELIVERED BY THE TRANSFEROR TO THE TRANSFER AGENT, THIS LEGEND WILL BE REMOVED UPON THE REQUEST OF A HOLDER AFTER THE RESALE RESTRICTION TERMINATION DATE. Each Global Note, whether or not an Initial Note, shall also bear the following legend on the face thereof: UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE 27 NAME OF CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY OR SUCH OTHER REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY OR SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY (AND ANY PAYMENT HEREON IS MADE TO CEDE & CO.), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL SINCE THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. TRANSFERS OF THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS IN WHOLE, BUT NOT IN PART, TO NOMINEES OF CEDE & CO. OR TO A SUCCESSOR THEREOF OR SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN SECTIONS 306 AND 307 OF THE INDENTURE. ARTICLE THREE THE NOTES SECTION 301. TITLE AND TERMS. The aggregate principal amount of Notes which may be authenticated and delivered under this Indenture is limited to $110,000,000, except for Notes authenticated and delivered upon registration of transfer of, or in exchange for, or in lieu of, other Notes pursuant to Section 304, 305, 306, 307, 308, 906, 1015, 1016 or 1108, pursuant to an Exchange Offer or pursuant to Section 312. The Initial Notes shall be known and designated as the "10% Senior Notes Due 2007" and the Exchange Notes shall be known and designated as the "10% Series B Senior Notes Due 2007" of the Company. The Stated Maturity of the Notes shall be August 15, 2007, and the Notes shall bear interest at the rate of 10% per annum from August 20, 1997, or from the most recent Interest Payment Date to which interest has been paid or duly provided for, payable semiannually on February 15 and August 15 in each year, commencing February 15, 1998, until the principal thereof is paid or duly provided for, to the Person in whose name the Note (or any predecessor Note) is registered at the close of business on the February 1 or August 1 next preceding such Interest Payment Date. The principal of (and premium, if any) and interest on the Notes shall be payable, and the Notes shall be exchangeable and transferable, at the office or agency of the 28 Company in The City of New York maintained for such purposes (which initially shall be the office of the Trustee located at 114 West 47th St., New York, N.Y. 10036-1532, Attention: Corporate Trust) or, at the option of the Company, interest may be paid by check mailed to the address of the Person entitled thereto as such address shall appear on the Register; PROVIDED that all payments with respect to the Global Note and the Certificated Notes the Holders of which have given wire transfer instructions to the Company will be required to be made by wire transfer of immediately available funds to the accounts specified by the Holders thereof. Notes that remain outstanding after the consummation of the Exchange Offer and Exchange Notes issued in connection with the Exchange Offer will be treated as a single class of securities under this Indenture. The Notes shall be redeemable as provided in Article Eleven. SECTION 302. DENOMINATIONS. The Notes shall be issuable only in registered form without coupons and only in denominations of $1,000 and any integral multiple thereof. SECTION 303. EXECUTION, AUTHENTICATION, DELIVERY AND DATING. The Notes shall be executed on behalf of the Company by its Chairman, its President, a Vice President or an Assistant Vice President, under its corporate seal reproduced thereon and attested by its Secretary or an Assistant Secretary. The signature of any of these officers on the Notes may be manual or facsimile signatures of the present or any future such authorized officer and may be imprinted or otherwise reproduced on the Notes. Notes bearing the manual or facsimile signatures of individuals who were at any time the proper officers of the Company shall bind the Company, notwithstanding that such individuals or any of them have ceased to hold such offices prior to the authentication and delivery of such Notes or did not hold such offices at the date of such Notes. At any time and from time to time after the execution and delivery of this Indenture, the Company may deliver Initial Notes executed by the Company to the Trustee for authentication, together with a Company Order for the authentication and delivery of such Initial Notes directing the Trustee to authenticate the Notes and certifying that all conditions precedent to the issuance of Notes contained herein have been fully complied with, and the Trustee in accordance with such Company Order shall authenticate and deliver such Initial Notes. On Company Order, the Trustee shall authenticate for original issue Exchange Notes in an aggregate principal amount not to exceed the sum of $110,000,000 plus the aggregate 29 principal amount of any Additional Notes issued; PROVIDED that such Exchange Notes shall be issuable only upon the valid surrender for cancellation of Initial Notes of a like aggregate principal amount in accordance with an Exchange Offer pursuant to the Registration Rights Agreement. In each case, the Trustee shall be entitled to receive an Officers' Certificate and an Opinion of Counsel of the Company that it may reasonably request in connection with such authentication of Notes. Such order shall specify the amount of Notes to be authenticated and the date on which the original issue of Initial Notes or Exchange Notes is to be authenticated. Each Note shall be dated the date of its authentication. No Note shall be entitled to any benefit under this Indenture or be valid or obligatory for any purpose unless there appears on such Note a certificate of authentication substantially in the form provided for in Exhibit A duly executed by the Trustee by manual signature of an authorized officer, and such certificate upon any Note shall be conclusive evidence, and the only evidence, that such Note has been duly authenticated and delivered hereunder and is entitled to the benefits of this Indenture. In case the Company, pursuant to Article Eight, shall be consolidated or merged with or into any other Person or shall convey, transfer, lease or otherwise dispose of its properties and assets substantially as an entirety to any Person, and the successor Person resulting from such consolidation, or surviving such merger, or into which the Company shall have been merged, or the Person which shall have received a conveyance, transfer, lease or other disposition as aforesaid, shall have executed an indenture supplemental hereto with the Trustee pursuant to Article Eight, any of the Notes authenticated or delivered prior to such consolidation, merger, conveyance, transfer, lease or other disposition may, from time to time, at the request of the successor Person, be exchanged for other Notes executed in the name of the successor Person with such changes in phraseology and form as may be appropriate, but otherwise in substance of like tenor as the Notes surrendered for such exchange and of like principal amount; and the Trustee, upon Company Request of the successor Person, shall authenticate and deliver Notes as specified in such request for the purpose of such exchange. If Notes shall at any time be authenticated and delivered in any new name of a successor Person pursuant to this Section in exchange or substitution for or upon registration of transfer of any Notes, such successor Person, at the option of the Holders but without expense to them, shall provide for the exchange of all Notes at the time Outstanding for Notes authenticated and delivered in such new name. SECTION 304. TEMPORARY NOTES. Pending the preparation of definitive Notes, the Company may execute, and upon Company Order the Trustee shall authenticate and deliver, temporary Notes which are printed, lithographed, typewritten, mimeographed or otherwise produced, in any authorized 30 denomination, substantially of the tenor of the definitive Notes in lieu of which they are issued and with such appropriate insertions, omissions, substitutions and other variations as the officers executing such Notes may determine, as conclusively evidenced by their execution of such Notes. If temporary Notes are issued, the Company will cause definitive Notes to be prepared without unreasonable delay. After the preparation of definitive Notes, the temporary Notes shall be exchangeable for definitive Notes upon surrender of the temporary Notes at the office or agency of the Company designated for such purpose pursuant to Section 1002, without charge to the Holder. Upon surrender for cancellation of any one or more temporary Notes, the Company shall execute and the Trustee shall authenticate and deliver in exchange therefor a like principal amount of definitive Notes of authorized denominations. Until so exchanged, the temporary Notes shall in all respects be entitled to the same benefits under this Indenture as definitive Notes. SECTION 305. REGISTRATION, REGISTRATION OF TRANSFER AND EXCHANGE. The Company shall cause to be kept at the Corporate Trust Office of the Trustee a register (the register maintained in such office and in any other office or agency designated pursuant to Section 1002 being herein sometimes referred to as the "Register") in which, subject to such reasonable regulations as it may prescribe, the Company shall provide for the registration of Notes and of transfers of Notes. The Register shall be in written form or any other form capable of being converted into written form within a reasonable time. At all reasonable times, the Register shall be open to inspection by the Trustee. The Trustee is hereby initially appointed as security registrar (the "Note Registrar") for the purpose of registering Notes and transfers of Notes as herein provided. Upon surrender for registration of transfer of any Note at the office or agency of the Company designated pursuant to Section 1002, the Company shall execute, and the Trustee shall authenticate and deliver, in the name of the designated transferee or transferees, one or more new Notes of any authorized denomination or denominations of a like aggregate principal amount. At the option of the Holder, Notes may be exchanged for other Notes of any authorized denomination and of a like aggregate principal amount, upon surrender of the Notes to be exchanged at such office or agency. Whenever any Notes are so surrendered for exchange (including an exchange of Initial Notes for Exchange Notes), the Company shall execute, and the Trustee shall authenticate and deliver, the Notes which the Holder making the exchange is entitled to receive; PROVIDED that no exchange of Initial Notes for Exchange Notes shall occur until an Exchange Offer Registration Statement shall have been declared effective by the Commission and that the Initial Notes to be exchanged for the Exchange Notes shall be cancelled by the Trustee. 31 All Notes issued upon any registration of transfer or exchange of Notes shall be the valid obligations of the Company, evidencing the same debt, and entitled to the same benefits under this Indenture, as the Notes surrendered upon such registration of transfer or exchange. Every Note presented or surrendered for registration of transfer or for exchange shall (if so required by the Company or the Note Registrar) be duly endorsed, or be accompanied by a written instrument of transfer, in form satisfactory to the Company and the Note Registrar, duly executed by the Holder thereof or his attorney duly authorized in writing. No service charge shall be made for any registration of transfer or exchange or redemption of Notes, but the Company may require payment in certain circumstances of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with any registration of transfer or exchange of Notes, other than exchanges pursuant to Section 304, 906, 1015, 1016 or 1108 not involving any transfer. The Company shall not be required (i) to issue, register the transfer of or exchange any Note during a period beginning at the opening of business 15 days before the selection of Notes to be redeemed under Sections 1104, 1015 and 1016 and ending at the close of business on the day of such mailing of the relevant notice of redemption, or (ii) to register the transfer of or exchange any Note so selected for redemption in whole or in part, except the unredeemed portion of any Note being redeemed in part. SECTION 306. BOOK-ENTRY PROVISIONS FOR GLOBAL NOTE. (a) The Global Note initially shall (i) be registered in the name of Cede & Co., as nominee of the Depositary (such nominee being referred to herein as the "Global Note Holder"), (ii) be deposited with, or on behalf of, the Depositary or with the Trustee, as custodian for such Depositary, and (iii) bear legends as set forth in Section 202. Members of, or participants in, the Depositary ("Agent Members") shall have no rights under this Indenture with respect to any Global Note held on their behalf by the Depositary, or the Trustee as its custodian, or under the Global Note, and the Depositary may be treated by the Company, the Trustee and any agent of the Company or the Trustee as the absolute owner of such Global Note for all purposes whatsoever. Notwithstanding the foregoing, nothing herein shall prevent the Company, the Trustee or any agent of the Company or the Trustee from giving effect to any written certification, proxy or other authorization furnished by the Depositary or shall impair, as between the Depositary and its Agent Members, the operation of customary practices governing the exercise of the rights of a holder of any Note. 32 (b) Transfers of the Global Note shall be limited to transfers of such Global Note in whole, but not in part, to the Depositary, its successors or their respective nominees. Interests of beneficial owners in the Global Note may be transferred in accordance with the rules and procedures of the Depositary and the provisions of Section 307. Beneficial owners may obtain Certificated Notes in exchange for their beneficial interests in the Global Note upon request in accordance with the Depositary's and the Registrar's procedures. In addition, if (i) the Company notifies the Trustee in writing that the Depositary is no longer willing or able to act as a depositary and the Company is unable to locate a qualified successor within 90 days or (ii) the Company, at its option, notifies the Trustee in writing that it elects to cause the issuance of Notes in the form of Certificated Securities under the Indenture then, upon surrender by the Global Note Holder of its Global Note, Certificated Notes will be issued to each person that the Global Note Holder and the Depositary identify as being the beneficial owner of the related Notes. (c) In connection with any transfer of a portion of the beneficial interest in the Global Note to beneficial owners pursuant to subsection (b) of this Section, the Note Registrar shall reflect on its books and records the date and a decrease in the principal amount of the Global Note in an amount equal to the principal amount of the beneficial interest in the Global Note to be transferred, and the Company shall execute, and the Trustee shall authenticate and deliver, one or more Certificated Notes of like tenor and amount. (d) Any Certificated Note delivered in exchange for an interest in the Global Note pursuant to subsection (c) or subsection (d) of this Section shall, except as otherwise provided by paragraph (a)(i)(x) of Section 307, bear the applicable legend regarding transfer restrictions applicable to the Certificated Note set forth in Section 202. (e) The Holder of the Global Note may grant proxies and otherwise authorize any person, including Agent Members and persons that may hold interests through Agent Members, to take any action which a Holder is entitled to take under this Indenture or the Notes. SECTION 307. SPECIAL TRANSFER PROVISIONS. Unless and until (i) an Initial Note is sold under an effective Registration Statement, or (ii) an Initial Note is exchanged for an Exchange Note in connection with an effective Registration Statement, in each case pursuant to the Registration Rights Agreement, the following provisions shall apply: (a) TRANSFERS TO NON-QIB INSTITUTIONAL ACCREDITED INVESTORS. The following provisions shall apply with respect to the registration of any proposed transfer of an Initial Note to any institutional "accredited investor" (as defined in Rule 501(a)(1), 33 (2), (3) or (7) of Regulation D under the Securities Act) which is not a QIB (excluding Non-U.S. Persons): (i) The Registrar shall register the transfer of any Initial Note, whether or not such Initial Note bears the Private Placement Legend, if (x) the requested transfer is at least two years after the original issue date of the Initial Notes or (y) the proposed transferee has delivered to the Registrar a certificate substantially in the form of Exhibit C hereto. (ii) If the proposed transferor is an Agent Member holding a beneficial interest in the Global Note, upon receipt by the Registrar of (x) the documents, if any, required by paragraph (i) and (y) instructions given in accordance with the Depositary's and the Registrar's procedures therefor, the Registrar shall reflect on its books and records the date and a decrease in the principal amount of the Global Note in an amount equal to the principal amount of the beneficial interest in the Global Note to be transferred, and the Company shall execute, and the Trustee shall authenticate and deliver, one or more Certificated Notes of like tenor and amount. (b) Transfers to QIBs. The following provisions shall apply with respect to the registration of any proposed transfer of an Initial Note to a QIB (excluding Non-U.S. Persons): (i) If the Note to be transferred consists of Certificated Notes, the Registrar shall register the transfer if such transfer is being made by a proposed transferor who has checked the box provided for on the form of Initial Note, stating, or has otherwise advised the Company and the Registrar in writing, that the sale has been made in compliance with the provisions of Rule 144A to a transferee who has signed the certification provided for on the form of Initial Note, stating, or has otherwise advised the Company and the Registrar in writing, that it is purchasing the Initial Note for its own account or an account with respect to which it exercises sole investment discretion and that it, or the Person on whose behalf it is acting with respect to any such account, is a QIB within the meaning of Rule 144A, and is aware that the sale to it is being made in reliance on Rule 144A and acknowledges that it has received such information regarding the Company as it has requested pursuant to Rule 144A or has determined not to request such information and that it is aware that the transferor is relying upon its foregoing representations in order to claim the exemption from registration provided by Rule 144A. (ii) If the proposed transferee is an Agent Member, and the Initial Note to be transferred consists of Certificated Notes, upon receipt by the 34 Registrar of instructions given in accordance with the Depositary's and the Registrar's procedures therefor, the Registrar shall reflect on its books and records the date and an increase in the principal amount of the Global Note in an amount equal to the principal amount of the Certificated Notes, as the case may be, to be transferred, and the Trustee shall cancel the Certificated Note so transferred. (c) Private Placement Legend. Upon the transfer, exchange or replacement of Notes not bearing the Private Placement Legend, the Registrar shall deliver Notes that do not bear the Private Placement Legend. Upon the transfer, exchange or replacement of Notes bearing the Private Placement Legend, the Registrar shall deliver only Notes that bear the Private Placement Legend unless either (i) the circumstances contemplated by paragraph (a)(i)(x) of this Section 307 exist or (ii) there is delivered to the Registrar an Opinion of Counsel reasonably satisfactory to the Company and the Trustee to the effect that neither such legend nor the related restrictions on transfer are required in order to maintain compliance with the provisions of the Securities Act. (d) General. By its acceptance of any Note bearing the Private Placement Legend, each Holder of such a Note acknowledges the restrictions on transfer of such Note set forth in this Indenture and in the Private Placement Legend and agrees that it will transfer such Note only as provided in this Indenture. The Registrar shall retain until such time as no Notes remain Outstanding copies of all letters, notices and other written communications received pursuant to Section 306 or this Section 307. The Company shall have the right to inspect and make copies of all such letters, notices or other written communications at any reasonable time upon the giving of reasonable written notice to the Registrar. SECTION 308. MUTILATED, DESTROYED, LOST AND STOLEN NOTES. If (i) any mutilated Note is surrendered to the Trustee or the Registrar, or (ii) the Company and the Trustee receive evidence to their satisfaction of the destruction, loss or theft of any Note, and there is delivered to the Company and the Trustee such security or indemnity as may be required by them to save each of them harmless, then, in the absence of notice to the Company or the Trustee that such Note has been acquired by a bona fide purchaser, the Company shall execute, and upon Company Order the Trustee shall authenticate and deliver, in exchange for any such mutilated Note or in lieu of any such destroyed, lost or stolen Note, a new Note of like tenor and principal amount, bearing a number not contemporaneously outstanding. 35 In case any such mutilated, destroyed, lost or stolen Note has become or is about to become due and payable, the Company in its discretion may, instead of issuing a new Note, pay such Note. Upon the issuance of any new Note under this Section, the Company may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses (including the fees and expenses of the Trustee) connected therewith. Every new Note issued pursuant to this Section in lieu of any mutilated, destroyed, lost or stolen Note shall constitute an original additional contractual obligation of the Company, whether or not the mutilated, destroyed, lost or stolen Note shall be at any time enforceable by anyone, and shall be entitled to all benefits of this Indenture equally and proportionately with any and all other Notes duly issued hereunder. The provisions of this Section are exclusive and shall preclude (to the extent lawful) all other rights and remedies with respect to the replacement or payment of mutilated, destroyed, lost or stolen Notes. SECTION 309. PAYMENT OF INTEREST; INTEREST RIGHTS PRESERVED. Interest on any Note which is payable, and is punctually paid or duly provided for, on any Interest Payment Date shall be paid to the Person in whose name such Note (or one or more Predecessor Notes) is registered at the close of business on the Regular Record Date for such interest at the office or agency of the Company in The City of New York maintained for such purposes (which initially shall be the office of the Trustee located at 114 West 47th St., New York, N.Y. 10036-1532, Attention: Corporate Trust) pursuant to Section 1002 or, at the option of the Company, interest may be paid by check mailed to the address of the Person entitled thereto pursuant to Section 310 as such address appears in the Register; PROVIDED that all payments with respect to the Global Note and Certificated Notes the holders of which have given wire transfer instructions to the Trustee (or other Paying Agent) by the Regular Record Date shall be required to be made by wire transfer of immediately available funds to the accounts specified by the holders thereof. Any interest on any Note which is payable, but is not punctually paid or duly provided for, on any Interest Payment Date shall forthwith cease to be payable to the Holder on the Regular Record Date by virtue of having been such Holder, and such defaulted interest and (to the extent lawful) interest on such defaulted interest at the rate borne by the Notes (such defaulted interest and interest thereon herein collectively called "Defaulted Interest") may be paid by the Company, at its election in each case, as provided in clause (a) or (b) below: 36 (a) The Company may elect to make payment of any Defaulted Interest to the Persons in whose names the Notes (or their respective Predecessor Notes) are registered at the close of business on a Special Record Date for the payment of such Defaulted Interest, which shall be fixed in the following manner. The Company shall notify the Trustee in writing of the amount of Defaulted Interest proposed to be paid on each Note and the date of the proposed payment, and at the same time the Company shall deposit with the Trustee an amount of money equal to the aggregate amount proposed to be paid in respect of such Defaulted Interest or shall make arrangements satisfactory to the Trustee for such deposit prior to the date of the proposed payment, such money when deposited to be held in trust for the benefit of the Persons entitled to such Defaulted Interest as in this clause provided. Thereupon the Trustee shall fix a Special Record Date for the payment of such Defaulted Interest which shall be not more than 15 days and not less than 10 days prior to the date of the proposed payment and not less than 10 days after the receipt by the Trustee of the notice of the proposed payment. The Trustee shall promptly notify the Company of such Special Record Date, and, in the name and at the expense of the Company, shall cause notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor to be given in the manner provided for in Section 107, not less than 10 days prior to such Special Record Date. Notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor having been so given, such Defaulted Interest shall be paid to the Persons in whose names the Notes (or their respective Predecessor Notes) are registered at the close of business on such Special Record Date and shall no longer be payable pursuant to the following clause (b). (b) The Company may make payment of any Defaulted Interest in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Notes may be listed, and upon such notice as may be required by such exchange, if, after notice given by the Company to the Trustee of the proposed payment pursuant to this clause, such manner of payment shall be deemed practicable by the Trustee. Subject to the foregoing provisions of this Section, each Note delivered under this Indenture upon registration of transfer of or in exchange for or in lieu of any other Note shall carry the rights to interest accrued and unpaid, and to accrue, which were carried by such other Note. If the Company shall be required to pay any additional interest pursuant to the terms of the Registration Rights Agreement, it shall deliver an Officer's Certificate to the Trustee setting forth the new interest rate and the period for which such rate is applicable. 37 SECTION 310. PERSONS DEEMED OWNERS. Prior to the due presentment of a Note for registration of transfer, the Company, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name such Note is registered as the owner of such Note for the purpose of receiving payment of principal of (and premium, if any) and (subject to Sections 305 and 309) interest on such Note and for all other purposes whatsoever, whether or not such Note be overdue, and none of the Company, the Trustee or any agent of the Company or the Trustee shall be affected by notice to the contrary. SECTION 311. CANCELLATION. All Notes surrendered for payment, redemption, registration of transfer or exchange shall, if surrendered to any Person other than the Trustee, be delivered to the Trustee and shall be promptly cancelled by it. The Company may at any time deliver to the Trustee for cancellation any Notes previously authenticated and delivered hereunder which the Company may have acquired in any manner whatsoever, and may deliver to the Trustee (or to any other Person for delivery to the Trustee) for cancellation any Notes previously authenticated hereunder which the Company has not issued and sold, and all Notes so delivered shall be promptly cancelled by the Trustee. If the Company shall so acquire any of the Notes, however, such acquisition shall not operate as a redemption or satisfaction of the indebtedness represented by such Notes unless and until the same are surrendered to the Trustee for cancellation. No Notes shall be authenticated in lieu of or in exchange for any Notes cancelled as provided in this Section, except as expressly permitted by this Indenture. All cancelled Notes held by the Trustee shall be disposed of by the Trustee in accordance with its customary procedures and certification of their disposal delivered to the Company unless by Company Order the Company shall direct that cancelled Notes be returned to it. SECTION 312. ISSUANCE OF ADDITIONAL NOTES. The Company may, subject to Article Ten of this Indenture, issue up to $75,000,000 aggregate principal amount of additional Notes having identical terms and conditions to the Notes offered hereby (the "Additional Notes"). Any Additional Notes will be part of the same issue as the Notes offered hereby and will vote on all matters with the Notes offered hereby. SECTION 313. COMPUTATION OF INTEREST. Interest on the Notes shall be computed on the basis of a 360-day year of twelve 30-day months. 38 ARTICLE FOUR SATISFACTION AND DISCHARGE SECTION 401. SATISFACTION AND DISCHARGE OF INDENTURE. Upon the request of the Company, the Indenture will cease to be of further effect (except as to surviving rights of registration of transfer or exchange of the Notes, as expressly provided for herein or pursuant hereto), the Company and the Subsidiary Guarantors will be discharged from their obligations under the Notes and the Note Guarantees, and the Trustee, at the expense of the Company, will execute proper instruments acknowledging satisfaction and discharge of the Indenture when: (a) either (i) all the Notes theretofore authenticated and delivered (other than mutilated, destroyed, lost or stolen Notes that have been replaced or paid and Notes that have been subject to defeasance under Article Twelve) have been delivered to the Trustee for cancellation or (ii) all Notes not theretofore delivered to the Trustee for cancellation (A) have become due and payable, (B) will become due and payable at maturity within one year or (C) are to be called for redemption within one year under arrangements satisfactory to the Trustee for the giving of notice of redemption by the Trustee in the name, and at the expense, of the Company, and the Company, in the case of (A), (B) or (C) above, has irrevocably deposited or caused to be deposited with the Trustee funds in trust for the purpose in an amount sufficient to pay and discharge, without the need to reinvest any proceeds thereof, the entire Indebtedness on such Notes not theretofore delivered to the Trustee for cancellation, for principal (and premium, if any, on) and interest on the Notes to the date of such deposit (in the case of Notes that have become due and payable) or to the Stated Maturity or redemption date, as the case may be; (b) the Company has paid or caused to be paid all sums payable under the Indenture by the Company; and (c) the Company has delivered to the Trustee an officers' certificate and an opinion of counsel, each stating that all conditions precedent provided in the Indenture relating to the satisfaction and discharge of the Indenture have been complied with. Notwithstanding the satisfaction and discharge of this Indenture, the obligations of the Company to the Trustee under Section 606 and, if money shall have been deposited with the Trustee pursuant to subclause (ii) of clause (a) of this Section, the obligations of the Trustee under Section 402 and the last paragraph of Section 1003 shall survive. 39 SECTION 402. APPLICATION OF TRUST MONEY. Subject to the provisions of the last paragraph of Section 1003, all money deposited with the Trustee pursuant to Section 401 shall be held in trust and applied by it, in accordance with the provisions of the Notes and this Indenture, to the payment, either directly or through any Paying Agent (including the Company acting as its own Paying Agent) as the Trustee may determine, to the Persons entitled thereto, of the principal (and premium, if any) and interest for whose payment such money has been deposited with the Trustee; but such money need not be segregated from other funds except to the extent required by law. All money deposited pursuant to Section 401 remaining after all payments to be made pursuant to this Article Four have been made shall be returned to the Company or its designee. ARTICLE FIVE REMEDIES SECTION 501. EVENTS OF DEFAULT. "Event of Default", wherever used herein, means any one of the following events (whatever the reason for such Event of Default and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body): (1) default in the payment of any interest or Liquidated Damages, if any, on any Note when it becomes due and payable, and continuance of such default for a period of 30 days; (2) default in the payment of the principal of (or premium, if any, on) any Note when due; (3) failure to perform or comply with Article Eight and Sections 1010 and 1011 or failure to make a Change of Control Offer or an Excess Proceeds Offer, in each case, within the time periods specified in the Indenture; (4) default in the performance, or breach, of any covenant or agreement of the Company or any Subsidiary Guarantor contained in the Indenture or any Note Guarantee (other than a default in the performance, or breach, of a covenant or agreement that is specifically dealt with elsewhere herein), and continuance of such default or breach for a period of 60 days after written notice has been given to the 40 Company by the Trustee or to the Company and the Trustee by the holders of at least 25% in aggregate principal amount of the Notes then outstanding; (5) (i) an event of default has occurred under any mortgage, bond, indenture, loan agreement or other document evidencing an issue of Indebtedness of the Company or any Restricted Subsidiary, which issue has an aggregate outstanding principal amount of not less than $5,000,000 41 ("Specified Indebtedness"), and such default has resulted in such Indebtedness becoming, whether by declaration or otherwise, due and payable prior to the date on which it would otherwise become due and payable or (ii) a default in any payment when due at final maturity of any such Specified Indebtedness; 42 (6) failure by the Company or any of its Restricted Subsidiaries to pay one or more final judgments the uninsured portion of which exceeds in the aggregate $5,000,000, which judgment or judgments are not paid, discharged or stayed for a period of 60 days; (7) any Note Guarantee ceases to be in full force and effect or is declared null and void or any such Subsidiary Guarantor denies that it has any further liability under any Note Guarantee, or gives notice to such effect (other than by reason of the termination of the Indenture or the release of any such Note Guarantee in accordance with the Indenture); (8) the entry of a decree or order by a court having jurisdiction in the premises adjudging the Company or any Significant Subsidiary a bankrupt or insolvent, or approving as properly filed a petition seeking reorganization, arrangement, adjustments or composition of or in respect of the Company or any Significant Subsidiary under the Federal Bankruptcy Code or any other applicable federal or state law, or appointing a receiver, liquidator, assignee, trustee, sequestrator (or other similar official) of the Company or any Significant Subsidiary or of any substantial part of its property, or ordering the winding-up or liquidation of its affairs, and the continuance of any such decree or order unstayed and in effect for a period of 90 consecutive days; or (9) the institution by the Company or any Significant Subsidiary of proceedings to be adjudicated a bankrupt or insolvent, or the consent by it to the institution of bankruptcy or insolvency proceedings against it, or the filing by it of a petition or answer or consent seeking reorganization or relief under the Federal Bankruptcy Code or any other applicable federal or state law, or the consent by it to the filing of any such petition or to the appointment of a receiver, liquidator, 43 assignee, trustee, sequestrator (or other similar official) of the Company or any Significant Subsidiary or of any substantial part of its property, or the making by it of an assignment for the benefit of creditors, or the admission by it in writing of its inability to pay its debts generally as they become due. If an Event of Default has occurred and is continuing, the Trustee shall exercise such rights and powers vested in it under the Indenture and use the same degree of care and skill in its exercise as a prudent person would exercise under the circumstances in the conduct of such person's own affairs. SECTION 502. ACCELERATION OF MATURITY; RESCISSION AND ANNULMENT. If an Event of Default (other than as specified in clauses (8) and (9) above) occurs and is continuing, the Trustee or the holders of not less than 25% in aggregate principal amount of the Notes then outstanding may, and the Trustee at the request of such holders will, declare the principal of and accrued interest and Liquidated Damages, if any, on all of the outstanding Notes immediately due and payable and, upon any such declaration, such principal and such interest will become due and payable immediately. If an Event of Default specified in clauses (8) and (9) above occurs and is continuing, then the principal of and accrued interest and Liquidated Damages, if any, on all of the outstanding Notes will IPSO FACTO become and be immediately due and payable without any declaration or other act on the part of the Trustee or any holder of Notes. At any time after a declaration of acceleration under the Indenture, but before a judgment or decree for payment of the money due has been obtained by the Trustee, the holders of a majority in aggregate principal amount of the outstanding Notes, by written notice to the Company and the Trustee, may rescind such declaration and its consequences if (i) the Company has paid or deposited with the Trustee a sum sufficient to pay (A) all overdue interest on all Notes, (B) all unpaid principal of (and premium, if any, on) any outstanding Notes that has become due otherwise than by such declaration of acceleration and interest thereon at the rate borne by the Notes, (C) to the extent that payment of such interest is lawful, interest upon overdue interest and overdue principal at the rate borne by the Notes and (D) all sums paid or advanced by the Trustee under the Indenture and the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel; and (ii) all Events of Default, other than the non-payment of amounts of principal of (or premium, if any, on) or interest on the Notes that have become due solely by such declaration of acceleration, have been cured or waived. No such rescission will affect any subsequent default or impair any right consequent thereon. Notwithstanding the preceding paragraph, in the event of a declaration of acceleration in respect of the Notes because of an Event of Default specified in 44 Section 501(5) shall have occurred and be continuing, such declaration of acceleration shall be automatically annulled if the Indebtedness that is the subject of such Event of Default has been discharged or the holders thereof have rescinded their declaration of acceleration in respect of such Indebtedness, and written notice of such discharge or rescission, as the case may be, shall have been given to the Trustee by the Company and countersigned by the holders of such Indebtedness or a trustee, fiduciary or agent for such holders, within 30 days after such declaration of acceleration in respect of the Notes, and no other Event of Default has occurred during such 30-day period which has not been cured or waived during such period. SECTION 503. COLLECTION OF INDEBTEDNESS AND SUITS FOR ENFORCEMENT BY TRUSTEE. The Company and each of the Subsidiary Guarantors covenant that if (a) default is made in the payment of any installment of interest on any Note when such interest becomes due and payable and such default continues for a period of 30 days, or (b) default is made in the payment of the principal of (or premium, if any, on) any Note at the Maturity thereof, the Company and each Subsidiary Guarantor will, upon demand of the Trustee, pay to the Trustee for the benefit of the Holders of such Notes, the whole amount then due and payable on such Notes for principal (and premium, if any) and interest, and interest on any overdue principal (and premium, if any) and, to the extent that payment of such interest shall be legally enforceable, upon any overdue installment of interest, at the rate borne by the Notes, and, in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel. If the Company or any Subsidiary Guarantor, as the case may be, fails to pay such amounts forthwith upon such demand, the Trustee, in its own name as trustee of an express trust, may institute a judicial proceeding for the collection of the sums so due and unpaid, may prosecute such proceeding to judgment or final decree and may enforce the same against the Company, such Subsidiary Guarantor or any other obligor upon the Notes and collect the moneys adjudged or decreed to be payable in the manner provided by law out of the property of the Company, such Subsidiary Guarantor or any other obligor upon the Notes, wherever situated. If an Event of Default occurs and is continuing, the Trustee may in its discretion proceed to protect and enforce its rights and the rights of the Holders by such 45 appropriate judicial proceedings as the Trustee shall deem most effectual to protect and enforce any such rights, whether for the specific enforcement of any covenant or agreement in this Indenture or in aid of the exercise of any power granted herein, or to enforce any other proper remedy. SECTION 504. TRUSTEE MAY FILE PROOFS OF CLAIM. In case of the pendency of any receivership, insolvency, liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or other judicial proceeding relative to the Company or any other obligor upon the Notes (including the Subsidiary Guarantors) or the property of the Company or of such other obligor or their creditors, the Trustee (irrespective of whether the principal of the Notes shall then be due and payable as therein expressed or by declaration or otherwise and irrespective of whether the Trustee shall have made any demand on the Company for the payment of overdue principal, premium, if any, or interest) shall be entitled and empowered, by intervention in such proceeding or otherwise, (a) to file and prove a claim for the whole amount of principal (and premium, if any) and interest owing and unpaid in respect of the Notes and to file such other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including any claim for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel) and of the Holders allowed in such judicial proceeding, and (b) to collect and receive any moneys or other property payable or deliverable on any such claims and to distribute the same; and any custodian, receiver, assignee, trustee, liquidator, sequestrator or similar official in any such judicial proceeding is hereby authorized by each Holder to make such payments to the Trustee and, in the event that the Trustee shall consent to the making of such payments directly to the Holders, to pay the Trustee any amount due it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 606. Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment or composition affecting the Notes or the rights of any Holder thereof, or to authorize the Trustee to vote in respect of the claim of any Holder in any such proceeding. 46 SECTION 505. TRUSTEE MAY ENFORCE CLAIMS WITHOUT POSSESSION OF NOTES. All rights of action and claims under this Indenture or the Notes may be prosecuted and enforced by the Trustee without the possession of any of the Notes or the production thereof in any proceeding relating thereto, and any such proceeding instituted by the Trustee shall be brought in its own name and as trustee of an express trust, and any recovery of judgment shall, after provision for the payment of the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, be for the ratable benefit of the Holders of the Notes in respect of which such judgment has been recovered. SECTION 506. APPLICATION OF MONEY COLLECTED. Any money collected by the Trustee pursuant to this Article shall be applied in the following order, at the date or dates fixed by the Trustee and, in case of the distribution of such money on account of principal (or premium, if any) or interest, upon presentation of the Notes and the notation thereon of the payment if only partially paid and upon surrender thereof if fully paid: FIRST: To the payment of all amounts due the Trustee under Section 606; SECOND: To the payment of the amounts then due and unpaid for principal of (and premium, if any) and interest on the Notes in respect of which or for the benefit of which such money has been collected, ratably, without preference or priority of any kind, according to the amounts due and payable on such Notes for principal (and premium, if any) and interest, respectively; and THIRD: The balance, if any, to the Company, its successors and assigns or the Person or Persons legally entitled thereto. SECTION 507. LIMITATION ON SUITS. No holder of any of the Notes has any right to institute any proceeding with respect to the Indenture or any remedy thereunder, unless the holders of at least 25% in aggregate principal amount of the outstanding Notes have made written request, and offered reasonable indemnity, to the Trustee to institute such proceeding within 60 days after receipt of such notice and the Trustee, within such 60-day period, has not received directions inconsistent with such written request by holders of a majority in aggregate principal amount of the outstanding Notes. Such limitations do not apply, however, to a suit instituted by a holder of a Note for the enforcement of the payment of the principal of, premium, if any, or interest on such Note on or after the respective due dates expressed in such Note. 47 SECTION 508. UNCONDITIONAL RIGHT OF HOLDERS TO RECEIVE PRINCIPAL, PREMIUM AND INTEREST. Notwithstanding any other provision in this Indenture, the Holder of any Note shall have the right, which is absolute and unconditional, to receive payment, as provided herein (including, if applicable, Article Twelve) and in such Note of the principal of (and premium, if any) and (subject to Section 309) interest on such Note on the respective Stated Maturities expressed in such Note (or, in the case of redemption, on the Redemption Date) and to institute suit for the enforcement of any such payment, and such rights shall not be impaired without the consent of such Holder. SECTION 509. RESTORATION OF RIGHTS AND REMEDIES. If the Trustee or any Holder has instituted any proceeding to enforce any right or remedy under this Indenture and such proceeding has been discontinued or abandoned for any reason, or has been determined adversely to the Trustee or to such Holder, then and in every such case, subject to any determination in such proceeding, the Company, the Subsidiary Guarantors, the Trustee and the Holders shall be restored severally and respectively to their former positions hereunder and thereafter all rights and remedies of the Trustee and the Holders shall continue as though no such proceeding had been instituted. SECTION 510. RIGHTS AND REMEDIES CUMULATIVE. Except as otherwise provided with respect to the replacement or payment of mutilated, destroyed, lost or stolen Notes in the last paragraph of Section 308, no right or remedy herein conferred upon or reserved to the Trustee or to the Holders is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy. SECTION 511. DELAY OR OMISSION NOT WAIVER. No delay or omission of the Trustee or of any Holder of any Note to exercise any right or remedy accruing upon any Event of Default shall impair any such right or remedy or constitute a waiver of any such Event of Default or an acquiescence therein. Every right and remedy given by this Article or by law to the Trustee or to the Holders may be exercised from time to time, and as often as may be deemed expedient, by the Trustee or by the Holders, as the case may be. 48 SECTION 512. CONTROL BY HOLDERS. The Holders of not less than a majority in principal amount of the Outstanding Notes shall have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred on the Trustee, PROVIDED that (a) such direction shall not be in conflict with any rule of law or with this Indenture, (b) the Trustee may take any other action deemed proper by the Trustee which is not inconsistent with such direction, and (c) the Trustee need not take any action which might involve it in personal liability or be unjustly prejudicial to the Holders not consenting. SECTION 513. WAIVER OF PAST DEFAULTS. The holders of not less than a majority in aggregate principal amount of the outstanding Notes may, on behalf of the holders of all of the Notes, waive any past defaults under the Indenture, except a default in the payment of the principal of (and premium, if any) or interest on any Note, or in respect of a covenant or provision that under the Indenture cannot be modified or amended without the consent of the holder of each Note outstanding. Upon any such waiver, such default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been cured, for every purpose of this Indenture; but no such waiver shall extend to any subsequent or other default or Event of Default or impair any right consequent thereon. SECTION 514. WAIVER OF STAY OR EXTENSION LAWS. The Company and each Subsidiary Guarantor covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, or plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay or extension law wherever enacted, now or at any time hereafter in force, which may affect the covenants or the performance of this Indenture; and the Company and each Subsidiary Guarantor (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law and covenants that it will not hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law had been enacted. 49 ARTICLE SIX THE TRUSTEE SECTION 601. NOTICE OF DEFAULTS. If a Default or an Event of Default occurs and is continuing and is known to the Trustee, the Trustee shall mail to each holder of the Notes notice of the Default or Event of Default within 90 days after the occurrence thereof. However, except in the case of a Default or an Event of Default in payment of principal of (and premium, if any, on) or interest on any Notes, the Trustee may withhold the notice to the holders of the Notes if a committee of its trust officers in good faith determines that withholding such notice is in the interests of the holders of the Notes. SECTION 602. CERTAIN RIGHTS OF TRUSTEE. Subject to the provisions of TIA Sections 315(a) through 315(d): (a) the Trustee may conclusively rely and shall be protected in acting or refraining from acting, pursuant to the terms of this Indenture or otherwise, upon any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties; (b) any request or direction of the Company mentioned herein shall be sufficiently evidenced by a Company Request or Company Order with sufficient detail as may be requested by the Trustee and any resolution of the Board of Directors may be sufficiently evidenced by a Board Resolution; (c) whenever in the administration of this Indenture the Trustee shall deem it desirable that a matter be proved or established prior to taking, suffering or omitting any action hereunder, the Trustee (unless other evidence be herein specifically prescribed) may, in the absence of bad faith on its part, rely upon an Officers Certificate and/or an Opinion of Counsel; (d) the Trustee may consult with counsel and the written advice of such counsel or any Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon; 50 (e) the Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request or direction of any of the Holders pursuant to this Indenture, unless such Holders shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities (including fees and expenses of its agents and counsel) which might be incurred by it in compliance with such request or direction; (f) the Trustee shall not be bound to make any investigation into, and may conclusively rely upon, the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document, but the Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit, and, if the Trustee shall determine to make such further inquiry or investigation, it shall be entitled to examine the books, records and premises of the Company, personally or by agent or attorney; (g) the Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents or attorneys and the Trustee shall not be responsible for any misconduct or negligence on the part of any agent or attorney appointed with due care by it hereunder; (h) the Trustee shall not be liable for any action taken, suffered or omitted by it in good faith and believed by it to be authorized or within the discretion or rights or powers conferred upon it by this Indenture; and (i) except during the continuance of an Event of Default, the Trustee need perform only those duties as are specifically set forth in this Indenture. The Trustee shall not be required to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder, or in the exercise of any of its rights or powers if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. SECTION 603. TRUSTEE NOT RESPONSIBLE FOR RECITALS OR ISSUANCE OF NOTES. The recitals contained herein and in the Notes, except for the Trustee's certificates of authentication, shall be taken as the statements of the Company and the Subsidiary Guarantors, and the Trustee assumes no responsibility for their correctness. The Trustee makes no representations as to the validity or sufficiency of this Indenture, the Notes or any Note Guarantee, except that the Trustee represents that it is duly authorized to execute and deliver this Indenture, authenticate the Notes and perform its obligations hereunder and, 51 upon the effectiveness of the Registration Statement, that the statements made by it in a Statement of Eligibility on Form T-1 supplied to the Company are true and accurate, subject to the qualifications set forth therein. The Trustee shall not be accountable for the use or application by the Company of the Notes or the proceeds thereof. SECTION 604. MAY HOLD NOTES. The Trustee, any Paying Agent, any Note Registrar or any other agent of the Company or of the Trustee, in its individual or any other capacity, may become the owner or pledgee of Notes and, subject to TIA Sections 310(b) and 311, may otherwise deal with the Company with the same rights it would have if it were not Trustee, Paying Agent, Note Registrar or such other agent. SECTION 605. MONEY HELD IN TRUST. Money held by the Trustee in trust hereunder need not be segregated from other funds except to the extent required by law. The Trustee shall be under no liability for interest on any money received by it hereunder except as otherwise agreed with the Company or any Subsidiary Guarantor, as the case may be. SECTION 606. COMPENSATION AND REIMBURSEMENT. The Company agrees: (a) to pay to the Trustee (in its capacity as Trustee, Paying Agent and Registrar) from time to time such reasonable compensation for all services rendered by it hereunder as may be separately agreed in writing (which compensation shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust); (b) except as otherwise expressly provided herein, to reimburse the Trustee upon its request for all reasonable expenses, disbursements and advances incurred or made by the Trustee in accordance with any provision of this Indenture (including the reasonable compensation and the expenses and disbursements of its agents and counsel), except any such expense, disbursement or advance as may be attributable to its negligence or bad faith; and (c) to indemnify the Trustee for, and to hold it harmless against, any loss, liability or expense incurred without negligence or bad faith on its part, arising out of or in connection with the acceptance or administration of this trust, including the costs and expenses of defending itself against any claim or liability in connection with the exercise or performance of any of its powers or duties hereunder. 52 The obligations of the Company under this Section to compensate the Trustee, to pay or reimburse the Trustee for expenses, disbursements and advances and to indemnify and hold harmless the Trustee shall constitute additional indebtedness hereunder and shall survive the satisfaction and discharge of this Indenture. As security for the performance of such obligations of the Company, the Trustee shall have a claim prior to the Notes upon all property and funds held or collected by the Trustee as such, except funds held in trust for the payment of principal of (and premium, if any) or interest on particular Notes. When the Trustee incurs expenses or renders services in connection with an Event of Default specified in Section 501(8) or (9), the expenses (including the reasonable charges and expenses of its counsel) of and the compensation for such services are intended to constitute expenses of administration under any applicable Federal or State bankruptcy, insolvency or other similar law. The provisions of this Section shall survive the termination of this Indenture. SECTION 607. CORPORATE TRUSTEE REQUIRED; ELIGIBILITY There shall be at all times a Trustee hereunder which shall be eligible to act as Trustee under TIA Section 310(a)(1) and shall have a combined capital and surplus of at least $50,000,000. If such corporation publishes reports of condition at least annually, pursuant to law or to the requirements of Federal, State, territorial or District of Columbia supervising or examining authority, then for the purposes of this Section, the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time the Trustee shall cease to be eligible in accordance with the provisions of this Section, it shall resign immediately in the manner and with the effect hereinafter specified in this Article. SECTION 608. RESIGNATION AND REMOVAL; APPOINTMENT OF SUCCESSOR. (a) No resignation or removal of the Trustee and no appointment of a successor Trustee pursuant to this Article shall become effective until the acceptance of appointment by the successor Trustee in accordance with the applicable requirements of Section 609. (b) The Trustee may resign at any time by giving written notice thereof to the Company. If the instrument of acceptance by a successor Trustee required by Section 609 shall not have been delivered to the Trustee within 30 days after the giving of such notice of resignation, the resigning Trustee may petition any court of competent jurisdiction for the appointment of a successor Trustee. 53 (c) The Trustee may be removed at any time by Act of the Holders of not less than a majority in principal amount of the Outstanding Notes, delivered to the Trustee and to the Company. (d) If at any time: (1) the Trustee shall fail to comply with the provisions of TIA Section 310(b) after written request therefor by the Company or by any Holder who has been a bona fide Holder of a Note for at least six months, except when the Trustee's duty to resign is stayed in accordance with the provisions of TIA Section 310(b), or (2) the Trustee shall cease to be eligible under Section 607 and shall fail to resign after written request therefor by the Company or by any Holder who has been a bona fide Holder of a Note for at least six months, or (3) the Trustee shall become incapable of acting or shall be adjudged a bankrupt or insolvent or a receiver of the Trustee or of its property shall be appointed or any public officer shall take charge or control of the Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation, then, in any such case, (i) the Company, by a Board Resolution, may remove the Trustee, or (ii) subject to TIA Section 315(e), any Holder who has been a bona fide Holder of a Note for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. (e) If the Trustee shall resign, be removed or become incapable of acting, or if a vacancy shall occur in the office of Trustee for any cause, the Company, by a Board Resolution, shall promptly appoint a successor Trustee. If, within one year after such resignation, removal or incapability, or the occurrence of such vacancy, a successor Trustee shall be appointed by Act of the Holders of a majority in principal amount of the Outstanding Notes delivered to the Company and the retiring Trustee, the successor Trustee so appointed shall, forthwith upon its acceptance of such appointment, become the successor Trustee and supersede the successor Trustee appointed by the Company. If no successor Trustee shall have been so appointed by the Company or the Holders and accepted appointment in the manner hereinafter provided subject to TIA Section 315(e), any Holder who has been a bona fide Holder of a Note for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the appointment of a successor Trustee. 54 (f) The Company shall give notice of each resignation and each removal of the Trustee and each appointment of a successor Trustee to the Holders of Notes in the manner provided for in Section 107. Each notice shall include the name of the successor Trustee and the address of its Corporate Trust Office. SECTION 609. ACCEPTANCE OF APPOINTMENT BY SUCCESSOR. Every successor Trustee appointed hereunder shall execute, acknowledge and deliver to the Company and to the retiring Trustee an instrument accepting such appointment, and thereupon the resignation or removal of the retiring Trustee shall become effective and such successor Trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, trusts and duties of the retiring Trustee; but, on request of the Company or the successor Trustee, such retiring Trustee shall, upon payment of its charges, execute and deliver an instrument transferring to such successor Trustee all the rights, powers and trusts of the retiring Trustee and shall duly assign, transfer and deliver to such successor Trustee all property and money held by such retiring Trustee hereunder subject to the retiring Trustee's rights as provided under the last sentence of Section 606. Upon request of any such successor Trustee, the Company shall execute any and all instruments for more fully and certainly vesting in and confirming to such successor Trustee all such rights, powers and trusts. No successor Trustee shall accept its appointment unless at the time of such acceptance such successor Trustee shall be qualified and eligible under this Article. SECTION 610. MERGER, CONVERSION, CONSOLIDATION OR SUCCESSION TO BUSINESS. Any corporation into which the Trustee may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Trustee shall be a party, or any corporation succeeding to all or substantially all of the corporate trust business of the Trustee, shall be the successor of the Trustee hereunder, provided such corporation shall be otherwise qualified and eligible under this Article, without the execution or filing of any paper or any further act on the part of any of the parties hereto. In case any Notes shall have been authenticated, but not delivered, by the Trustee then in office, any successor by merger, conversion or consolidation to such authenticating Trustee may adopt such authentication and deliver the Notes so authenticated with the same effect as if such successor Trustee had itself authenticated such Notes. In case at that time any of the Notes shall not have been authenticated, any successor Trustee may authenticate such Notes either in the name of any predecessor hereunder or in the name of the successor Trustee. In all such cases such certificates shall have the full force and effect which this Indenture provides that the certificate of authentication of the Trustee shall have for the certificate of authentication of the Trustee shall have; PROVIDED, HOWEVER, that the 55 right to adopt the certificate of authentication of any predecessor Trustee or to authenticate Notes in the name of any predecessor Trustee shall apply only to its successor or successors by merger, conversion or consolidation. ARTICLE SEVEN HOLDERS LISTS AND REPORTS BY TRUSTEE, COMPANY AND SUBSIDIARY GUARANTORS SECTION 701. DISCLOSURE OF NAMES AND ADDRESSES OF HOLDERS. Every Holder of Notes, by receiving and holding the same, agrees with the Company, the Subsidiary Guarantors and the Trustee that none of the Company, the Subsidiary Guarantors or the Trustee or any agent of either of them shall be held accountable by reason of the disclosure of any such information as to the names and addresses of the Holders in accordance with TIA Section 312, regardless of the source from which such information was derived, and that the Trustee shall not be held accountable by reason of mailing any material pursuant to a request made under TIA Section 312(b). SECTION 702. REPORTS BY TRUSTEE. Within 60 days after May 15 of each year commencing with the first May 15 after the first issuance of Notes, the Trustee shall transmit to the Holders, in the manner and to the extent provided in TIA Section 313(c), a brief report dated as of such May 15 if required by TIA Section 313(a). ARTICLE EIGHT CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE SECTION 801. COMPANY MAY CONSOLIDATE, ETC., ONLY ON CERTAIN TERMS. The Company may not, in a single transaction or series of related transactions, consolidate or merge with or into (other than the consolidation or merger of a Restricted Subsidiary with another Restricted Subsidiary or into the Company) (whether or not the Company or such Restricted Subsidiary is the surviving corporation), or directly and/or indirectly through its Restricted Subsidiaries, sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of its properties or assets (determined on a consolidated basis for the Company and its Restricted Subsidiaries taken as a whole) in one 56 or more related transactions to, another corporation, person or entity or permit any of its Restricted Subsidiaries to enter into any such transaction or series of transactions if such transaction or series of transactions, in the aggregate, would result in the sale, assignment, transfer, lease, conveyance or other disposition of all or substantially all of the properties or assets of the Company and its Restricted Subsidiaries (determined on a consolidated basis for the Company and its Restricted Subsidiaries taken as a whole) unless: (a) either (i) the Company, in the case of a transaction involving the Company, or such Restricted Subsidiary, in the case of a transaction involving a Restricted Subsidiary, is the surviving corporation or (ii) in the case of a transaction involving the Company, the entity or the person formed by or surviving any such consolidation or merger (if other than the Company) or to which such sale, assignment, transfer, lease, conveyance or other disposition shall have been made (the "Surviving Entity") is a corporation organized or existing under the laws of the United States, any state thereof or the District of Columbia and assumes all the obligations of the Company under the Notes and the Indenture pursuant to a supplemental indenture in a form reasonably satisfactory to the Trustee; (b) immediately after giving effect to such transaction and treating any obligation of the Company or a Restricted Subsidiary in connection with or as a result of such transaction as having been incurred as of the time of such transaction, no Default or Event of Default has occurred and is continuing; (c) the Company (or the Surviving Entity if the Company is not the continuing obligor under the Indenture) could, at the time of such transaction and after giving pro forma effect thereto as if such transaction had occurred at the beginning of the applicable four-quarter period, incur at least $1.00 of additional Indebtedness (other than Permitted Indebtedness) pursuant to the first paragraph of Section 1010; (d) if the Company is not the continuing obligor under the Indenture, each Subsidiary Guarantor, unless it is the other party to the transaction described above, has by supplemental indenture confirmed that its Note Guarantee applies to the Surviving Entity's obligations under the Indenture and the Notes; (e) if any of the property or assets of the Company or any of its Restricted Subsidiaries would thereupon become subject to any Lien, the provisions of Section 1014 are complied with; (f) immediately after giving effect to such transaction on a pro forma basis, the Consolidated Net Worth of the Company (or of the Surviving Entity if the Company is not the continuing obligor under the Indenture) is equal to or greater than 57 the Consolidated Net Worth of the Company immediately prior to such transaction; and (g) the Company delivers, or causes to be delivered, to the Trustee, in form and substance reasonably satisfactory to the Trustee, an officers' certificate and an opinion of counsel, each stating that such transaction complies with the requirements of this Indenture. For purposes of the foregoing, the transfer (by lease, assignment, sale or otherwise, in a single transaction or series of transactions) of all or substantially all of the properties or assets of one or more Restricted Subsidiaries the Capital Stock of which constitutes all or substantially all of the properties and assets of the Company, shall be deemed to be the transfer of all or substantially all of the properties and assets of the Company. SECTION 802. SUCCESSOR SUBSTITUTED. In the event of any transaction described in and complying with the conditions listed in Section 801 in which the Company is not the continuing obligor under the Indenture, the Surviving Entity will succeed to, and be substituted for, and may exercise every right and power of, the Company under the Indenture, and thereafter the Company will, except in the case of a lease, be discharged from all its obligations and covenants under the Indenture and Notes. ARTICLE NINE SUPPLEMENTS AND AMENDMENTS TO INDENTURE AND NOTE GUARANTEES SECTION 901. WITHOUT CONSENT OF HOLDERS. Without the consent of any Holders, the Company and any affected Subsidiary Guarantor, each when authorized by a Board Resolution, and the Trustee may amend or supplement this Indenture, the Notes or any Note Guarantee without the consent of any Holder of a Note: (a) to evidence the succession of another person to the Company or any Subsidiary Guarantor and the assumption by any such successor of the covenants of the Company or any Subsidiary Guarantor in the Indenture and in the Notes; or 58 (b) to add to the covenants of the Company or any Subsidiary Guarantor for the benefit of the Holders or to surrender any right or power herein conferred upon the Company; or (c) to add any additional Events of Default; or (d) to provide for uncertificated Notes in addition to or in place of the certificated Notes; or (e) to evidence and provide for the acceptance of appointment under the Indenture by a successor Trustee; or (f) to secure the Notes or any Note Guarantee; or (g) to cure any ambiguity, to correct or supplement any provision in the Indenture that may be defective or inconsistent with any other provision in the Indenture, or to make any other provisions with respect to matters or questions arising under the Indenture, PROVIDED that such actions pursuant to this clause do not adversely affect the interests of the holders in any material respect; or (h) to comply with any requirements of the Commission in order to effect and maintain the qualification of the Indenture under the Trust Indenture Act; or (i) to release any Subsidiary Guarantor from its Note Guarantee in accordance with the provisions of the Indenture (including in connection with a sale of all of the Capital Stock of such Subsidiary Guarantor). Upon the request of the Company accompanied by a Board Resolution authorizing the execution of any such amended or supplemental Indenture, Note or Note Guarantee, and upon receipt by the Trustee of the documents described in Section 602(b) hereof, the Trustee shall join with the Company or the affected Subsidiary Guarantor in the execution of any amended or supplemental Indenture or Note Guarantee authorized or permitted by the terms of this Indenture and to make any further appropriate agreements and stipulations that may be therein contained, but the Trustee shall not be obligated to enter into such amended or supplemental Indenture or Note Guarantee that adversely affects its own rights, duties or immunities under this Indenture or otherwise. SECTION 902. WITH CONSENT OF HOLDERS. With the consent of the Holders of not less than a majority in aggregate Outstanding principal amount of the Notes, by Act of said Holders delivered to the Company, any affected Subsidiary Guarantor and the Trustee, the Company and the 59 Subsidiary Guarantor, each when authorized by a Board Resolution, and the Trustee may amend or supplement in any manner this Indenture or any Note Guarantee or modify in any manner the rights of the Holders under this Indenture or any Note Guarantee; PROVIDED, HOWEVER, that no such supplement, amendment or modification may, without the consent of the Holder of each Outstanding Note affected thereby: (a) change the Stated Maturity of the principal of, or any installment of interest on, any Note, or reduce the principal amount thereof or the rate of interest thereon or any premium payable upon the redemption thereof, or change the coin or currency in which any Note or any premium or the interest thereon is payable, or impair the right to institute suit for the enforcement of any such payment after the Stated Maturity thereof (or, in the case of redemption, on or after the redemption date); (b) reduce the percentage in principal amount of outstanding Notes, the consent of whose holders is required for any waiver of compliance with certain provisions of, or certain defaults and their consequences provided for under, the Indenture; (c) waive a default in the payment of principal of, or premium, if any, or interest on the Notes; or (d) release any Subsidiary Guarantor that is a Significant Subsidiary from any of its obligations under its Note Guarantee or the Indenture other than in accordance with the terms of the Indenture. It shall not be necessary for any Act of Holders under this Section to approve the particular form of any proposed supplemental indenture, but it shall be sufficient if such Act shall approve the substance thereof. SECTION 903. EXECUTION OF SUPPLEMENTAL INDENTURES. In executing, or accepting the additional trusts created by, any supplemental indenture permitted by this Article or the modifications thereby of the trusts created by this Indenture, the Trustee shall be entitled to receive, and shall be fully protected in relying upon, an Opinion of Counsel stating that the execution of such supplemental indenture is authorized or permitted by this Indenture. The Trustee may, but shall not be obligated to, enter into any such supplemental indenture which affects the Trustee's own rights, duties or immunities under this Indenture or otherwise. 60 SECTION 904. EFFECT OF SUPPLEMENTAL INDENTURES. Upon the execution of any supplemental indenture under this Article, this Indenture shall be modified in accordance therewith, and such supplemental indenture shall form a part of this Indenture for all purposes; and every Holder of Notes theretofore or thereafter authenticated and delivered hereunder shall be bound thereby. SECTION 905. CONFORMITY WITH TRUST INDENTURE ACT. Every supplemental indenture executed pursuant to the Article shall conform to the requirements of the Trust Indenture Act as then in effect. SECTION 906. REFERENCE IN NOTES TO SUPPLEMENTAL INDENTURES. Notes authenticated and delivered after the execution of any supplemental indenture pursuant to this Article may, and shall if required by the Trustee, bear a notation in form approved by the Trustee as to any matter provided for in such supplemental indenture. If the Company shall so determine, new Notes so modified as to conform, in the opinion of the Trustee and the Company, to any such supplemental indenture may be prepared and executed by the Company and authenticated and delivered by the Trustee in exchange for Outstanding Notes. SECTION 907. NOTICE OF SUPPLEMENTAL INDENTURES. Promptly after the execution by the Company, any affected Subsidiary Guarantor and the Trustee of any supplemental indenture or Note Guarantee pursuant to the provisions of Section 902, the Company shall give notice thereof to the Holders of each Outstanding Note affected, in the manner provided for in Section 107, setting forth in general terms the substance of such supplemental indenture or Note Guarantee. Any failed attempt to effect such notice, or any defect therein shall not, however, in any way impair or affect the validity of any such amended or supplemental indenture or Note Guarantee; PROVIDED that the Company has acted reasonably and in good faith. 61 ARTICLE TEN COVENANTS SECTION 1001. PAYMENT OF PRINCIPAL, PREMIUM, IF ANY, AND INTEREST. The Company covenants and agrees for the benefit of the Holders that it will duly and punctually pay the principal of (and premium, if any) and interest on the Notes in accordance with the terms of the Notes and this Indenture. SECTION 1002. MAINTENANCE OF OFFICE OR AGENCY. The Company will maintain in The City of New York, an office or agency where Notes may be presented or surrendered for payment, where Notes may be surrendered for registration of transfer or exchange and where notices and demands to or upon the Company in respect of the Notes and this Indenture may be served. The Corporate Trust Office located at 114 West 47th St., New York, NY 10036-1532 of the Trustee shall be such office or agency of the Company, unless the Company shall designate and maintain some other office or agency for one or more of such purposes. The Company will give prompt written notice to the Trustee of any change in the location of any such office or agency. If at any time the Company shall fail to maintain any such required office or agency or shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the Corporate Trust Office of the Trustee, and the Company hereby appoints the Trustee as its agent to receive all such presentations, surrenders, notices and demands. The Company may also from time to time designate one or more other offices or agencies (in or outside of The City of New York) where the Notes may be presented or surrendered for any or all such purposes and may from time to time rescind any such designation; PROVIDED, HOWEVER, that no such designation or rescission shall in any manner relieve the Company of its obligation to maintain an office or agency in The City of New York for such purposes. The Company will give prompt written notice to the Trustee of any such designation or rescission and any change in the location of any such other office or agency. SECTION 1003. MONEY FOR NOTE PAYMENTS TO BE HELD IN TRUST. If the Company shall at any time act as its own Paying Agent, it will, on or before each due date of the principal of (or premium, if any) or interest on any of the Notes, segregate and hold in trust for the benefit of the Persons entitled thereto a sum sufficient to pay the principal of (or premium, if any) or interest so becoming due until such sums shall 62 be paid to such Persons or otherwise disposed of as herein provided and will promptly notify the Trustee of its action or failure so to act. Whenever the Company shall have one or more Paying Agents for the Notes, it will, on or before each due date of the principal of (or premium, if any) or interest on any Notes, deposit with a Paying Agent a sum sufficient to pay the principal (and premium, if any) or interest so becoming due, such sum to be held in trust for the benefit of the Persons entitled to such principal, premium or interest, and (unless such Paying Agent is the Trustee) the Company will promptly notify the Trustee of such action or any failure so to act. The Company will cause each Paying Agent (other than the Trustee) to execute and deliver to the Trustee an instrument in which such Paying Agent shall agree with the Trustee, subject to the provisions of this Section, that such Paying Agent will: (a) hold all sums held by it for the payment of the principal of (and premium, if any) or interest on Notes in trust for the benefit of the Persons entitled thereto until such sums shall be paid to such Persons or otherwise disposed of as herein provided; (b) give the Trustee notice of any default by the Company (or any other obligor upon the Notes) in the making of any payment of principal (and premium, if any) or interest; and (c) at any time during the continuance of any such default, upon the written request of the Trustee, forthwith pay to the Trustee all sums so held in trust by such Paying Agent. The Company may at any time, for the purpose of obtaining the satisfaction and discharge of this Indenture or for any other purpose, pay, or by Company Order direct any Paying Agent to pay, to the Trustee all sums held in trust by the Company or such Paying Agent, such sums to be held by the Trustee upon the same trusts as those upon which such sums were held by the Company or such Paying Agent; and, upon such payment by any Paying Agent to the Trustee, such Paying Agent shall be released from all further liability with respect to such sums. Any money deposited with the Trustee or any Paying Agent, or then held by the Company, in trust for the payment of the principal of (or premium, if any) or interest on any Note and remaining unclaimed for two years after such principal (and premium, if any) or interest has become due and payable shall be paid to the Company on Company Request, or (if then held by the Company) shall be discharged from such trust; and the Holder of such Note shall thereafter, as an unsecured general creditor, look only to the Company for payment thereof, and all liability of the Trustee or such Paying Agent with respect to such 63 trust money, and all liability of the Company as trustee thereof, shall thereupon cease; PROVIDED, HOWEVER, that the Trustee or such Paying Agent, before being required to make any such repayment, may at the expense of the Company cause to be published once, in a newspaper published in the English language, customarily published on each Business Day and of general circulation in the Borough of Manhattan, The City of New York, notice that such money remains unclaimed and that, after a date specified therein, which shall not be less than 30 days from the date of such publication, any unclaimed balance of such money then remaining will be repaid to the Company. SECTION 1004. CORPORATE EXISTENCE. Subject to Article Eight, the Company will do or cause to be done all things necessary to preserve and keep in full force and effect the corporate existence, rights (charter and statutory) and franchises of the Company and each Restricted Subsidiary; PROVIDED, HOWEVER, that the Company shall not be required to preserve any such right or franchise if the Board of Directors shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Company and its Restricted Subsidiaries as a whole and that the loss thereof is not disadvantageous in any material respect to the Holders. SECTION 1005. PAYMENT OF TAXES AND OTHER CLAIMS. The Company will pay or discharge or cause to be paid or discharged, before the same shall become delinquent, (a) all taxes, assessments and governmental charges levied or imposed upon the Company or any Restricted Subsidiary or upon the income, profits or property of the Company or any Restricted Subsidiary and (b) all lawful claims for labor, materials and supplies, which, if unpaid, might by law become a lien upon the property of the Company or any Restricted Subsidiary; PROVIDED, HOWEVER, that the Company shall not be required to pay or discharge or cause to be paid or discharged any such tax, assessment, charge or claim whose amount, applicability or validity is being contested in good faith by appropriate proceedings. SECTION 1006. MAINTENANCE OF PROPERTIES. The Company will cause all properties owned by the Company or any Restricted Subsidiary or used or held for use in the conduct of its business or the business of any Restricted Subsidiary to be maintained and kept in good condition, repair and working order (ordinary wear and tear excepted) and will cause to be made all necessary repairs, renewals, replacements, betterments and improvements thereof, all to the extent in the judgment of the Company may be necessary so that the business carried on in connection therewith may be properly and advantageously conducted at all times; PROVIDED, HOWEVER, that nothing in this Section shall prevent the Company from discontinuing the maintenance of any of such properties if such discontinuance is, in the judgment of the Company, desirable 64 in the conduct of its business or the business of any Subsidiary and not disadvantageous in any material respect to the Holders. SECTION 1007. INSURANCE. The Company will at all times keep all of its and its Restricted Subsidiaries' material properties which are of an insurable nature insured with insurers, believed by the Company to be responsible, against loss or damage to the extent that property of similar character is usually so insured by corporations similarly situated and owning like properties. SECTION 1008. STATEMENT BY OFFICERS AS TO DEFAULT. (a) The Company and each Subsidiary Guarantor will deliver to the Trustee, within 120 days after the end of each fiscal year, a brief certificate from the principal executive officer, principal financial officer or principal accounting officer as to his or her knowledge of compliance by the Company and such Subsidiary Guarantor with all conditions and covenants under this Indenture. For purposes of this Section 1008(a), such compliance shall be determined without regard to any period of grace or requirement of notice under this Indenture. (b) When any Default has occurred and is continuing under this Indenture, or if the trustee for or the holder of any other evidence of Indebtedness of the Company or any Subsidiary gives any notice or takes any other action with respect to a claimed default (other than with respect to Indebtedness in the principal amount of less than $2,000,000), the Company shall deliver to the Trustee by registered or certified mail or by telegram, telex or facsimile transmission an officers certificate specifying such event, notice or other action within five Business Days of its occurrence. SECTION 1009. [INTENTIONALLY OMITTED] SECTION 1010. LIMITATION ON INDEBTEDNESS OF ISSUANCE OF DISQUALIFIED STOCK The Company shall not, and shall not permit any Restricted Subsidiary to, create, issue, assume, guarantee or in any manner become directly or indirectly liable for the payment of, or otherwise incur (collectively, "incur"), any Indebtedness (including Acquired Indebtedness and the issuance of Disqualified Stock), except that the Company or any Subsidiary Guarantor may incur Indebtedness if, at the time of such event, the Fixed Charge Coverage Ratio for the immediately preceding four full fiscal quarters for which internal financial statements are available, taken as one accounting period, would have been equal to at least 2.00 to 1.0. 65 In making the foregoing calculation for any four-quarter period that includes the Closing Date, pro forma effect shall be given to the Offering and the Recapitalization, as if such transactions had occurred at the beginning of such four-quarter period. In addition (but without duplication), in making the foregoing calculation, pro forma effect shall be given to: (i) the incurrence of such Indebtedness and (if applicable) the application of the net proceeds therefrom, including to refinance other Indebtedness, as if such Indebtedness was incurred and the application of such proceeds occurred at the beginning of such four-quarter period, (ii) the incurrence, repayment or retirement of any other Indebtedness by the Company or its Restricted Subsidiaries since the first day of such four-quarter period as if such Indebtedness was incurred, repaid or retired at the beginning of such four-quarter period and (iii) the acquisition (whether by purchase, merger or otherwise) or disposition (whether by sale, merger or otherwise) of any company, entity or business acquired or disposed of by the Company or its Restricted Subsidiaries, as the case may be, since the first day of such four-quarter period, in each case as if such acquisition or disposition (and the reduction or increase of any associated Fixed Charge obligations and the change in Consolidated EBITDA resulting therefrom) had occurred at the beginning of such four-quarter period. If since the beginning of such period any Person (that subsequently became a Restricted Subsidiary or was merged with or into the Company or any Restricted Subsidiary since the beginning of such period) shall have made any acquisition (whether by purchase, merger or otherwise) or disposition that would have required adjustment pursuant to this definition, then the Fixed Charge Coverage Ratio shall be calculated giving PRO FORMA effect thereto as if such acquisition or disposition had occurred at the beginning of the applicable four-quarter period. In making a computation under the foregoing clause (i) or (ii), (A) the amount of Indebtedness under a revolving credit facility shall be computed based on the average daily balance of such Indebtedness during such four-quarter period, (B) if such Indebtedness bears, at the option of the Company, a fixed or floating rate of interest, interest thereon shall be computed by applying, at the option of the Company, either the fixed or floating rate and (C) the amount of any Indebtedness that bears interest at a floating rate will be calculated as if the rate in effect on the date of determination had been the applicable rate for the entire period (taking into account any Hedging Obligations applicable to such Indebtedness if such Hedging Obligations have a remaining term at the date of determination in excess of 12 months). For purposes of this definition, whenever PRO FORMA effect is to be given to a transaction, the PRO FORMA calculations shall be made in good faith by the chief financial officer of the Company. Notwithstanding the foregoing, the Company may, and may permit its Restricted Subsidiaries to, incur the following Indebtedness ("Permitted Indebtedness"): (i) Indebtedness of the Company or any Restricted Subsidiary under the Bank Credit Agreement or one or more other credit facilities (and the incurrence by any Restricted Subsidiary of guarantees thereof) in an aggregate principal amount at any one time outstanding not to exceed the greater of (x) $15 million or (y) the 66 amount of the Borrowing Base, less any amounts applied to the permanent reduction of such credit facilities pursuant to Section 1016; (ii) Indebtedness of the Company or any Restricted Subsidiary outstanding on the Closing Date and listed on a schedule to the Indenture (other than Indebtedness described under clause (i) above); (iii) Indebtedness owed by the Company to any Wholly Owned Restricted Subsidiary or owed by any Restricted Subsidiary to the Company or a Wholly Owned Restricted Subsidiary (provided that such Indebtedness is held by the Company or such Restricted Subsidiary); PROVIDED, HOWEVER, that any Indebtedness of the Company owing to any such Restricted Subsidiary is unsecured and subordinated in right of payment from and after such time as the Notes shall become due and payable (whether at Stated Maturity, acceleration, or otherwise) to the payment and performance of the Company's obligations under the Notes; (iv) Indebtedness represented by the Notes (other than the Additional Notes) and the Note Guarantees (including any Note Guarantees issued pursuant to Section 1021); (v) Indebtedness of the Company or any Restricted Subsidiary under Hedging Obligations incurred in the ordinary course of business; (vi) Indebtedness of the Company or any Restricted Subsidiary consisting of guarantees, indemnities or obligations in respect of purchase price adjustments in connection with the acquisition or disposition of assets, including, without limitation, shares of Capital Stock; (vii) either (A) Capitalized Lease Obligations of the Company or any Restricted Subsidiary or (B) Indebtedness under purchase money mortgages or secured by purchase money security interests, in each case incurred for the purpose of financing or refinancing all or any part of the purchase price or cost of construction or improvement of any property (real or personal) or other assets that are used or useful in the business of the Company or such Restricted Subsidiary (whether through the direct purchase of assets or the Capital Stock of any Person owning such assets and whether such Indebtedness is owed to the seller or Person carrying out such construction or improvement or to any third party), so long as (x) such Indebtedness is not secured by any property or assets of the Company or any Restricted Subsidiary other than the property and assets so acquired, constructed or improved and (y) such Indebtedness is created within 90 days of the acquisition or completion of construction or improvement of the related property; provided that the aggregate amount of 67 Indebtedness under clauses (A) and (B) does not exceed $7,500,000 million at any one time outstanding; (viii) Indebtedness of the Company or any Restricted Subsidiary not permitted by any other clause of this definition, in an aggregate principal amount not to exceed $10 million at any one time outstanding; (ix) Indebtedness under (or constituting reimbursement obligations with respect) to letters of credit issued in the ordinary course of business, including without limitation letters of credit in respect of workers' compensation claims or self-insurance, or other Indebtedness with respect to reimbursement type obligations regarding workers' compensation claims; PROVIDED, HOWEVER, that upon the drawing of such letters of credit or other obligations, such obligations are reimbursed within five days following such drawing; and (x) any renewals, extensions, substitutions, refinancings or replacements (each, for purposes of this clause, a "refinancing") of any outstanding Indebtedness, other than Indebtedness incurred pursuant to clause (i), (iii), (v), (vi), (vii), (viii) or (ix) of this definition, including any successive refinancings thereof, so long as (A) any such new Indebtedness is in a principal amount that does not exceed the principal amount so refinanced, plus the amount of any premium required to be paid in connection with such refinancing pursuant to the terms of the Indebtedness refinanced or the amount of any premium reasonably determined by the Company as necessary to accomplish such refinancing, plus the amount of the expenses of the Company incurred in connection with such refinancing, (B) in the case of any refinancing of Subordinated Indebtedness, such new Indebtedness is made subordinate to the Notes at least to the same extent as the Indebtedness being refinanced and (C) such refinancing Indebtedness does not have an Average Life less than the Average Life of the Indebtedness being refinanced and does not have a final scheduled maturity earlier than the final scheduled maturity, or permit redemption at the option of the holder earlier than the earliest date of redemption at the option of the holder, of the Indebtedness being refinanced. SECTION 1011. LIMITATION ON RESTRICTED PAYMENTS. The Company shall not, and shall not permit any Restricted Subsidiary to, directly or indirectly, take any of the following actions: (a) declare or pay any dividend or make any other payment or distribution on account of the Company's or any of its Restricted Subsidiaries' Capital Stock (including, without limitation any payment in connection with any merger or consolidation involving the Company) or to the direct or indirect holders of the 68 Company's or any of its Restricted Subsidiaries' Capital Stock in their capacity as such, other than (i) dividends, payments or distributions payable solely in Qualified Equity Interests, (ii) dividends, payments or distributions by a Restricted Subsidiary payments payable to the Company or another Restricted Subsidiary or (iii) pro rata dividends, payments or distributions on common stock of Restricted Subsidiaries held by minority stockholders, provided that such dividends, payments or distributions do not in the aggregate exceed the minority stockholders' pro rata share of such Restricted Subsidiaries' net income from the first day of the Company's fiscal quarter during which the Closing Date occurs; (b) purchase, redeem or otherwise acquire or retire for value, directly or indirectly, any shares of Capital Stock, or any options, warrants or other rights to acquire such shares of Capital Stock of (i) the Company or (ii) any Restricted Subsidiary held by any Affiliate of the Company (other than, in either case, any such Capital Stock owned by the Company or any of its Restricted Subsidiaries); (c) make any principal payment on, or repurchase, redeem, defease or otherwise acquire or retire for value, prior to any scheduled principal payment, sinking fund payment or maturity, any Subordinated Indebtedness; and (d) make any Investment (other than a Permitted Investment) in any person (such payments or other actions described in (but not excluded from) clauses (a) through (d) being referred to as "Restricted Payments"), unless at the time of, and immediately after giving effect to, the proposed Restricted Payment: (i) no Default or Event of Default has occurred and is continuing, (ii) the Company could incur at least $1.00 of additional Indebtedness pursuant to the first paragraph of Section 1010 and (iii) the aggregate amount of all Restricted Payments made after the Closing Date does not exceed the sum of: (A) 50% of the aggregate Consolidated Adjusted Net Income of the Company during the period (taken as one accounting period) from the first day of the Company's first fiscal quarter commencing after the Closing Date to the last day of the Company's most recently ended fiscal quarter for which internal financial statements are available at the time of such proposed Restricted Payment (or, if such aggregate cumulative Consolidated Adjusted Net Income is a loss, minus 100% of such amount), plus 69 (B) 100% of the aggregate net cash proceeds received by the Company after the Closing Date from (x) the issuance or sale (other than to a Restricted Subsidiary) of either (1) Qualified Equity Interests of the Company or (2) Indebtedness (other than the Series A Preferred Stock and any refinancings thereof) or Disqualified Stock that has been converted into or exchanged for Qualified Equity Interests of the Company, together with the aggregate net cash proceeds received by the Company at the time of such conversion or exchange or (y) cash capital contributions received by the Company after the Closing Date with respect to Qualified Equity Interests, plus (C) $3 million. Notwithstanding the foregoing, the Company and its Restricted Subsidiaries may take the following actions, so long as (other than with respect to the action described in clause (a) below) no Default or Event of Default has occurred and is continuing or would occur: (a) the payment of any dividend within 60 days after the date of declaration thereof, if at the declaration date such payment would not have been prohibited by the foregoing provisions; (b) the repurchase, redemption or other acquisition or retirement for value of any shares of Capital Stock of the Company, in exchange for, or out of the net cash proceeds of a substantially concurrent issuance and sale (other than to a Subsidiary) of, Qualified Equity Interests of the Company; (c) the purchase, redemption, defeasance or other acquisition or retirement for value of any Subordinated Indebtedness in exchange for, or out of the net cash proceeds of a substantially concurrent issuance and sale (other than to a Subsidiary) of, shares of Qualified Equity Interests of the Company; (d) the purchase, redemption, defeasance or other acquisition or retirement for value of Subordinated Indebtedness in exchange for, or out of the net cash proceeds of a substantially concurrent issuance or sale (other than to a Restricted Subsidiary) of, Subordinated Indebtedness, so long as the Company or a Restricted Subsidiary would be permitted to refinance such original Subordinated Indebtedness with such new Subordinated Indebtedness pursuant to clause (x) of the definition of Permitted Indebtedness; (e) the purchase, redemption, acquisition, cancellation or other retirement for value of shares of Capital Stock of the Company, options or warrants to acquire 70 any such shares or related stock appreciation rights held by officers, directors or employees of the Company or its Subsidiaries or former officers, directors or employees (or their respective estates or beneficiaries under their estates) of the Company or its Subsidiaries or by any plan for their benefit, in each case, upon death, disability, retirement or termination of employment or pursuant to the terms of any benefit plan or any other agreement under which such shares of stock or options, warrants or rights were issued; provided that the aggregate cash consideration paid for such purchase, redemption, acquisition, cancellation or other retirement of such shares of Capital Stock or options, warrants or rights after the Closing Date does not exceed in any fiscal year the sum of (i) $500,000, (ii) the cash proceeds received by the Company after the Closing Date from the sale of Qualified Equity Interests to employees, directors or officers of the Company and its Subsidiaries that occurs in such fiscal year and (iii) amounts referred to in clauses (i) through (ii) that remain unused from the immediately preceding fiscal year; and (f) (i) the payment of any regular quarterly dividends in respect of the Series A Preferred Stock in the form of additional shares of Series A Preferred Stock having the terms and conditions set forth in the Certificate of Determination for the Series A Preferred Stock as in effect on the Closing Date; and (ii) commencing October 15, 2000, the payment of regular quarterly cash dividends (in the amount no greater than that provided for in the Certificate of Determination for the Series A Preferred Stock as in effect on the Closing Date), out of funds legally available therefor, on any of the shares of Series A Preferred Stock issued and outstanding on the Closing Date and on any shares of Series A Preferred Stock issued in payment of dividends made or subsequently issued in payment of dividends thereon in respect of such shares of Series A Preferred Stock outstanding on the Closing Date, PROVIDED that, at the time of and immediately after giving effect to the payment of such cash dividend, the Fixed Charge Coverage Ratio, giving pro forma effect to the payment of such dividend as if it had occurred at the beginning of the four full fiscal quarters immediately preceding the date on which the dividend is to be paid, would have been equal to at least 2.25 to 1.0. The actions described in clauses (b), (c), (e) and (f)(ii) of this paragraph shall be Restricted Payments that will be permitted to be taken in accordance with this paragraph but will be considered Restricted Payments for purposes of clause (iii) of the first paragraph of this Section 1011 and the actions described in clauses (a), (d) and (f)(i) of this paragraph shall be Restricted Payments that shall be permitted to be taken in accordance with this paragraph but will not be considered Restricted Payments for purposes of clause (iii) of the first paragraph of this Section 1011. For the purpose of making any calculations under the Indenture (i) if a Restricted Subsidiary is designated an Unrestricted Subsidiary, the Company shall be deemed 71 to have made an Investment in an amount equal to the fair market value of the net assets of such Restricted Subsidiary at the time of such designation as determined by the Board of Directors of the Company, whose good faith determination shall be conclusive, (ii) any property transferred to or from an Unrestricted Subsidiary shall be valued at fair market value at the time of such transfer, as determined by the Board of Directors of the Company, whose good faith determination shall be conclusive and (iii) subject to the foregoing, the amount of any Restricted Payment, if other than cash, shall be determined by the Board of Directors of the Company, whose good faith determination shall be conclusive. If the aggregate amount of all Restricted Payments calculated under the foregoing provision includes an Investment (other than a Permitted Investment) in an Unrestricted Subsidiary or other person that thereafter becomes a Restricted Subsidiary, the aggregate amount of all Restricted Payments calculated under the foregoing provision shall be reduced by the lesser of (x) the net asset value of such Subsidiary at the time it becomes a Restricted Subsidiary and (y) the initial amount of such Restricted Payment. If an Investment resulted in the making of a Restricted Payment, the aggregate amount of all Restricted Payments calculated under the foregoing provision shall be reduced by the amount of any net reduction in such Investment (resulting from the payment of interest or dividends, loan repayment, transfer of assets or otherwise), to the extent such net reduction is not included in the Company's Consolidated Adjusted Net Income; provided that the total amount by which the aggregate amount of all Restricted Payments may be reduced may not exceed the lesser of (x) the cash proceeds received by the Company and its Restricted Subsidiaries in connection with such net reduction and (y) the initial amount of such Restricted Payment. In computing the Consolidated Adjusted Net Income of the Company for purposes of the foregoing clause (iii)(A), (i) the Company may use audited financial statements for the portions of the relevant period for which audited financial statements are available on the date of determination and unaudited financial statements and other current financial data based on the books and records of the Company for the remaining portion of such period and (ii) the Company shall be permitted to rely in good faith on the financial statements and other financial data derived from its books and records that are available on the date of determination. If the Company makes a Restricted Payment that, at the time of the making of such Restricted Payment, would in the good faith determination of the Company be permitted under the requirements of the Indenture, such Restricted Payment shall be deemed to have been made in compliance with the Indenture notwithstanding any subsequent adjustments made in good faith to the Company's financial statements affecting Consolidated Adjusted Net Income of the Company for any period. 72 SECTION 1012. LIMITATION ON ISSUANCES AND SALES OF PREFERRED STOCK OF RESTRICTED SUBSIDIARIES. The Company shall not permit any Restricted Subsidiary to issue any Preferred Stock. SECTION 1013. LIMITATION ON TRANSACTIONS WITH AFFILIATES. The Company shall not, and shall not permit any Restricted Subsidiary to, directly or indirectly, enter into or suffer to exist any transaction with, or for the benefit of, any Affiliate of the Company or any beneficial owner of 10% or more of any class of the Capital Stock of the Company at any time outstanding ("Interested Persons"), unless (a) such transaction is on terms that are no less favorable to the Company or such Restricted Subsidiary, as the case may be, than those that could have been obtained in an arm's length transaction with third parties who are not Interested Persons and (b) the Company delivers to the Trustee (i) with respect to any transaction or series of related transactions entered into after the Closing Date involving aggregate payments in excess of $1.0 million, a resolution of the Board of Directors of the Company set forth in an officers' certificate certifying that such transaction or transactions complies with clause (a) above and that such transaction or transactions have been approved by the Board of Directors (including a majority of the Disinterested Directors) of the Company and (ii) with respect to a transaction or series of related transactions involving aggregate payments equal to or greater than $5 million, a written opinion as to the fairness to the Company or such Restricted Subsidiary of such transaction or series of transactions from a financial point of view issued by an independent investment banking, accounting or valuation firm of national standing. The foregoing covenant shall not restrict (A) transactions among the Company and/or its Restricted Subsidiaries; (B) transactions (including Permitted Investments) permitted by Section 1011; (C) employment agreements on customary terms and the payment of regular and customary compensation to employees, officers or directors in the ordinary course of business; (D) the payment to the Principals or their Related Parties and Affiliates, of annual management and advisory fees and related expenses, PROVIDED that the amount of any such fees and expenses shall not exceed $500,000 per fiscal year, PROVIDED FURTHER that any such fees shall only commence accruing on October 1, 1998 and shall be payable in arrears on a quarterly basis commencing on January 1, 1999; 73 (E) loans or advances to officers or employees of the Company or any of its Restricted Subsidiaries in the ordinary course of business not to exceed $250,000 in the aggregate at any one time outstanding; (F) the payment of all fees and expenses related to the Recapitalization; and (G) any agreement to which the Company or any Restricted Subsidiary is a party as in effect as of the date of the Indenture as set forth in Schedule A hereto or any amendment thereto (as long as any such amendment is not disadvantageous to the Holders in any material respect) or any transaction contemplated thereby. SECTION 1014. LIMITATION ON LIENS. The Company shall not, and shall not permit any Restricted Subsidiary to, directly or indirectly, create, incur, assume or suffer to exist any Lien of any kind on or with respect to any of its property or assets, including any shares of stock or debt of any Restricted Subsidiary, whether owned at the Closing Date or thereafter acquired, or any income, profits or proceeds therefrom, or assign or otherwise convey any right to receive income thereon, unless (a) in the case of any Lien securing Subordinated Indebtedness, the Notes are secured by a Lien on such property, assets or proceeds that is senior in priority to such Lien and (b) in the case of any other Lien, the Notes are equally and ratably secured with the obligation or liability secured by such Lien. Notwithstanding the foregoing, the Company may, and may permit any Subsidiary to, incur the following Liens ("Permitted Liens"): (i) Liens (other than Liens securing Indebtedness under the Bank Credit Agreement) existing as of the Closing Date; (ii) Liens on property or assets of the Company or any Restricted Subsidiary securing Indebtedness under the Bank Credit Agreement or one or more other credit facilities in a principal amount not to exceed the principal amount of the outstanding Indebtedness permitted by clause (i) of the definition of "Permitted Indebtedness"; (iii) Liens on any property or assets of a Restricted Subsidiary granted in favor of the Company or any Wholly Owned Restricted Subsidiary; (iv) Liens securing the Notes or any Note Guarantee; 74 (v) any interest or title of a lessor under any Capitalized Lease Obligation or Sale and Leaseback Transaction that was not entered into in violation of Section 1010; (vi) Liens securing Acquired Indebtedness created prior to (and not in connection with or in contemplation of) the incurrence of such Indebtedness by the Company or any Restricted Subsidiary; provided that such Lien does not extend to any property or assets of the Company or any Restricted Subsidiary other than the property and assets acquired in connection with the incurrence of such Acquired Indebtedness; (vii) Liens securing Hedging Obligations permitted to be incurred pursuant to clause (v) of the definition of "Permitted Indebtedness"; (viii) Liens securing Indebtedness permitted to be incurred under paragraph (vii) of the definition of "Permitted Indebtedness" in Section 1010; (ix) statutory Liens or landlords', carriers', warehouseman's, mechanics', suppliers', materialmen's, repairmen's or other like Liens arising in the ordinary course of business and with respect to amounts not yet delinquent or being contested in good faith by appropriate proceedings and, if required by GAAP, a reserve or other appropriate provision has been made therefor; (x) Liens for taxes, assessments, government charges or claims that are not yet delinquent or being contested in good faith by appropriate proceedings promptly instituted and diligently conducted and, if required by GAAP, a reserve or other appropriate provision has been made therefor; (xi) Liens incurred or deposits made to secure the performance of tenders, bids, leases, statutory obligations, surety and appeal bonds, government contracts, performance bonds and other obligations of a like nature incurred in the ordinary course of business (other than contracts for the payment of money); (xii) easements, rights-of-way, restrictions and other similar charges or encumbrances not interfering in any material respect with the business of the Company or any Restricted Subsidiary incurred in the ordinary course of business; (xiii) Liens arising by reason of any judgment, decree or order of any court, so long as such Lien is adequately bonded and any appropriate legal proceedings that may have been duly initiated for the review of such judgment, decree or order have not been finally terminated or the period within which such proceedings may be initiated has not expired; 75 (xiv) Liens securing reimbursement obligations with respect to letters of credit that encumber documents and other property relating to such letters of credit and the products and proceeds thereof; (xv) Liens upon specific items of inventory or other goods and proceeds of the Company or any Restricted Subsidiary securing its obligations in respect of bankers' acceptances issued or created for the account of any person to facilitate the purchase, shipment or storage of such inventory or other goods; (xvi) Liens in favor of customs and revenue authorities arising as a matter of law to secure payment of customs duties in connection with the importation of goods; (xvii) Liens incurred in the ordinary course of business of the Company or any Restricted Subsidiary of the Company with respect to obligations that do not exceed $500,000 at any one time outstanding and that (a) are not incurred in connection with the borrowing of money or the obtaining of advances or credit (other than trade credit in the ordinary course of business) and (b) do not in the aggregate materially detract from the value of the property or materially impair the use thereof in the operation of the businesses of the Company or such Restricted Subsidiary; (xviii) leases or subleases to third parties; (xix) Liens in connection with workers' compensation obligations of the Company and its Restricted Subsidiaries incurred in the ordinary course; and (xx) any extension, renewal or replacement, in whole or in part, of any Lien described in the foregoing clauses (i) through (xix); provided that any such extension, renewal or replacement is no more restrictive in any material respect than the Lien so extended, renewed or replaced and does not extend to any additional property or assets. SECTION 1015. PURCHASE OF NOTES UPON A CHANGE OF CONTROL. (a) If a Change of Control occurs at any time, then, unless irrevocable notice of redemption for all of the Notes is given within 30 days after the occurrence of such Change of Control in accordance with the provisions of Article Eleven, each holder of Notes or Additional Notes shall have the right to require that the Company purchase such holder's Notes or Additional Notes, as applicable, in whole or in part in integral multiples of $1,000, at a purchase price in cash equal to 101% of the principal amount of such Notes or Additional Notes, plus accrued and unpaid interest, if any, and Liquidated Damages, if any, to the date of purchase, pursuant to the offer described below (the "Change of Control Offer"). 76 (b) Within 30 days following any Change of Control, the Company shall notify the Trustee thereof and give written notice of such Change of Control to each holder of Notes or Additional Notes by first-class mail, postage prepaid, at its address appearing in the security register, stating: (i) that a Change of Control has occurred, that the Change of Control Offer is being made pursuant to this Section 1015 and that all Notes validly tendered will be accepted for payment; (ii) the purchase price and the purchase date, which shall be a Business Day no earlier than 30 days nor later than 60 days from the date such notice is mailed or such later date as is necessary to comply with requirements under the Exchange Act (the "Change of Control Payment Date"); (iii) that any Note or Additional Note not tendered shall continue to accrue interest; (iv) that, unless the Company defaults in the payment of the purchase price, any Notes or Additional Notes accepted for payment pursuant to the Change of Control Offer shall cease to accrue interest after the Change of Control Payment Date; (v) certain other procedures that a holder of Notes or Additional Notes must follow to accept a Change of Control Offer or to withdraw such acceptance; (vi) that Holders electing to have any Note purchased pursuant to the Change of Control Offer will be required to surrender such Note, together with the form entitled "Option of the Holder to Elect Purchase" on the reverse side of such Note completed, to the Paying Agent at the address specified in the notice prior to the close of business on the Business Day immediately preceding the Change of Control Payment Date; (vii) that Holders will be entitled to withdraw their election if the Paying Agent receives, not later than the close of business on the third Business Day immediately preceding the Change of Control Payment Date, a telegram, telex, facsimile transmission or letter setting forth the name of such Holder, the principal amount of Notes delivered for purchase and a statement that such Holder is withdrawing his election to have such Notes purchased; and (viii) that Holders whose Notes are being purchased only in part will be issued new Notes equal in principal amount to the unpurchased portion of the Notes 77 surrendered; PROVIDED that each Note purchased and each new Note issued shall be in a principal amount of $1,000 or integral multiples thereof. (c) On the Change of Control Payment Date, the Company shall: (i) accept for payment Notes or portions thereof tendered pursuant to the Change of Control Offer; (ii) deposit one day prior to the Change of Control purchase date with the Paying Agent money sufficient to pay the purchase price of all Notes or portions thereof so accepted; and (iii) deliver, or cause to be delivered, to the Trustee, all Notes or portions thereof so accepted together with an Officers' Certificate specifying the Notes or portions thereof accepted for payment by the Company. The Paying Agent shall promptly mail, to the Holders of Notes so accepted, payment in an amount equal to the purchase price, and the Trustee shall promptly authenticate and mail to such Holders a new Note or Notes equal in principal amount to any unpurchased portion of the Notes surrendered; PROVIDED that each Note purchased and each new Note issued shall be in a principal amount of $1,000 or integral multiples thereof. The Company will publicly announce the results of the Change of Control Offer on or as soon as practicable after the Change of Control purchase date. For purposes of this Section 1015, the Trustee shall act as Paying Agent. All Notes or portions thereof purchased pursuant to this Section 1015 will be cancelled by the Trustee. (d) The Company shall comply with the applicable tender offer rules including Rule-14e under the Exchange Act, and any other applicable securities laws and regulations in connection with a Change of Control Offer. To the extent that provisions of any applicable securities laws or regulations conflict with provisions of this Section 1015, the Company shall comply with such securities laws and regulations and shall not be deemed to have breached its obligations under this Section 1015 by virtue thereof. SECTION 1016. LIMITATION ON CERTAIN ASSET SALES. (a) The Company shall not, and shall not permit any Restricted Subsidiary to, engage in any Asset Sale unless (i) the consideration received by the Company or such Restricted Subsidiary for such Asset Sale is not less than the fair market value of the assets sold (as determined by the Board of Directors of the Company, whose good faith determination shall be conclusive) and (ii) the consideration received by the Company or the relevant Restricted Subsidiary in respect of such Asset Sale consists of at least 75% cash or cash equivalents (including, for purposes of this clause (ii), the principal amount of any 78 Indebtedness for money borrowed (as reflected on the Company's consolidated balance sheet) of the Company or any Restricted Subsidiary that (x) is assumed by any transferee of any such assets or other property in such Asset Sale or (y) with respect to the sale or other disposition of all of the Capital Stock of any Restricted Subsidiary, remains the liability of such Subsidiary subsequent to such sale or other disposition, but only to the extent that such assumption, sale or other disposition, as the case may be, is effected on a basis under which there is no further recourse to the Company or any of its Restricted Subsidiaries with respect to such liability). (b) If the Company or any Restricted Subsidiary engages in an Asset Sale, the Company may, at its option, within 12 months after such Asset Sale, (i) apply all or a portion of the Net Cash Proceeds to the reduction of amounts outstanding under the Bank Credit Agreement or to the permanent repayment of other senior Indebtedness of the Company or a Restricted Subsidiary, or (ii) invest (or enter into a legally binding agreement to invest) all or a portion of such Net Cash Proceeds in the making of capital expenditures, the acquisition of a controlling interest in a Permitted Business or acquisition of other long-term assets, in each case, that shall be used or useful in the Permitted Businesses of the Company or its Restricted Subsidiaries, as the case may be. Pending the final application of any such Net Cash Proceeds, the Company may temporarily reduce revolving credit Indebtedness to the extent not prohibited by the Indenture. If any such legally binding agreement to invest such Net Cash Proceeds is terminated, the Company may, within 90 days of such termination or within 12 months of such Asset Sale, whichever is later, invest such Net Cash Proceeds as provided in clause (i) or (ii) (without regard to the parenthetical contained in such clause (ii)) above. The amount of such Net Cash Proceeds not so used as set forth above in this paragraph (b) constitutes "Excess Proceeds". (c) When the aggregate amount of Excess Proceeds exceeds $5 million, the Company shall, within 30 days thereafter, make an offer (an "Excess Proceeds Offer") to purchase from all holders of Notes and Additional Notes, on a pro rata basis, the maximum principal amount (expressed as a multiple of $1,000) of Notes and Additional Notes that may be purchased with the Excess Proceeds, at a purchase price in cash equal to 100% of the principal amount thereof, plus accrued interest, if any, and Liquidated Damages, if any, to the date such offer to purchase is consummated. To the extent that the aggregate principal amount of Notes and Additional Notes tendered pursuant to such offer to purchase is less than the Excess Proceeds, the Company or its Restricted Subsidiaries may use such deficiency for general corporate purposes. If the aggregate principal amount of Notes and Additional Notes validly tendered and not withdrawn by holders thereof exceeds the Excess Proceeds, the Notes and Additional Notes to be purchased shall be selected on a pro rata basis. Upon completion of such offer to purchase, the amount of Excess Proceeds shall be reset to zero. 79 (d) The Company shall commence an Excess Proceeds Offer by mailing a notice to the Trustee and each Holder as of such record date as the Company shall establish (and delivering such notice to the Trustee at least five days prior thereto) stating: (i) that the Excess Proceeds Offer is being made pursuant to this Section 1016 and that all Notes validly tendered will be accepted for payment on a PRO RATA basis; (ii) the purchase price and the date of purchase (which shall be a Business Day no earlier than 30 days nor later than 60 days from the date such notice is mailed) (the "Excess Proceeds Payment Date"); (iii) that any Note not tendered will continue to accrue interest; (iv) that, unless the Company defaults in the payment of the Excess Proceeds Payment, any Note accepted for payment pursuant to the Excess Proceeds Offer shall cease to accrue interest on and after the Excess Proceeds Payment Date; (v) that Holders electing to have any Note purchased pursuant to the Excess Proceeds Offer will be required to surrender such Note, together with the form entitled "Option of the Holder to Elect Purchase" on the reverse side of the Note completed, to the Paying Agent at the address specified in the notice prior to the close of business on the Business Day immediately preceding the Excess Proceeds Payment Date; (vi) that Holders will be entitled to withdraw their election if the Paying Agent receives, not later than the close of business on the third Business Day immediately preceding the Excess Proceeds Payment Date, a telegram, telex, facsimile transmission or letter setting forth the name of such Holder, the principal amount of Notes delivered for purchase and a statement that such Holder is withdrawing his election to have such Notes purchased; and (vii) that Holders whose Notes are being purchased only in part will be issued new Notes equal in principal amount to the unpurchased portion of the Notes surrendered; PROVIDED that each Note purchased and each new Note issued shall be in a principal amount of $1,000 or integral multiples thereof. At least five days prior to the date notice is mailed to each Holder, the Company shall furnish the Trustee with an Officers' Certificate stating the amount of the Excess Proceeds Payment. (e) On the Excess Proceeds Payment Date, the Company shall: 80 (i) accept for payment on a pro rata basis Notes or portions thereof tendered pursuant to the Excess Proceeds Offer; (ii) deposit one day prior to the Excess Proceeds Payment Date with the Paying Agent money sufficient to pay the purchase price of all Notes or portions thereof so accepted; and (iii) deliver; or cause to be delivered, to the Trustee, all Notes or portions thereof so accepted, together with an Officers' Certificate specifying the Notes or portions thereof accepted for payment by the Company. The Paying Agent shall promptly mail to the Holders of Notes so accepted payment in an amount equal to the purchase price, and the Trustee shall promptly authenticate and mail to such Holders a new Note equal in principal amount to any unpurchased portion of the Note surrendered; PROVIDED that each Note purchased and each new Note issued shall be in a principal amount of $1,000 or integral multiples thereof. The Company will publicly announce the results of the Excess Proceeds Offer as soon as practicable after the Excess Proceeds Payment Date. For purposes of this Section 1016, the Trustee shall act as the Paying Agent. All Notes or portions thereof purchased pursuant to this Section 1016 will be cancelled by the Trustee. (f) The Company shall comply with the applicable tender offer rules including Rule-14e under the Exchange Act, and any other applicable securities laws and regulations in connection with an offer made pursuant to clause (c) above. To the extent that provisions of any applicable securities laws or regulations conflict with provisions of this Section 1016, the Company shall comply with such securities laws and regulations and shall not be deemed to have breached its obligations under this Section 1016 by virtue thereof. SECTION 1017. UNRESTRICTED SUBSIDIARIES. (a) The Board of Directors of the Company may designate any Subsidiary (including any newly acquired or newly formed Subsidiary) to be an Unrestricted Subsidiary so long as (i) neither the Company nor any Restricted Subsidiary is directly or indirectly liable for any Indebtedness of such Subsidiary, (ii) no default with respect to any Indebtedness of such Subsidiary would permit (upon notice, lapse of time or otherwise) any holder of any other Indebtedness of the Company or any Restricted Subsidiary to declare a default on such other Indebtedness or cause the payment thereof to be accelerated or payable prior to its stated maturity, (iii) any Investment in such Subsidiary made as a result of designating such Subsidiary an Unrestricted Subsidiary will not violate the provisions of Section 1011, (iv) neither the Company nor any Restricted Subsidiary has a contract, agreement, arrangement, understanding or obligation of any kind, whether written or oral, 81 with such Subsidiary other than those that might be obtained at the time from persons who are not Affiliates of the Company and (v) neither the Company nor any Restricted Subsidiary has any obligation to subscribe for additional shares of Capital Stock or other equity interest in such Subsidiary, or to maintain or preserve such Subsidiary's financial condition or to cause such Subsidiary to achieve certain levels of operating results. (b) The Board of Directors of the Company may designate any Unrestricted Subsidiary as a Restricted Subsidiary; PROVIDED that (i) no Default or Event of Default has occurred and is continuing following such designation and (ii) the Company could incur at least $1.00 of additional Debt (other than Permitted Debt) pursuant to the first paragraph of Section 1010 (treating any Debt of such Unrestricted Subsidiary as the incurrence of Debt by a Restricted Subsidiary). SECTION 1018. LIMITATION ON DIVIDENDS AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED SUBSIDIARIES. The Company shall not, and shall not permit any Restricted Subsidiary to, directly or indirectly, create or otherwise cause or suffer to exist or become effective any consensual encumbrance or restriction of any kind on the ability of any Restricted Subsidiary to (a) pay dividends, in cash or otherwise, or make any other distributions on or in respect of its Capital Stock, (b) pay any Indebtedness owed to the Company or any other Restricted Subsidiary, (c) make loans or advances to the Company or any other Restricted Subsidiary or (d) transfer any of its properties or assets to the Company or any other Restricted Subsidiary, except for such encumbrances or restrictions existing under or by reason of: (i) any agreement in effect on the Closing Date; (ii) any agreement or other instrument of a person acquired by the Company or any Restricted Subsidiary in existence at the time of such acquisition (but not created in contemplation thereof), which encumbrance or restriction is not applicable to any person, or the properties or assets of any person, other than the person, or the property or assets of the person, so acquired; (iii) any security or pledge agreements or leases (or similar agreements) containing customary restrictions on transfers of the assets encumbered thereby or leased or on the leasehold interest represented thereby; (iv) any contracts for the sale of assets, including, without limitation, any restriction with respect to a Restricted Subsidiary imposed pursuant to an agreement entered into for the sale or disposition of all or substantially all of the Capital Stock or assets of such Restricted Subsidiary, pending the closing of such sale or 82 disposition, PROVIDED that any such restriction relates solely to the assets that are the subject of such agreement; (v) restrictions on cash or other deposits or net worth imposed by leases entered into in the ordinary course of business; and (vi) any encumbrances or restrictions imposed by any amendments, modifications, restatements, renewals, increases, supplements, refundings, replacements or refinancings of the contracts, instruments or obligations referred to in clauses (i) and (ii), PROVIDED that any encumbrances or restrictions imposed by such amendments, modifications, restatements, renewals, increases, supplements, refunding, replacements or refinancings are not materially more restrictive than those contained in the contract, instrument or obligation prior to such amendment, modification, restatement, renewal, increase, supplement, refunding, replacement or refinancing. SECTION 1019. WAIVER OF CERTAIN COVENANTS. The Company or any Subsidiary Guarantor may omit in any particular instance to comply with any term, provision or condition set forth in Article Eight or Sections 1004 through 1023, inclusive, if before or after the time for such compliance the Holders of at least a majority in principal amount of the Outstanding Notes, by Act of such Holders, waive such compliance in such instance with such term, provision or condition, but no such waiver shall extend to or affect such term, provision or condition except to the extent so expressly waived, and, until such waiver shall become effective, the obligations of the Company and the duties of the Trustee in respect of any such term, provision or condition shall remain in full force and effect. SECTION 1020. PAYMENT FOR CONSENT. Neither the Company nor any of its Restricted Subsidiaries shall, directly or indirectly, pay or cause to be paid any consideration, whether by way of interest, fee or otherwise, to any Holder of any Notes for or as an inducement to any consent, waiver or amendment of any of the terms or provisions of the Indenture or the Notes unless such consideration is offered to be paid or is paid to all Holders of the Notes that consent, waive or agree to amend in the time frame set forth in the solicitation documents relating to such consent, waiver or agreement. 83 SECTION 1021. LIMITATION ON GUARANTEES OF INDEBTEDNESS BY RESTRICTED SUBSIDIARIES. The Company shall not permit any Restricted Subsidiary that is not a Subsidiary Guarantor, directly or indirectly, to guarantee, assume or in any other manner become liable for the payment of any Indebtedness of the Company or any Indebtedness of any other Restricted Subsidiary, unless (a) such Restricted Subsidiary simultaneously executes and delivers a supplemental indenture and a Note Guarantee providing for a guarantee of payment of the Notes by such Restricted Subsidiary and (b) with respect to any guarantee of Subordinated Indebtedness by a Restricted Subsidiary, any such guarantee is subordinated to such Restricted Subsidiary's guarantee with respect to the Notes at least to the same extent as such Subordinated Indebtedness is subordinated to the Notes. SECTION 1022. LINE OF BUSINESS. The Company shall not and shall not cause or permit any of its Restricted Subsidiaries to engage in any businesses other than the businesses in which the Company is engaged on the Closing Date and any businesses reasonably related or complimentary to one or more of its businesses on the Closing Date (as determined in good faith by the Company's Board of Directors). SECTION 1023. REPORTS. At all times from and after the earlier of (i) the date of the commencement of an Exchange Offer or the effectiveness of the Shelf Registration Statement (the "Registration") and (ii) the date 120 days after the Closing Date, in either case, whether or not the Company is then required to file reports with the Commission, the Company shall file with the Commission (to the extent accepted by the Commission) all such annual reports, quarterly reports and other documents that the Company would be required to file if it were subject to Sections 13(a) or 15(d) under the Exchange Act. The Company shall also (a) supply to the Trustee and each holder of Notes, or supply to the Trustee for forwarding to each such holder, without cost to such holder, copies of such reports and other documents within 15 days after the date on which the Company files such reports and documents with the Commission or the date on which the Company would be required to file such reports and documents if the Company were so required and (b) if filing such reports and documents with the Commission is not accepted by the Commission or is prohibited under the Exchange Act, to supply at the Company's cost copies of such reports and documents to any prospective holder of Notes promptly upon written request. In addition, at all times prior to the earlier of the date of the Registration and the date 120 days after the Closing Date, the Company will, at its cost, deliver to each holder of the Notes quarterly and annual reports substantially equivalent to those that would be 84 required by the Exchange Act. Furthermore, at all times prior to the date of Registration, the Company will supply at the Company's cost copies of such reports and documents to any prospective holder of Notes promptly upon written request. ARTICLE ELEVEN REDEMPTION OF NOTES SECTION 1101. RIGHT OF REDEMPTION. (a) The Notes may be redeemed at the option of the Company, as a whole or from time to time in part, at any time on or after August 15, 2002, subject to the conditions and at the Redemption Prices specified in the form of Note, together with accrued interest, if any, to the Redemption Date. (b) In addition, at any time or from time to time prior to August 15, 2000, the Company may redeem up to 35% of the sum of (i) the initial aggregate principal amount of the Notes and (ii) the initial aggregate principal amount of any Additional Notes on one or more occasions with the net proceeds of one or more Public Equity Offerings at a redemption price equal to 110% of the principal amount thereof, plus accrued interest, if any, and Liquidated Damages, if any, to the redemption date (subject to the right of holders of record on the relevant record date to receive interest due on an interest payment date); PROVIDED that, immediately after giving effect to such redemption, at least 65% of the sum of (x) the initial aggregate principal amount of the Notes and (y) the initial aggregate principal amount of any Additional Notes remains outstanding; PROVIDED FURTHER that such redemptions shall occur within 45 days of the date of closing of each Public Equity Offering. (c) Upon the occurrence of a Change of Control prior to August 15, 2002, the Notes will be redeemable, in whole or in part, at the option of the Company, upon not less than 30 nor more than 60 days prior notice to each holder of Notes to be redeemed, at a redemption price equal to the sum of (i) the then outstanding principal amount thereof plus (ii) accrued and unpaid interest thereon, and Liquidated Damages, if any, to the redemption date plus (iii) the Applicable Premium. SECTION 1102. APPLICABILITY OF ARTICLE. Redemption of Notes at the election of the Company or otherwise, as permitted or required by any provision of this Indenture, shall be made in accordance with such provision and this Article. 85 SECTION 1103. ELECTION TO REDEEM; NOTICE TO TRUSTEE. The election of the Company to redeem any Notes pursuant to Section 1101 shall be evidenced by a Board Resolution. In case of any redemption at the election of the Company, the Company shall, at least 45 days prior to the Redemption Date fixed by the Company (unless a shorter notice shall be satisfactory to the Trustee), notify the Trustee of such Redemption Date and of the principal amount of Notes to be redeemed, and Liquidated Damages, if any, and shall deliver to the Trustee such documentation and records as shall enable the Trustee to select the Notes to be redeemed pursuant to Section 1104. SECTION 1104. SELECTION BY TRUSTEE OF NOTES TO BE REDEEMED. If less than all the Notes are to be redeemed, the particular Notes to be redeemed shall be selected not more than 60 days prior to the Redemption Date by the Trustee, from the Outstanding Notes not previously called for redemption, pro rata or by lot or by such other method as the Trustee shall deem fair and appropriate and which may provide for the selection for redemption of portions of the principal of Notes; PROVIDED, HOWEVER, that no such partial redemption shall reduce the portion of the principal amount of a Note not redeemed to less than $1,000. The Trustee shall promptly notify the Company in writing of the Notes selected for redemption and, in the case of any Notes selected for partial redemption, the principal amount thereof to be redeemed. For all purposes of this Indenture, unless the context otherwise requires, all provisions relating to redemption of Notes shall relate, in the case of any Note redeemed or to be redeemed only in part, to the portion of the principal amount of such Note which has been or is to be redeemed. SECTION 1105. NOTICE OF REDEMPTION. Notice of redemption shall be given in the manner provided for in Section 107 not less than 30 nor more than 60 days prior to the Redemption Date, to each Holder of Notes to be redeemed. All notices of redemption shall state: (1) the Redemption Date, (2) the Redemption Price and the amount of accrued interest to the Redemption Date payable as provided in Section 1107, if any, 86 (3) if less than all Outstanding Notes are to be redeemed, the identification (and, in the case of a partial redemption, the principal amounts) of the particular Notes to be redeemed, (4) in case any Note is to be redeemed in part only, the notice which relates to such Note shall state that on and after the Redemption Date, upon surrender of such Note, the holder will receive, without charge, a new Note or Notes of authorized denominations for the principal amount thereof remaining unredeemed, (5) that on the Redemption Date the Redemption Price (and accrued interest, if any, to the Redemption Date payable as provided in Section 1107) will become due and payable upon each such Note, or the portion thereof, to be redeemed, and that interest thereon will cease to accrue on and after said date, (6) the place or places where such Notes are to be surrendered for payment of the Redemption Price and accrued interest, if any, and (7) the CUSIP number. Notice of redemption of Notes to be redeemed at the election of the Company shall be given by the Company or, at the Company's request, by the Trustee in the name and at the expense of the Company. SECTION 1106. DEPOSIT OF REDEMPTION PRICE. Prior to any Redemption Date, the Company shall deposit with the Trustee or with a Paying Agent (or, if the Company is acting as its own Paying Agent, segregate and hold in trust as provided in Section 1003) an amount of money sufficient to pay the Redemption Price of, and accrued interest on, all the Notes which are to be redeemed on that date. SECTION 1107. NOTES PAYABLE ON REDEMPTION DATE. Notice of redemption having been given as aforesaid, the Notes so to be redeemed shall, on the Redemption Date, become due and payable at the Redemption Price therein specified (together with accrued interest, if any, to the Redemption Date), and from and after such date (unless the Company shall default in the payment of the Redemption Price and accrued interest) such Notes shall cease to bear interest. Upon surrender of any such Note for redemption in accordance with said notice, such Note shall be paid by the Company at the Redemption Price, together with accrued interest, if any, to the Redemption Date; PROVIDED, HOWEVER, that installments of interest whose Stated Maturity is on or prior to the Redemption Date shall be payable to the Holders of such Notes, or one or more 87 Predecessor Notes, registered as such at the close of business on the relevant Record Dates according to their terms and the provisions of Section 309. If any Note called for redemption shall not be so paid upon surrender thereof for redemption, the principal (and premium, if any) shall, until paid, bear interest from the Redemption Date at the rate borne by the Notes. SECTION 1108. NOTES REDEEMED IN PART. Any Note which is to be redeemed only in part shall be surrendered at the office or agency of the Company maintained for such purpose pursuant to Section 1002 (with, if the Company or the Trustee so requires, due endorsement by, or a written instrument of transfer in form satisfactory to the Company and the Trustee duly executed by, the Holder thereof or such Holder's attorney duly authorized in writing), and the Company shall execute, and the Trustee shall authenticate and deliver to the Holder of such Note without service charge, a new Note or Notes, of any authorized denomination as requested by such Holder, in aggregate principal amount equal to and in exchange for the unredeemed portion of the principal of the Note so surrendered. ARTICLE TWELVE DEFEASANCE AND COVENANT DEFEASANCE SECTION 1201. COMPANY OPTION TO EFFECT DEFEASANCE OR COVENANT DEFEASANCE. The Company may, at its option and at any time, with respect to the Notes, elect to have either Section 1202 or Section 1203 be applied to all Outstanding Notes upon compliance with the conditions set forth below in this Article Twelve. SECTION 1202. DEFEASANCE AND DISCHARGE. Upon the Company's exercise under Section 1201 of the option applicable to this Section 1202, the Company and the Subsidiary Guarantors shall be deemed to have been discharged from its obligations with respect to all Outstanding Notes and the Note Guarantees on the date the conditions set forth in Section 1204 are satisfied (hereinafter, "defeasance"). For this purpose, such defeasance means that the Company shall be deemed to have paid and discharged the entire indebtedness represented by the Outstanding Notes and the Note Guarantees, which shall thereafter be deemed to be "Outstanding" only for the purposes of Section 1205 and the other Sections of this Indenture referred to in (A) and (B) below, and to have satisfied all its other obligations under such Notes and the Note Guarantees and this 88 Indenture insofar as such Notes and Note Guarantees are concerned (and the Trustee, at the expense of the Company, shall execute proper instruments acknowledging the same), except for the following which shall survive until otherwise terminated or discharged hereunder: (A) the rights of holders of outstanding Notes to receive payments in respect of the principal of (and premium, if any, on) and interest and Liquidated Damages, if any, on such Notes when such payments are due, (B) the Company's obligations to issue temporary Notes, register the transfer or exchange of any Notes, replace mutilated, destroyed, lost or stolen Notes, maintain an office or agency for payments in respect of the Notes and segregate and hold such payments in trust, (C) the rights, powers, trusts, duties and immunities of the Trustee and (D) this Article Twelve. Subject to compliance with this Article Twelve, the Company may exercise its option under this Section 1202 notwithstanding the prior exercise of its option under Section 1203 with respect to the Notes. SECTION 1203. COVENANT DEFEASANCE. Upon the Company's exercise under Section 1201 of the option applicable to this Section 1203, the Company and any Subsidiary Guarantor shall be released from its obligations under any covenant contained in Section 801 and Section 802 and in Sections 1007 through 1023 with respect to the Outstanding Notes on and after the date the conditions set forth below are satisfied (hereinafter, "covenant defeasance"), and the Notes shall thereafter be deemed not to be "Outstanding" for the purposes of any direction, waiver, consent or declaration or Act of Holders (and the consequences of any thereof) in connection with such covenants, but shall continue to be deemed "Outstanding" for all other purposes hereunder. For this purpose, such covenant defeasance means that, with respect to the Outstanding Notes, the Company and any Subsidiary Guarantor may omit to comply with and shall have no liability in respect of any term, condition or limitation set forth in any such covenant, whether directly or indirectly, by reason of any reference elsewhere herein to any such covenant or by reason of any reference in any such covenant to any other provision herein or in any other document and such omission to comply shall not constitute a Default or an Event of Default under Sections 501(3) and 501(4), but, except as specified above, the remainder of this Indenture and such Notes shall be unaffected thereby. SECTION 1204. CONDITIONS TO DEFEASANCE OR COVENANT DEFEASANCE. The following shall be the conditions to application of either Section 1202 or Section 1203 to the Outstanding Notes: (1) the Company must irrevocably deposit or cause to be deposited with the Trustee, as trust funds in trust, specifically pledged as security for, and dedicated solely to, the benefit of the holders of the Notes, money in an amount, or U.S. Government Obligations (as defined in the Indenture) that through the scheduled payment of principal and interest and Liquidated Damages, if any, thereon will, 89 without the need for reinvestment of the proceeds thereof, provide money in an amount, or a combination thereof, sufficient, in the opinion of a nationally recognized firm of independent public accountants, to pay and discharge the principal of (and premium, if any, on) and interest on the outstanding Notes at maturity (or upon redemption, if applicable) of such principal or installment of interest or Liquidated Damages, if any; (2) no Default or Event of Default has occurred and is continuing on the date of such deposit or, insofar as an event of bankruptcy under Sections 501(8) or (9) above is concerned, at any time during the period ending on the 91st day after the date of such deposit; (3) such defeasance or covenant defeasance may not result in a breach or violation of, or constitute a default under, the Indenture (other than a violation of Section 1010 or 1014 as a result of incurrence of Indebtedness to finance the deposit referred to in clause (1) above) or any material agreement or instrument to which the Company or any Subsidiary Guarantor is a party or by which it is bound; (4) in the case of defeasance, the Company must deliver to the Trustee an opinion of counsel stating that the Company has received from, or there has been published by, the Internal Revenue Service a ruling, or since the date hereof, there has been a change in applicable federal income tax law, to the effect, and based thereon such opinion must confirm that, the holders of the outstanding Notes will not recognize income, gain or loss for federal income tax purposes as a result of such defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such defeasance had not occurred; and (5) the Company must have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent provided for relating to either the defeasance or the covenant defeasance, as the case may be, have been complied with. SECTION 1205. DEPOSITED MONEY AND U.S. GOVERNMENT OBLIGATIONS TO BE HELD IN TRUST; OTHER MISCELLANEOUS PROVISIONS. Subject to the provisions of the last paragraph of Section 1003, all money and U.S. Government Obligations (including the proceeds thereof) deposited with the Trustee (or other qualifying trustee, collectively for purposes of this Section 1205, the "Trustee") pursuant to Section 1204 in respect of the Outstanding Notes shall be held in trust and applied by the Trustee, in accordance with the provisions of such Notes and this Indenture, to the payment, either directly or through any Paying Agent (including the Company acting as its own Paying Agent) as the Trustee may determine, to the Holders of such Notes of all 90 sums due and to become due thereon in respect of principal (and premium, if any) and interest, but such money need not be segregated from other funds except to the extent required by law. The Company shall pay and indemnify and hold harmless the Trustee against any tax, fee or other charge imposed on or assessed against the U.S. Governmental Obligations deposited pursuant to Section 1204 or the principal and interest received in respect thereof other than any such tax, fee or other charge which by law is for the account of the Holders of the Outstanding Notes. Anything in this Article Twelve to the contrary notwithstanding, the Trustee shall deliver or pay to the Company from time to time upon Company Request any money or U.S. Government Obligations held by it as provided in Section 1204 which, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, are in excess of the amount thereof which would then be required to be deposited to effect an equivalent Defeasance or Covenant Defeasance, as applicable, in accordance with this Article. SECTION 1206. REINSTATEMENT. If the Trustee or any Paying Agent is unable to apply any money in accordance with Section 1205 by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, then the Company obligations under this Indenture and the Notes shall be revived and reinstated as though no deposit had occurred pursuant to Section 1202 or 1203, as the case may be, until such time as the Trustee or Paying Agent is permitted to apply all such money in accordance with Section 1205; PROVIDED, HOWEVER, that if the Company makes any payment of principal of (or premium, if any) or interest on any Note following the reinstatement of its obligations, the Company shall be subrogated to the rights of the Holders of such Notes to receive such payment from the money held by the Trustee or Paying Agent. ARTICLE THIRTEEN GUARANTEES SECTION 1301. NOTE GUARANTEES. Each Subsidiary Guarantor hereby jointly and severally, absolutely, unconditionally and irrevocably guarantees the Notes and obligations of the Company hereunder and thereunder, and guarantees to each Holder of a Note authenticated and delivered by the Trustee and to the Trustee on behalf of such Holder, that: (a) the principal 91 of (and premium, if any) and interest on the Notes will be paid in full when due, whether at Stated Maturity, by acceleration, call for redemption or otherwise (including, without limitation, the amount that would become due but for the operation of the automatic stay under Section 362(a) of the Federal Bankruptcy Code to the extent permitted by law), together with interest on the overdue principal, if any, and interest on any overdue interest, to the extent lawful, and all other obligations of the Company to the Holders or the Trustee hereunder or thereunder will be paid in full or performed, all in accordance with the terms hereof and thereof; and (b) in case of any extension of time of payment or renewal of any Notes or of any such other obligations, the same will be paid in full when due or performed in accordance with the terms of the extension or renewal, whether at Stated Maturity, by acceleration or otherwise, subject, however, in the case of clauses (a) and (b) above, to the limitations set forth in Section 1306 hereof. Each Subsidiary Guarantor hereby agrees that its obligations hereunder shall be unconditional, irrespective of the validity, regularity or enforceability of the Notes or this Indenture, the absence of any action to enforce the same, any waiver or consent by any Holder of the Notes with respect to any provisions hereof or thereof, the recovery of any judgment against the Company, any action to enforce the same or any other circumstance which might otherwise constitute a legal or equitable discharge or defense of a guarantor. Each Subsidiary Guarantor hereby waives the benefits of diligence, presentment, demand for payment, filing of claims with a court in the event of insolvency or bankruptcy of the Company, any right to require a proceeding first against the Company or any other Person, protest, notice and all demands whatsoever and covenants that the Note Guarantee of such Subsidiary Guarantor will not be discharged as to any Note except by complete performance of the obligations contained in such Note and such Note Guarantee. Each of the Subsidiary Guarantors hereby agrees that, in the event of a default in payment of principal (or premium, if any) or interest on such Note, whether at its Stated Maturity, by acceleration, call for redemption, purchase or otherwise, legal proceedings may be instituted by the Trustee on behalf of, or by, the Holder of such Note, subject to the terms and conditions set forth in this Indenture, directly against each of the Subsidiary Guarantors to enforce such Subsidiary Guarantor's Note Guarantee without first proceeding against the Company or any other Subsidiary Guarantor. Each Subsidiary Guarantor agrees that if, after the occurrence and during the continuance of an Event of Default, the Trustee or any of the Holders are prevented by applicable law from exercising their respective rights to accelerate the maturity of the Notes, to collect interest on the Notes, or to enforce or exercise any other right or remedy with respect to the Notes, such Subsidiary Guarantor will pay to the Trustee for the account of the Holders, upon demand therefor, the amount that would otherwise have been due and payable had such rights and remedies been permitted to be exercised by the Trustee or any of the Holders. 92 If any Holder or the Trustee is required by any court or otherwise to return to the Company or any Subsidiary Guarantor, or any custodian, trustee, liquidator or other similar official acting in relation to either the Company or any Subsidiary Guarantor, any amount paid by any of them to the Trustee or such Holder, the Note Guarantee of each of the Subsidiary Guarantors, to the extent theretofore discharged, shall be reinstated in full force and effect. Each Subsidiary Guarantor further agrees that, as between each Subsidiary Guarantor, on the one hand, and the Holders and the Trustee, on the other hand, (x) the maturity of the obligations guaranteed hereby may be accelerated as provided in Article Five hereof for the purposes of the Note Guarantee of such Subsidiary Guarantor, notwithstanding any stay, injunction or other prohibition preventing such acceleration in respect of the obligations guaranteed hereby, and (y) in the event of any acceleration of such obligations as provided in Article Five hereof, such obligations (whether or not due and payable) shall forthwith become due and payable by each Subsidiary Guarantor for the purpose of the Note Guarantee of such Subsidiary Guarantor. SECTION 1302. EXECUTION AND DELIVERY OF NOTE GUARANTEE. To further evidence the Note Guarantee set forth in Section 1301, each Subsidiary Guarantor hereby agrees that a notation of such Note Guarantee, substantially in the form included in Exhibit B of this Indenture, shall be endorsed on each Note authenticated and delivered by the Trustee. Such Note Guarantee shall be executed on behalf of each Subsidiary Guarantor by its Chairman, any Vice Chairman, its President, a Vice President or an Assistant Vice President and attested by its Secretary or Assistant Secretary, and shall have been duly authorized by all requisite corporate action. Such signature may be in facsimile form. The validity and enforceability of any Note Guarantee shall not be affected by the fact that it is not affixed to any particular Note. Each Subsidiary Guarantor hereby agrees that its respective Note Guarantee set forth in Section 1301 shall remain in full force and effect notwithstanding any failure to endorse on each note a notation of such Note Guarantee. The delivery of any Note by the Note Trustee, after the authentication thereof hereunder, shall constitute due delivery of any Note Guarantee set forth in this Indenture on behalf of the Subsidiary Guarantors. SECTION 1303. Severability. In case any provision of any Guarantee shall be invalid, illegal or unenforceable, the validity, legality, and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. 93 SECTION 1304. SENIORITY OF GUARANTEES. The obligations of each Subsidiary Guarantor to the Holders of Notes and to the Trustee pursuant to such Subsidiary Guarantor's Note Guarantee and this Indenture are senior unsecured obligations of such Subsidiary Guarantor ranking pari passu in right of payment with all existing and future senior obligations of such Subsidiary Guarantor. SECTION 1305. LIMITATION OF SUBSIDIARY GUARANTOR'S LIABILITY. Each Subsidiary Guarantor and by its acceptance hereof each Holder confirms that it is the intention of all such parties that the guarantee by each Subsidiary Guarantor pursuant to its Note Guarantee not constitute a fraudulent transfer or conveyance for purposes of the Federal Bankruptcy Code, the Uniform Fraudulent Conveyance Act, the Uniform Fraudulent Transfer Act or any similar federal or state law or the provisions of its local law relating to fraudulent transfer or conveyance. To effectuate the foregoing intention, the Holders and such Subsidiary Guarantor hereby irrevocably agree that the obligations of such Subsidiary Guarantor under its Note Guarantee shall be limited to the maximum amount that will not, after giving effect to all other contingent and fixed liabilities of such Subsidiary Guarantor and after giving effect to any collections from or payments made by or on behalf of any other Subsidiary Guarantor in respect of the obligations of such other Subsidiary Guarantor under its Note Guarantee or pursuant to Section 1305 hereof, result in the obligations of such Subsidiary Guarantor under its Note Guarantee constituting such fraudulent transfer or conveyance. SECTION 1306. CONTRIBUTION. In order to provide for just and equitable contribution among the Subsidiary Guarantors, the Subsidiary Guarantors agree, INTER SE, that in the event any payment or distribution is made by any Subsidiary Guarantor (a "Funding Subsidiary Guarantor") under a Guarantee, such Funding Subsidiary Guarantor shall be entitled to a contribution from all other Subsidiary Guarantors in a pro rata amount based on the Adjusted Net Assets of each Subsidiary Guarantor (including the Funding Subsidiary Guarantor) for all payments, damages and expenses incurred by that Funding Subsidiary Guarantor in discharging the Company's obligations with respect to the Notes or any other Subsidiary Guarantor's obligations with respect to the Guarantee of such Subsidiary Guarantor. "Adjusted Net Assets" of such Subsidiary Guarantor at any date shall mean the lesser of (x) the amount by which the fair value of the property of such Subsidiary Guarantor exceeds the total amount of liabilities, including, without limitation, contingent liabilities (after giving effect to all other fixed and contingent liabilities incurred or assumed on such date), but excluding liabilities under the Guarantee of such Subsidiary Guarantor at such date and (y) the amount by which the present fair salable value of the assets of such Subsidiary Guarantor at such date exceeds the amount that will be required to pay the probable liability of such Subsidiary Guarantor on 94 its debts (after giving effect to all other fixed and contingent liabilities incurred or assumed on such date), excluding debt in respect of the Guarantee of such Subsidiary Guarantor, as they become absolute and matured. SECTION 1307. RELEASE OF A SUBSIDIARY GUARANTOR. (a) In the event of any sale, exchange or transfer to any person not an Affiliate of the Company of all of the Company's and the Restricted Subsidiaries' Capital Stock in, or all or substantially all the assets of, such Restricted Subsidiary (which sale, exchange or transfer is not prohibited by Section 801), then such Subsidiary Guarantor will be deemed automatically and unconditionally released and discharged from all of its obligations under its Note Guarantee without any further action on the part of the Trustee or any holder of the Notes; PROVIDED that the Net Proceeds of such sale, transfer or other disposition are applied in accordance with Section 1016 to the extent required thereby. (b) Any Subsidiary Guarantor that is designated by the Board of Directors of the Company as an Unrestricted Subsidiary in accordance with the terms of this Indenture may, at such time, at the option of the Board of Directors, be released and relieved of its obligations under its Note Guarantee. The Trustee shall deliver an appropriate instrument evidencing such release upon receipt of a Company Request accompanied by an Officers' Certificate certifying as to the compliance with this Section 1307. Any Subsidiary Guarantor not so released shall remain liable for the full amount of principal of and interest on the Notes as provided in its Note Guarantee. (c) Any Non-U.S. Restricted Subsidiary that is or becomes a Subsidiary Guarantor shall be released and relieved of its obligations under its Note Guarantee at the time such Subsidiary no longer guarantees any Indebtedness (other than the Notes) of the Company or any U.S. Restricted Subsidiary (other than as a result of payment thereof). The Trustee shall deliver an appropriate instrument evidencing such release upon receipt of a Company Request accompanied by an Officers' Certificate certifying as to the compliance with this Section 1308. (d) Concurrently with the defeasance of the Notes under Section 1202 hereof, or the covenant defeasance of the Notes under Section 1203 hereof, the Subsidiary Guarantors shall be released from all their obligations under their Note Guarantees under this Article Thirteen. SECTION 1308. SUBSIDIARY GUARANTORS MAY CONSOLIDATE, ETC. ON CERTAIN TERMS. No Subsidiary Guarantor may consolidate with or merge with or into any other person or convey, sell, assign, transfer, lease or otherwise dispose of its properties and assets 95 substantially as an entirety to any other person (other than the Company or another Subsidiary Guarantor) unless: (a) such Subsidiary Guarantor is released from its Note Guarantee pursuant to Section 1307 or (b)(i), the person formed by or surviving such consolidation or merger (if other than such Subsidiary Guarantor) or to which such properties and assets are transferred assumes all of the obligations of such Subsidiary Guarantor under the Indenture and its Note Guarantee, pursuant to a supplemental indenture in form and substance satisfactory to the Trustee and (ii) immediately after giving effect to such transaction, no Default or Event of Default has occurred and is continuing. SECTION 1309. BENEFITS ACKNOWLEDGED. Each Subsidiary Guarantor acknowledges that it will receive direct and indirect benefits from the financing arrangements contemplated by this Indenture and that its guarantee and waivers pursuant to its Guarantee are knowingly made in contemplation of such benefits. SECTION 1310. ISSUANCE OF GUARANTEES BY CERTAIN NEW RESTRICTED SUBSIDIARIES. The Company shall provide to the Trustee, on the date that any Person becomes a Restricted Subsidiary, a supplemental indenture to the Indenture, executed by such new Restricted Subsidiary, providing for a full and unconditional guarantee on a senior basis by such new Restricted Subsidiary of the Company's obligations under the Notes and the Indenture to the same extent as that set forth in the Indenture, PROVIDED that any such Restricted Subsidiary that is organized outside the United States shall not be required to provide a Note Guarantee so long as such Restricted Subsidiary has not guaranteed any other Indebtedness of the Company or any other Restricted Subsidiary. * * * * This Indenture may be signed in any number of counterparts each of which so executed shall be deemed to be an original, but all such counterparts shall together constitute but one and the same Indenture. 1 IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed, and their respective corporate seals, if any, to be hereunto affixed and attested, all as of the day and year first above written. BURKE INDUSTRIES, INC. By /s/ KEITH OSTER ------------------------------- Name: Keith Oster Title: Attest: /s/ LOUIS MINTZ ---------------------------- Title: Assistant Secretary UNITED STATES TRUST COMPANY OF NEW YORK By ILLEGIBLE ------------------------------- Authorized Signatory BURKE FLOORING PRODUCTS, INC. BURKE CUSTOM PROCESSING, INC. BURKE RUBBER COMPANY, INC. Each, a Subsidiary Guarantor By /s/ KEITH OSTER ------------------------------- Name: Keith Oster Title: Attest: /s/ LOUIS MINTZ ---------------------------- Title: Assistant Secretary EXHIBIT A [FACE OF NOTE] BURKE INDUSTRIES, INC. 10% [Series B]** Senior Note Due 2007 CUSIP _________ No. _______ $ _________________ BURKE INDUSTRIES, INC., a California corporation (the "Company", which term includes any successor under the Indenture hereinafter referred to), for value received, promises to pay to ___________, or its registered assigns, the principal sum of ________________________________ ($___________), on August 15, 2007. Interest Rate: 10% per annum. Interest Payment Dates: February 15 and August 15 of each year commencing February 15, 1998. Regular Record Dates: February 1 and August 1 of each year. Reference is hereby made to the further provisions of this Note set forth on the reverse hereof, which further provisions shall for all purposes have the same effect as if set forth at this place. IN WITNESS WHEREOF, the Company has caused this Note to be signed manually or by facsimile by its duly authorized officers. Date: BURKE INDUSTRIES, INC. ----------------------- By: ------------------------------- Title: Attest: ---------------------- Title: (Form of Trustee's Certificate of Authentication) This is one of the 10% [Series B] Senior Notes due 2007 described in the within-mentioned Indenture. UNITED STATES TRUST COMPANY OF NEW YORK, as Trustee By: --------------------------- Authorized Signatory [REVERSE SIDE OF NOTE] BURKE INDUSTRIES, INC. 10% [Series B] Senior Note due 2007 1. PRINCIPAL AND INTEREST. The Stated Maturity of the Notes shall be August 15, 2007, and the Notes shall bear interest at the rate of 10% per annum from August 20, 1997, or from the most recent Interest Payment Date to which interest has been paid or duly provided for, payable semiannually on February 15 and August 15 in each year, commencing February 15, 1998, until the principal thereof is paid or duly provided for, to the Person in whose name the Note (or any predecessor Note) is registered at the close of business on the February 1 or August 1 next preceding such Interest Payment Date. [If (a) the Company fails to file any of the Registration Statements required by the Registration Rights Agreement on or before the date specified for such filing, (b) any of such Registration Statements is not declared effective by the Commission on or prior to the date specified in the Registration Rights Agreement (the "Effectiveness Target Date"), or (c) the Company fails to consummate the Exchange Offer within 30 business days of the Effectiveness Target Date with respect to the Exchange Offer Registration Statement, or (d) the Shelf Registration Statement or the Exchange Offer Registration Statement is declared effective but thereafter ceases to be effective or usable in connection with resales of Notes during the periods specified in the Registration Rights Agreement (each such event referred to in clauses (a) through (d) above a "Registration Default"), then the Company will pay liquidated damages ("Liquidated Damages") to each Holder of Notes, with respect to the first 90-day period immediately following the occurrence of such Registration Default in an amount equal to $0.05 per week per $1,000 principal amount of Notes held by such Holder. The amount of the Liquidated Damages will increase by an additional $0.05 per week per $1,000 principal amount of Notes with respect to each subsequent 90-day period until all Registration Defaults have been cured, up to a maximum amount of Liquidated Damages of $.30 per week per $1,000 principal amount of Notes. Upon the filing of the Exchange Offer Registration Statement, the consummation of the Exchange Offer or the effectiveness of a Shelf Registration Statement, as the case may be, Liquidated Damages will cease to accrue from the date of such filing, consummation or effectiveness, as the case may be; PROVIDED, HOWEVER, that, if after the date such Liquidated Damages cease to accrue, a different event specified in clause (a), (b), (c) or (d) above occurs, Liquidated Damages may again commence accruing pursuant to the foregoing provisions.] The Company shall pay interest on overdue principal and premium, if any, and interest on overdue installments of interest, to the extent lawful, at a rate per annum equal to the rate of interest applicable to the Notes. 2. METHOD OF PAYMENT. The Company will pay interest (except defaulted interest) on the principal amount of the Notes on each Interest Payment Date to the persons who are Holders (as reflected in the Register at the close of business on the Regular Record Date immediately preceding the Interest Payment Date), in each case, even if the Note is cancelled on registration of transfer or registration of exchange after such record date; PROVIDED that, with respect to the payment of principal, the Company will make payment to the Holder that surrenders this Note to any Paying Agent on or after August 15, 2007. The principal of (and premium, if any), and interest on the Notes shall be payable, and the Notes shall be exchangeable and transferable, at the office or agency of the Company in The City of New York maintained for such purposes, (which initially shall be the office of the Trustee located at 114 West 47th St., New York, N.Y. 10036-1532, Attention: Corporate Trust) or, at the option of the Company, interest may be paid by check mailed to the address of the Person entitled thereto as such address shall appear on the Register; PROVIDED that all payments with respect to the Global Note and the Certificated Notes the Holder of which have given wire transfer instructions to the Company will be required to be made by wire transfer of immediately available funds to the accounts specified by the Holders thereof. 3. PAYING AGENT AND REGISTRAR. Initially, the Trustee will act as Paying Agent and Registrar. The Company may change any Paying Agent or Registrar upon written notice thereto and without notice to any Holder. The Company, any Subsidiary or any Affiliate of any of them may act as Paying Agent, Registrar or co-registrar. 4. INDENTURE; LIMITATIONS. The Company issued the Notes under an Indenture dated as of August 20, 1997 (the "Indenture"), between the Company, the Subsidiary Guarantors and United States Trust Company of New York (the "Trustee"). Capitalized terms herein are used as defined in the Indenture unless otherwise indicated. The terms of the Notes include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act. The Notes are subject to all such terms, and Holders are referred to the Indenture and the Trust Indenture Act for a statement of all such terms. To the extent permitted by applicable law, in the event of any inconsistency between the terms of this Note and the terms of the Indenture, the terms of the Indenture shall control. The Notes are general unsecured obligations of the Company. 5. REDEMPTION. OPTIONAL REDEMPTION. The Notes may be redeemed at the option of the Company, in whole or in part, at any time and from time to time on or after August 15, 2002, at the following Redemption Prices (expressed in percentages of principal amount), plus accrued and unpaid interest, if any, to the Redemption Date (subject to the right of Holders of record on the relevant Regular Record Date to receive interest due on an Interest Payment Date that is on or prior to the Redemption Date), if redeemed during the 12-month period beginning August 15 of each of the years set forth below: Redemption YEAR PRICE 2002 . . . . . . . . . . . . . . . . . . . 105.000% 2003 . . . . . . . . . . . . . . . . . . . 103.333% 2004 . . . . . . . . . . . . . . . . . . . 101.667% and thereafter at 100% of the principal amount, together with accrued interest, if any, to the redemption date. In addition, at any time or from time to time prior to August 15, 2000, the Company may redeem up to 35% of the sum of (i) the initial aggregate principal amount of the Notes and (ii) the initial aggregate principal amount of any Additional Notes on one or more occasions with the net proceeds of one or more Public Equity Offerings at a redemption price equal to 110% of the principal amount thereof, plus accrued interest, if any, to the redemption date (subject to the right of holders of record on the relevant record date to receive interest due on an interest payment date); PROVIDED that, immediately after giving effect to such redemption, at least 65% of the sum of (x) the initial aggregate principal amount of the Notes and (y) the initial aggregate principal amount of any Additional Notes remains outstanding; PROVIDED FURTHER that such redemptions shall occur within 45 days of the date of closing of each Public Equity Offering. Upon the occurrence of a Change of Control prior to August 15, 2002, the Notes will be redeemable, in whole or in part, at the option of the Company, upon not less than 30 nor more than 60 days' prior notice to each holder of Notes to be redeemed, at a redemption price equal to the sum of (i) the then outstanding principal amount thereof plus (ii) accrued and unpaid interest thereon, to the redemption date plus (iii) the Applicable Premium. Notice of a redemption will be mailed at least 30 days but not more than 60 days before the Redemption Date to each Holder to be redeemed at such Holder's last address as it appears in the Register. Notes in original denominations larger than $1,000 may be redeemed in part in integral multiples of $1,000. On and after the Redemption Date, interest ceases to accrue on Notes or portions of Notes called for redemption, unless the Company defaults in the payment of the Redemption Price. 6. REPURCHASE UPON A CHANGE IN CONTROL AND ASSET SALES. (a) If a Change of Control occurs at any time, then, unless irrevocable notice of redemption for all of the Notes is given within 30 days after the occurrence of such Change of Control in accordance with the provisions of Section 1015 of the Indenture, each holder of Notes shall have the right to require that the Company purchase such holder's Notes or Additional Notes, as applicable, in whole or in part in integral multiples of $1,000, at a purchase price in cash equal to 101% of the principal amount of such Notes or Additional Notes, plus accrued and unpaid interest, if any, to the date of purchase, pursuant to the offer described below (the "Change of Control Offer") and (b) upon Asset Sales, the Company may be obligated to make offers to purchase Notes with a portion of the Net Cash Proceeds of such Asset Sales at a redemption price of 100% of the principal amount thereof plus accrued and unpaid interest, if any, to the date of purchase. 7. DENOMINATIONS; TRANSFER; EXCHANGE. The Notes are in registered form without coupons, in denominations of $1,000 and multiples of $1,000 in excess thereof. A Holder may register the transfer or exchange of Notes in accordance with the Indenture. The Registrar may require a Holder, among other things, to furnish appropriate endorsements and transfer documents and to pay any taxes and fees required by law or permitted by the Indenture. The Registrar need not register the transfer or exchange of any Notes selected for redemption (except the unredeemed portion of any Note being redeemed in part). Also, it need not register the transfer or exchange of any Notes for a period of 15 days before a selection of Notes to be redeemed is made. 8. PERSONS DEEMED OWNERS. A Holder may be treated as the owner of a Note for all purposes. 9. UNCLAIMED MONEY. If money for the payment of principal, premium, if any, or interest remains unclaimed for two years, the Trustee and the Paying Agent will pay the money back to the Company at its request. After that, Holders entitled to the money must look to the Company for payment, unless an abandoned property law designates another Person, and all liability of the Trustee and such Paying Agent with respect to such money shall cease. 10. DISCHARGE PRIOR TO REDEMPTION OR MATURITY. If the Company irrevocably deposits, or causes to be deposited, with the Trustee money or U.S. Government Obligations sufficient to pay the then outstanding principal of, premium, if any, and accrued interest on the Notes (a) to redemption or maturity, the Company will be discharged from the Indenture, the Notes and the Note Guarantees, except in certain circumstances for certain sections thereof, and (b) to the Stated Maturity, the Company will be discharged from certain covenants set forth in the Indenture. 11. AMENDMENT; SUPPLEMENT; WAIVER. Subject to certain exceptions, the Indenture or the Notes may be amended or supplemented with the consent of the Holders of at least a majority in aggregate principal amount of the Notes then outstanding, and any existing default or compliance with any provision may be waived with the consent of the Holders of a majority in aggregate principal amount of the Notes then outstanding. Without notice to or the consent of any Holder, the parties thereto may amend or supplement the Indenture or the Notes to, among other things, cure any ambiguity, defect or inconsistency. 12. RESTRICTIVE COVENANTS. The Indenture contains certain covenants, including, without limitation, covenants with respect to the following matters: (i) Indebtedness; (ii) Restricted Payments; (iii) issuances and sales of preferred stock of Restricted Subsidiaries; (iv) transactions with Affiliates; (v) Liens; (vi) certain Asset Sales; (vii) dividends and other payment restrictions affecting Restricted Subsidiaries; (viii) mergers and certain transfers of assets. Within 120 days after the end of each fiscal year, the Company must report to the Trustee on compliance with such limitations. 13. SUCCESSOR PERSONS. When a successor person or other entity assumes all the obligations of its predecessor under the Notes and the Indenture, the predecessor person will be released from those obligations. 14. REMEDIES FOR EVENTS OF DEFAULT. If an Event of Default, as defined in the Indenture, occurs and is continuing, the Trustee or the Holders of not less than 25% in principal amount of the Notes then outstanding may declare all the Notes to be immediately due and payable. If a bankruptcy or insolvency default with respect to the Company or any of its Significant Subsidiaries occurs and is continuing, the Notes automatically become immediately due and payable. Holders may not enforce the Indenture or the Notes except as provided in the Indenture. The Trustee may require indemnity satisfactory to it before it enforces the Indenture or the Notes. Subject to certain limitations, Holders of at least a majority in principal amount of the Notes then outstanding may direct the Trustee in its exercise of any trust or power. 15. TRUSTEE DEALINGS WITH COMPANY. The Trustee under the Indenture, in its individual or any other capacity, may become the owner or pledgee of Notes and may make loans to, accept deposits from, perform services for, and otherwise deal with, the Company and its Affiliates as if it were not the Trustee. 16. AUTHENTICATION. This Note shall not be valid until the Trustee signs the certificate of authentication on the other side of this Note. 17. GOVERNING LAW. The Notes shall be governed by, and construed in accordance with, the law of the State of New York. 18. ABBREVIATIONS. Customary abbreviations may be used in the name of a Holder or an assignee, such as: TEN COM (= tenants in common), TEN ENT (= tenants by the entireties), JT TEN (= joint tenants with right of survivorship and not as tenants in common), CUST (= Custodian) and U/G/M/A (= Uniform Gifts to Minors Act). 19. NO RECOURSE AGAINST OTHERS. A director, officer, employee, incorporator or stockholder of the Company, as such, shall not have any liability for any obligations of the Company under the Notes, the Indenture or the Note Guarantees or for any claim based on, in respect of, or by reason of, such obligations of their creation. Each Holder by accepting a Note waives and releases all such liability. The waiver and release are part of the consideration for the issuance of the Notes. The Company will furnish to any Holder upon written request and without charge a copy of the Indenture. Requests may be made to Burke Industries, Inc., 2250 South Tenth Street, San Jose, California 95112, Attention: Chief Executive Officer. [FORM OF TRANSFER NOTICE] FOR VALUE RECEIVED the undersigned registered holder hereby sell(s), assign(s) and transfer(s) unto INSERT TAXPAYER IDENTIFICATION NO. (Please print or typewrite name and address including zip code of assignee) the within Note and all rights thereunder, hereby irrevocably constituting and appointing attorney to transfer such Note on the books of the Company with full power of substitution in the premises. [THE FOLLOWING PROVISION TO BE INCLUDED ON ALL CERTIFICATES] In connection with any transfer of this Note occurring prior to the date which is the earlier of the date of an effective Registration Statement or ____________, the undersigned confirms that, without utilizing any general solicitation or general advertising that: [CHECK ONE] [ ] (a) this Note is being transferred in compliance with the exemption from registration under the Securities Act of 1933, as amended, provided by Rule 144A thereunder. OR [ ] (b) this Note is being transferred other than in accordance with (a) above and documents are being furnished which comply with the conditions of transfer set forth in this Note and the Indenture. If none of the foregoing boxes is checked, the Trustee or other Registrar shall not be obligated to register this Note in the name of any Person other than the Holder hereof unless and until the conditions to any such transfer of registration set forth herein and in Section 307 of the Indenture shall have been satisfied. Date: NOTICE: The signature to this assignment must correspond with the name as written upon the face of the within-mentioned instrument in every particular, without alteration or any change whatsoever. Signature Guarantee: TO BE COMPLETED BY PURCHASER IF (a) ABOVE IS CHECKED. The undersigned represents and warrants that it is purchasing this Note for its own account or an account with respect to which it exercises sole investment discretion and that it and any such account is a "qualified institutional buyer" within the meaning of Rule 144A under the Securities Act of 1933, as amended, and is aware that the sale to it is being made in reliance on Rule 144A and acknowledges that it has received such information regarding the Company as the undersigned has requested pursuant to Rule 144A or has determined not to request such information and that it is aware that the transferor is relying upon the undersigned's foregoing representations in order to claim the exemption from registration provided by Rule 144A. Dated: NOTICE: To be executed by an executive officer OPTION OF HOLDER TO ELECT PURCHASE If you wish to have this Note purchased by the Company pursuant to Section 1015 or Section 1016 of the Indenture, check the Box: [ ]. If you wish to have a portion of this Note purchased by the Company pursuant to Section 1015 or Section 1016 of the Indenture, state the amount (in original principal amount) below: $____________________. Date: Your Signature: (Sign exactly as your name appears on the other side of this Note) Signature Guarantee: Tax ID #: __________________ EXHIBIT B FORM OF SUBSIDIARY GUARANTEE Each Subsidiary Guarantor hereby jointly and severally, absolutely, unconditionally and irrevocably guarantees the Notes and obligations of the Company hereunder and thereunder, and guarantees to each Holder of a Note authenticated and delivered by the Trustee and to the Trustee on behalf of such Holder, that: (a) the principal of (and premium, if any) and interest on the Notes will be paid in full when due, whether at Stated Maturity, by acceleration, call for redemption or otherwise (including, without limitation, the amount that would become due but for the operation of the automatic stay under Section 362(a) of the Federal Bankruptcy Code), together with interest on the overdue principal, if any, and interest on any overdue interest, to the extent lawful, and all other obligations of the Company to the Holders or the Trustee hereunder or thereunder will be paid in full or performed, all in accordance with the terms hereof and thereof; and (b) in case of any extension of time of payment or renewal of any Notes or of any such other obligations, the same will be paid in full when due or performed in accordance with the terms of the extension or renewal, whether at Stated Maturity, by acceleration or otherwise, subject, however, in the case of clauses (a) and (b) above, to the limitations set forth in Section 1306 of the Indenture. The obligations of the Subsidiary Guarantors to the Holders of the Notes and to the Trustee pursuant to this Note Guarantee and the Indenture are expressly set forth in Article 13 of the Indenture, and reference is hereby made to such Indenture for the precise terms of this Note Guarantee. The terms of Article 13 of the Indenture are incorporated herein by reference. This is a continuing Note Guarantee and shall remain in full force and effect and shall be binding upon each Subsidiary Guarantor and its respective successors and assigns to the extent set forth in the Indenture until full and final payment of all of the Company's obligations under the Notes and the Indenture and shall inure to the benefit of the successors and assigns of the Trustee and the Holders of Notes and, in the event of any transfer or assignment of rights by any Holder of Notes or the Trustee, the rights and privileges herein conferred upon that party shall automatically extend to and be vested in such transferee or assignee, all subject to the terms and conditions hereof. This is a Note Guarantee of payment and not a guarantee of collection. In certain circumstances more fully described in the Indenture, any Subsidiary Guarantor may be released from its liability under this Subsidiary Guarantee, and any such release will be effective whether or not noted herein. This Subsidiary Guarantee shall not be valid or obligatory for any purpose until the certificate of authentication on the Senior Subordinated Note upon which this B-2 Subsidiary Guarantee is noted shall have been executed by the Trustee under the Indenture by the manual signature of one of its authorized officers. Capitalized terms used herein have the same meanings given in the Indenture unless otherwise indicated. BURKE FLOORING PRODUCTS, INC. BURKE CUSTOM PROCESSING, INC. BURKE RUBBER COMPANY, INC. Each, a Subsidiary Guarantor By: ----------------------------- Name: Title: Attest: -------------------------- Title: EXHIBIT C FORM OF LETTER TO BE DELIVERED BY ACCREDITED INVESTORS , 1997 NationsBanc Capital Markets, Inc. NationsBank Corporate Center 100 North Tryon Street, NCI-007-01 Charlotte, North Carolina 28255 Burke Industries, Inc. 2250 South Tenth Street San Jose, California 95112 Re: Purchase of $110,000,000 principal amount of 10% Senior Notes due 2007 (the "Senior Notes") of Burke Industries, Inc., a Delaware corporation (the "Company") Ladies and Gentlemen: In connection with our purchase of the Senior Notes we confirm that: 1. We understand that the Senior Notes are not being and will not be registered under the Securities Act of 1933, as amended (the "Securities Act"), and are being sold to us in a transaction that is exempt from the registration requirements of the Securities Act. 2. We acknowledge that (a) neither the Company, nor the Initial Purchaser (as defined in the Offering Memorandum dated _____, 1997 relating to the Senior Notes (the "Final Memorandum")) nor any persons acting on behalf of the Company or the Initial Purchaser has made any representation to us with respect to the Company or the offer or sale of any Senior Notes and (b) any information we desire concerning the Company and the Senior Notes or any other matter relevant to our decision to purchase the Senior Notes (including a copy of the Final Memorandum) is or has been made available to us. 3. We have such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of an investment in the Senior Notes, and we are (or any account for which we are purchasing under paragraph 5 below is) an Institutional "accredited investor" (within the meaning of Rule 501(a)(1), (2), (3), or (7) of C-2 Regulation D under the Securities Act) (an "IAI") able to bear the economic risk of investment in the Senior Notes. 4. We understand that the minimum principal amount of Senior Notes that may be purchased by an IAI is $250,000. 5. We are acquiring the Senior Notes for our own account (or for accounts as to which we exercise sole investment discretion and have authority to make, and do make, the statements contained in this letter) and not with a view to any distribution of the Senior Notes, subject, nevertheless, to the understanding that the disposition of our property will at all times be and remain within our control. 6. We understand that the Senior Notes will be in registered form only and that any certificates delivered to us in respect of the Senior Notes will bear a legend substantially to the following effect: THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF AGREES TO OFFER, SELL OR OTHERWISE TRANSFER SUCH SECURITY, PRIOR TO THE DATE WHICH IS TWO YEARS AFTER THE LATER OF THE ORIGINAL ISSUE DATE HEREOF AND THE LAST DATE ON WHICH BURKE INDUSTRIES, INC. (THE "COMPANY") OR ANY AFFILIATE OF THE COMPANY WAS THE OWNER OF THIS SECURITY (OR ANY PREDECESSOR OF THIS SECURITY) (THE "RESALE RESTRICTION TERMINATION DATE") ONLY (A) TO THE COMPANY, (B) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, (C) FOR SO LONG AS THE SECURITIES ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT ("RULE 144A), TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (D) PURSUANT TO OFFERS AND SALES TO NON-U.S. PERSONS THAT OCCUR OUTSIDE THE UNITED STATES WITHIN THE C-3 MEANING OF REGULATION S UNDER THE SECURITIES ACT, (E) TO AN INSTITUTIONAL "ACCREDITED INVESTOR" WITHIN THE MEANING OF SUBPARAGRAPH (a)(1), (2), (3) OR (7) OF RULE 501 UNDER THE SECURITIES ACT THAT IS ACQUIRING THE SECURITY FOR ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF SUCH AN INSTITUTIONAL "ACCREDITED INVESTOR", FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO, OR FOR OFFER OR SALE IN CONNECTION WITH, ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, (F) PURSUANT TO THE EXEMPTION FROM REGISTRATION UNDER SECURITIES ACT PROVIDED BY RULE 144 THEREUNDER (IF AVAILABLE) OR (G) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO THE COMPANY'S AND THE TRUSTEE'S RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER (I) PURSUANT TO CLAUSES (E), (F) OR (G) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM, AND (II) IN EACH OF THE FOREGOING CASES, TO REQUIRE THAT A CERTIFICATE OF TRANSFER IN THE FORM APPEARING ON THIS SECURITY IS COMPLETED AND DELIVERED BY THE TRANSFEROR TO THE TRANSFER AGENT, THIS LEGEND WILL BE REMOVED UPON THE REQUEST OF A HOLDER AFTER THE RESALE RESTRICTION TERMINATION DATE. 7. We agree that in the event that at some future time we wish to dispose of any of the Senior Notes, we will not do so unless such disposition is made in accordance with any applicable securities laws of any state of the United States and: (a) the Senior Notes are sold in compliance with Rule 144(k) under the Securities Act or (b) the Senior Notes are sold in compliance with Rule 144A under the Securities Act or (c) the Senior Notes are sold in compliance with Regulation S under the Securities Act or (d) the Senior Notes are sold pursuant to an effective registration statement under the Securities Act or (e) the Senior Notes are sold to the Company or an affiliate (as defined in Rule 501(b) of Regulation D) of the Company or C-4 (f) the Senior Notes are disposed of in any other transaction that does not require registration under the Securities Act, and prior to such disposition we have furnished to the Company or its designee an opinion of counsel experienced in securities law matters to such effect or such other documentation as the Company or its designee may reasonably request. 8. We understand that NationsBanc Capital Markets, Inc., as the Initial Purchase, the Company and other persons will rely upon the truth and accuracy of the statements set forth herein, and we agree that if any such statements are no longer true or accurate we will promptly so notify the Company and the Initial Purchase in writing. THIS LETTER SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. --------------------------------- (Name of Purchaser) By: --------------------------------- Name: Title: Address: Upon transfer, the Notes should be registered in the name of the new beneficial owner as follows: Name: Address: Taxpayer ID Number: EX-4.3 3 EXH 4.3 REGISTRATION RIGHTS AGREEMENT EXHIBIT 4.3 BURKE INDUSTRIES, INC. 2250 South Tenth Street San Jose, CA 95112 $110,000,000 10% SENIOR NOTES DUE 2007 REGISTRATION RIGHTS AGREEMENT New York, New York August 20, 1997 NationsBanc Capital Markets, Inc. NationsBank Corporate Center 100 North Tryon Street, NC1-007-07-01 Charlotte, North Carolina 28255-0001 Ladies and Gentlemen: Burke Industries, Inc., as successor-in-interest to JFL Merger Co. pursuant to an Agreement and Plan of Merger dated August 20, 1997, a California corporation (the "Company"), proposes to issue and sell (the "Initial Placement") to the Initial Purchaser, upon the terms set forth in a purchase agreement of even date herewith (the "Purchase Agreement"), its 10% Senior Notes due 2007 (the "Notes"). As an inducement to the Initial Purchaser to enter into the Purchase Agreement and purchase the Notes and in satisfaction of a condition to your obligations under the Purchase Agreement, the Company and the Subsidiary Guarantors (as defined below) agree with you for the benefit of the holders from time to time of the Notes (including the Initial Purchaser) (each of the foregoing a "Holder" and together the "Holders"), as follows: 1. DEFINITIONS. Capitalized terms used herein without definition shall have their respective meanings set forth in the Purchase Agreement. As used in this Agreement, the following capitalized defined terms shall have the following meanings: "AFFILIATE" of any specified person means any other person that, directly or indirectly, is in control of, is controlled by, or is under common control with, such specified person. For purposes of this definition, control of a person means the power, direct or indirect, to direct or cause the direction of the management and policies of such person whether by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "CLOSING DATE" has the meaning set forth in the Purchase Agreement. 2 "COMMISSION" means the Securities and Exchange Commission. "COMPANY" has the meaning set forth in the preamble hereto. "EFFECTIVENESS TARGET DATE" has the meaning set forth in Section 5(b) hereto. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended, and the rules and regulations of the Commission promulgated thereunder. "EXCHANGE NOTES" means debt securities issued by the Company and guaranteed by the Subsidiary Guarantors, identical in all material respects to the Notes (except that (i) interest thereon shall accrue from the last date on which interest was paid on the Notes or, if no such interest has been paid, from August 20, 1997 and (ii) the interest rate step-up provisions and the transfer restrictions pertaining to the Notes will be modified or eliminated, as appropriate, in the Exchange Notes), to be issued under the Indenture. "EXCHANGE OFFER" means the proposed offer to the Holders to issue and deliver to such Holders, in exchange for the Notes, a like principal amount of Exchange Notes. "EXCHANGE OFFER REGISTRATION PERIOD" means the longer of (A) the period until the consummation of the Exchange Offer and (B) two years after effectiveness of the Exchange Offer Registration Statement, exclusive of any period during which any stop order shall be in effect suspending the effectiveness of the Exchange Offer Registration Statement; PROVIDED, HOWEVER, that in the event that all resales of Exchange Notes (including, subject to the time periods set forth herein, any resales by Exchanging Dealers) covered by such Exchange Offer Registration Statement have been made, the Exchange Offer Registration Statement need not remain continuously effective for the period set forth in clause (B) above. "EXCHANGE OFFER REGISTRATION STATEMENT" means a registration statement of the Company on an appropriate form under the Securities Act with respect to the Exchange Offer, all amendments and supplements to such registration statement, including post-effective amendments, in each case including the Prospectus contained therein, all exhibits thereto and all material incorporated by reference therein. "EXCHANGING DEALER" means any Holder (which may include the Initial Purchaser) that is a broker-dealer, electing to exchange Notes acquired for its own account as a result of market-making activities or other trading activities for Exchange Notes. 3 "FINAL MEMORANDUM" has the meaning set forth in the Purchase Agreement. "GUARANTEES" has the meaning set forth in the Purchase Agreement. "SUBSIDIARY GUARANTORS" has the meaning set forth in the preamble hereto. "HOLDER" has the meaning set forth in the preamble hereto. "INDENTURE" means the indenture relating to the Notes and the Exchange Notes, to be dated as of the Closing Date, among the Company, Burke Flooring Products, Inc., Burke Custom Processing, Inc. and Burke Rubber Company, Inc., as Subsidiary Guarantors, and United States Trust Company of New York, as trustee, as the same may be amended, supplemented, waived or otherwise modified from time to time in accordance with the terms thereof. "INITIAL PLACEMENT" has the meaning set forth in the preamble hereto. "INITIAL PURCHASER" has the meaning set forth in the Purchase Agreement. "LIQUIDATED DAMAGES" has the meaning set forth in Section 5(b) hereto. "LOSSES" has the meaning set forth in Section 6(d) hereto. "MAJORITY HOLDERS" means the Holders of a majority of the aggregate principal amount of Notes registered under a Registration Statement. "MANAGING UNDERWRITERS" means the investment banker or investment bankers and manager or managers that shall administer an underwritten offering under a Shelf Registration Statement. "NOTES" has the meaning set forth in the preamble hereto. "PROSPECTUS" means the prospectus included in any Registration Statement (including, without limitation, a prospectus that discloses information previously omitted from a prospectus filed as part of an effective registration statement in reliance upon Rule 430A under the Securities Act), as amended or supplemented by any prospectus supplement, with respect to the terms of the offering of any portion of the Notes or the Exchange Notes covered by such Registration Statement, and all amendments and supplements to the Prospectus, including post-effective amendments. "PURCHASE AGREEMENT" has the meaning set forth in the preamble hereto. 4 "REGISTRATION DEFAULT" has the meaning set forth in Section 5(b) hereto. "REGISTRATION STATEMENT" means any Exchange Offer Registration Statement or Shelf Registration Statement that covers any of the Notes or the Exchange Notes (including the Guarantees thereon) pursuant to the provisions of this Agreement, amendments and supplements to such registration statement, including post-effective amendments, in each case including the Prospectus contained therein, all exhibits thereto, and all material incorporated by reference therein. "SECURITIES ACT" means the Securities Act of 1933, as amended, and the rules and regulations of the Commission promulgated thereunder. "SHELF REGISTRATION" means a registration effected pursuant to Section 3 hereof. "SHELF REGISTRATION PERIOD" has the meaning set forth in Section 3(b) hereof. "SHELF REGISTRATION STATEMENT" means a "shelf" registration statement of the Company pursuant to the provisions of Section 3 hereof, which covers some or all of the Notes or Exchange Notes, as applicable (including the Guarantees thereon), on an appropriate form under Rule 415 under the Securities Act, or any similar rule that may be adopted by the Commission, amendments and supplements to such registration statement, including post-effective amendments, in each case including the Prospectus contained therein, all exhibits thereto and all material incorporated by reference therein. "SUBSIDIARY GUARANTORS" has the meaning set forth in the Indenture. "TRUSTEE" means the trustee with respect to the Notes or Exchange Notes, as applicable, under the Indenture. "UNDERWRITER" means any underwriter of Notes in connection with an offering thereof under a Shelf Registration Statement. 2. Exchange Offer; Resales of Exchange Notes by Exchanging Dealers; Private Exchange. (a) The Company and the Subsidiary Guarantors shall prepare and, on or prior to the 60th calendar day following the Closing Date, shall file with the Commission the Exchange Offer Registration Statement with respect to the Exchange Offer. The Company and the Subsidiary Guarantors shall use their best efforts (i) to cause the Exchange Offer Registration Statement to be declared effective under the Securities Act on or prior to the 120th calendar day following the Closing Date and remain effective until the closing of the 5 Exchange Offer and (ii) to consummate the Exchange Offer on or prior to the 150th calendar day following the Closing Date. (b) Upon the effectiveness of the Exchange Offer Registration Statement, the Company and the Subsidiary Guarantors shall promptly commence the Exchange Offer, it being the objective of such Exchange Offer to enable each Holder electing to exchange Notes for Exchange Notes (assuming that such Holder (x) is not an "affiliate" of the Company within the meaning of the Securities Act, (y) is not a broker-dealer that acquired the Notes in a transaction other than as a part of its market-making or other trading activities and (z) if such Holder is not a broker-dealer, acquires the Exchange Notes in the ordinary course of such Holder's business, is not participating in the distribution of the Exchange Notes and has no arrangements or understandings with any person to participate in the distribution of the Exchange Notes) to resell such Exchange Notes from and after their receipt without any limitations or restrictions under the Securities Act and without material restrictions under the securities laws of a substantial proportion of the several states of the United States. (c) In connection with the Exchange Offer, the Company shall mail to each Holder a copy of the Prospectus forming part of the Exchange Offer Registration Statement, together with an appropriate letter of transmittal and related documents, stating, in addition to such other disclosures as are required by applicable law: (i) that the Exchange Offer is being made pursuant to this Agreement and that all Notes validly tendered will be accepted for exchange; (ii) the dates of acceptance for exchange; (iii) that any Note not tendered will remain outstanding and continue to accrue interest, but will not retain any rights under this Agreement; (iv) that Holders electing to have a Note exchanged pursuant to the Exchange Offer will be required to surrender such Note, together with the enclosed letters of transmittal, to the institution and at the address (located in the Borough of Manhattan, The City of New York) specified in the notice prior to the close of business on the last day of acceptance for exchange; and (v) that Holders will be entitled to withdraw their election, not later than the close of business on the last day of acceptance for exchange, by sending to the institution and at the address (located in the Borough of Manhattan, The City of New York) specified in the notice a telegram, telex, facsimile transmission or letter setting forth the name of such Holder, the principal amount of Notes delivered for exchange and a statement that such Holder is withdrawing his election to have such Notes exchanged; and shall keep the Exchange Offer open for acceptance for not less than 6 30 days and not more than 45 days (or longer if required by applicable law) after the date notice thereof is mailed to the Holders; utilize the services of a depositary for the Exchange Offer with an address in the Borough of Manhattan, The City of New York; and comply in all respects with all applicable laws relating to the Exchange Offer. (d) As soon as practicable after the close of the Exchange Offer, the Company shall: (i) accept for exchange all Notes duly tendered and not validly withdrawn pursuant to the Exchange Offer; (ii) deliver to the Trustee for cancellation all Notes so accepted for exchange; and (iii) cause the Trustee promptly to authenticate and deliver to each Holder the Exchange Notes equal in principal amount to the Notes of such Holder so accepted for exchange. (e) The Initial Purchaser, the Company and the Subsidiary Guarantors acknowledge that, pursuant to interpretations by the staff of the Commission of Section 5 of the Securities Act, and in the absence of an applicable exemption therefrom, each Exchanging Dealer is required to deliver a Prospectus in connection with a sale of any Exchange Notes received by such Exchanging Dealer pursuant to the Exchange Offer in exchange for Notes acquired for its own account as a result of market-making activities or other trading activities. Accordingly, the Company and the Subsidiary Guarantors shall: (i) include the information set forth in Annex A hereto on the cover of the Exchange Offer Registration Statement, in Annex B hereto in the forepart of the Exchange Offer Registration Statement in a section setting forth details of the Exchange Offer, in Annex C hereto in the underwriting or plan of distribution section of the Prospectus forming a part of the Exchange Offer Registration Statement, and in Annex D hereto in the letter of transmittal delivered pursuant to the Exchange Offer; and (ii) use its best efforts to keep the Exchange Offer Registration Statement continuously effective under the Securities Act during the Exchange Offer Registration Period for delivery of the prospectus included therein by Exchanging Dealers in connection with sales of Exchange Notes received pursuant to the Exchange Offer, as contemplated by Section 4(h) below; PROVIDED, HOWEVER, that the Company shall not be required to maintain the effectiveness of the Exchange Offer Registration Statement for more than 60 days following the consummation of the Exchange Offer unless the 7 Company has been notified in writing on or prior to the 60th day following the consummation of the Exchange Offer by one or more Exchanging Dealers that such Holder has received Exchange Notes as to which it will be required to deliver a prospectus upon resale. (f) In the event that the Initial Purchaser determines that it is not eligible to participate in the Exchange Offer with respect to the exchange of Notes constituting any portion of an unsold allotment, upon the effectiveness of the Shelf Registration Statement as contemplated by Section 3 hereof and at the request of the Initial Purchaser, the Company shall issue and deliver to the Initial Purchaser, or to the party purchasing Exchange Notes registered under the Shelf Registration Statement from the Initial Purchaser, in exchange for such Notes, a like principal amount of Exchange Notes. The Company shall use its best efforts to cause the CUSIP Service Bureau to issue the same CUSIP number for such Exchange Notes as for Exchange Notes issued pursuant to the Exchange Offer. (g) The Company and the Subsidiary Guarantors shall use their best efforts to complete the Exchange Offer as provided above and shall comply with the applicable requirements of the Securities Act, the Exchange Act and other applicable laws and regulations in connection with the Exchange Offer. The Exchange Offer shall not be subject to any conditions, other than that the Exchange Offer does not violate applicable law or any applicable interpretation of the staff of the Commission. The Company shall inform the Initial Purchaser of the names and addresses of the Holders to whom the Exchange Offer is made, and the Initial Purchaser shall have the right, subject to applicable law, to contact such Holders and otherwise facilitate the tender of Notes in the Exchange Offer. 3. SHELF REGISTRATION. If (i) because of any change in law or applicable interpretations thereof by the Commission's staff, the Company determines upon advice of its outside counsel that it is not permitted to effect the Exchange Offer as contemplated by Section 2 hereof or (ii) for any reason other than those specified clause (i) above, the Exchange Offer is not consummated within 150 days of the Closing Date unless the Exchange Offer has commenced, in which case, the Exchange Offer is not consummated within 30 days after the date on which the Exchange Offer was commenced or (iii) the Initial Purchaser so requests with respect to Notes held by it following consummation of the Exchange Offer, or (iv) any Holder (other than the Initial Purchaser) is not eligible to participate in the Exchange Offer or has participated in the Exchange Offer and has received Exchange Notes that are not freely tradeable or (v) in the case where the Initial Purchaser participates in the Exchange Offer or acquires Exchange Notes pursuant to Section 2(f) hereof, the Initial Purchaser does not receive freely tradeable Exchange Notes in exchange for Notes constituting any portion of an unsold allotment (it being understood that, for purposes of this Section 3, (x) the requirement that the Initial Purchaser deliver a Prospectus containing the information required by Items 507 and/or 508 of Regulation S-K under the Securities Act in connection with sales of Exchange Notes acquired in exchange for such 8 Notes shall result in such Exchange Notes being not "freely tradeable" and (y) the requirement that an Exchanging Dealer deliver a Prospectus in connection with sales of Exchange Notes acquired in the Exchange Offer in exchange for Notes acquired as a result of market-making activities or other trading activities shall not result in such Exchange Notes being not "freely tradeable"), the following provisions shall apply: (a) The Company and the Subsidiary Guarantors shall, as promptly as practicable (but in any event on or prior to 60 days after such filing obligation arises), file with the Commission a Shelf Registration Statement relating to the offer and sale of the Notes or the Exchange Notes, as applicable, by the Holders from time to time in accordance with the methods of distribution elected by such Holders and set forth in such Shelf Registration Statement and Rule 415 under the Securities Act, provided that, with respect to Exchange Notes received by the Initial Purchaser in exchange for Notes constituting any portion of an unsold allotment, the Company and the Subsidiary Guarantors may, if permitted by current interpretations by the Commission's staff, file a post-effective amendment to the Exchange Offer Registration Statement containing the information required by Regulation S-K Items 507 and/or 508, as applicable, in satisfaction of its obligations under this paragraph (a) with respect thereto, and any such Exchange Offer Registration Statement, as so amended, shall be referred to herein as, and governed by the provisions herein applicable to, a Shelf Registration Statement. (b) The Company and the Subsidiary Guarantors shall use their best efforts to cause the Shelf Registration Statement to be declared effective under the Securities Act as promptly as possible after filing such Shelf Registration Statement pursuant to this Section 3 and to keep such Shelf Registration Statement continuously effective in order to permit the Prospectus contained therein to be usable by Holders for a period of [two] years from the date the Shelf Registration Statement is declared effective by the Commission or such shorter period that will terminate when all the Notes or Exchange Notes, as applicable, covered by the Shelf Registration Statement have been sold pursuant to the Shelf Registration Statement (in any such case, such period being called the "Shelf Registration Period"). The Company shall be deemed not to have used its best efforts to keep the Shelf Registration Statement effective during the requisite period if it voluntarily takes any action that would result in Holders of Notes covered thereby not being able to offer and sell such Notes during that period, unless (i) such action is required by applicable law or (ii) such action is taken by the Company in good faith and for valid business reasons (not including avoidance of the Company's obligations hereunder), including the acquisition or divestiture of assets, so long as the Company promptly thereafter complies with the requirements of Section 4(k) hereof, if applicable. 9 4. REGISTRATION PROCEDURES. In connection with any Shelf Registration Statement and, to the extent applicable, any Exchange Offer Registration Statement, the following provisions shall apply: (a) The Company and the Subsidiary Guarantors shall, within a reasonable time prior to the filing of any Registration Statement, any Prospectus, any amendment to a Registration Statement or amendment or supplement to a Prospectus or any document which is to be incorporated by reference into a Registration Statement or a Prospectus after initial filing of a Registration Statement, provide copies of such document to the Initial Purchaser and its counsel (and, in the case of a Shelf Registration Statement, the Holders and their counsel) and make such representatives of the Company and the Subsidiary Guarantors as shall be reasonably requested by the Initial Purchaser or its counsel (and, in the case of a Shelf Registration Statement, the Holders or their counsel) available for discussion of such document, and shall not at any time file or make any amendment to the Registration Statement, any Prospectus or any amendment of or supplement to a Registration Statement or a Prospectus or any document which is to be incorporated by reference into a Registration Statement or a Prospectus, of which the Initial Purchaser and its counsel (and, in the case of a Shelf Registration Statement, the Holders and their counsel) shall not have previously been advised and furnished a copy or to which the Initial Purchaser or its counsel (and, in the case of a Shelf Registration Statement, the Holders or their counsel) shall object, except for any amendment or supplement or document (a copy of which has been previously furnished to the Initial Purchaser and its counsel (and, in the case of a Shelf Registration Statement, the Holders and their counsel)) which counsel to the Company and the Subsidiary Guarantors shall advise the Company and the Subsidiary Guarantors, in the form of a written legal opinion, is required in order to comply with applicable law; the Initial Purchaser agrees that, if it receives timely notice and drafts under this clause (a), it will not take actions or make objections pursuant to this clause (a) such that the Company and the Subsidiary Guarantors are unable to comply with their obligations under Section 2. (b) The Company and the Subsidiary Guarantors shall ensure that: (i) any Registration Statement and any amendment thereto and any Prospectus contained therein and any amendment or supplement thereto complies in all material respects with the Securities Act and the rules and regulations thereunder; (ii) any Registration Statement and any amendment thereto does not, when it becomes effective, contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; and 10 (iii) any Prospectus forming part of any Registration Statement, including any amendment or supplement to such Prospectus, does not include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. (c) (1) The Company shall advise the Initial Purchaser and, in the case of a Shelf Registration Statement, the Holders of Notes covered thereby, and, if requested by the Initial Purchaser or any such Holder, confirm such advice in writing: (i) when a Registration Statement and any amendment thereto has been filed with the Commission and when the Registration Statement or any post-effective amendment thereto has become effective; and (ii) of any request by the Commission for amendments or supplements to the Registration Statement or the Prospectus included therein or for additional information. (2) During the Shelf Registration Period or the Exchange Offer Registration Period, as applicable, the Company shall advise the Initial Purchaser and, in the case of a Shelf Registration Statement, the Holders of Notes covered thereby, and, in the case of an Exchange Offer Registration Statement, any Exchanging Dealer that has provided in writing to the Company a telephone or facsimile number and address for notices, and, if requested by the Initial Purchaser or any such Holder or Exchanging Dealer, confirm such advice in writing: (i) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or the initiation of any proceedings for that purpose; (ii) of the receipt by the Company of any notification with respect to the suspension of the qualification of the Notes included therein for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose; and (iii) of the happening of any event that requires the making of any changes in the Registration Statement or the Prospectus so that, as of such date, the Registration Statement or the Prospectus does not include an untrue statement of a material fact or omit to state a material fact necessary to make the statements therein (in the case of the Prospectus, in light of the circumstances under which they were made) not misleading (which advice 11 shall be accompanied by an instruction to suspend the use of the Prospectus until the requisite changes have been made). (d) The Company and the Subsidiary Guarantors shall use their best efforts to obtain the withdrawal of any order suspending the effectiveness of any Registration Statement at the earliest possible time. (e) The Company shall furnish to each Holder of Notes covered by any Shelf Registration Statement, without charge, at least one copy of such Shelf Registration Statement and any post-effective amendment thereto, including financial statements and schedules, and, if the Holder so requests in writing, all exhibits thereto (including those incorporated by reference). (f) The Company shall, during the Shelf Registration Period, deliver to each Holder of Notes covered by any Shelf Registration Statement, without charge, as many copies of the Prospectus (including each preliminary Prospectus) included in such Shelf Registration Statement and any amendment or supplement thereto as such Holder may reasonably request; and the Company consents to the use of the Prospectus or any amendment or supplement thereto by each of the selling Holders of Notes in connection with the offering and sale of the Notes covered by the Prospectus or any amendment or supplement thereto. (g) The Company shall furnish to each Exchanging Dealer that so requests, without charge, at least one copy of the Exchange Offer Registration Statement and any post-effective amendment thereto, including financial statements and schedules, any documents incorporated by reference therein and, if the Exchanging Dealer so requests in writing, all exhibits thereto (including those incorporated by reference). (h) The Company shall, during the Exchange Offer Registration Period, promptly deliver to each Exchanging Dealer, without charge, as many copies of the Prospectus included in such Exchange Offer Registration Statement and any amendment or supplement thereto as such Exchanging Dealer may reasonably request for delivery by such Exchanging Dealer in connection with a sale of Exchange Notes received by it pursuant to the Exchange Offer; and the Company consents to the use of the Prospectus or any amendment or supplement thereto by any such Exchanging Dealer, as provided in Section (2)(e) above. (i) Prior to the Exchange Offer or any other offering of Notes pursuant to any Registration Statement, the Company and the Subsidiary Guarantors shall register or qualify or cooperate with the Holders of Notes included therein and their respective counsel in connection with the registration or qualification of such Notes for offer and sale under the securities or blue sky laws of such states as any such Holders 12 reasonably request in writing and do any and all other acts or things necessary or advisable to enable the offer and sale in such states of the Notes covered by such Registration Statement; PROVIDED, HOWEVER, that the Company and the Subsidiary Guarantors will not be required to qualify as a foreign corporation or as a dealer in securities in any jurisdiction in which it is not then so qualified, to file any general consent to service of process or to take any action that would subject it to general service of process in any such jurisdiction where it is not then so subject or to subject itself to taxation in respect of doing business in any jurisdiction in which it is not otherwise so subject. (j) The Company shall cooperate with the Holders to facilitate the timely preparation and delivery of certificates representing Notes to be sold pursuant to any Registration Statement free of any restrictive legends and in denominations of $1,000 or an integral multiple thereof and registered in such names as Holders may request prior to sales of Notes pursuant to such Registration Statement. (k) Upon the occurrence of any event contemplated by paragraph (c)(2)(iii) of this Section 4, the Company and the Subsidiary Guarantors shall promptly prepare and file a post-effective amendment to any Registration Statement or an amendment or supplement to the related Prospectus or any other required document so that, as thereafter delivered to purchasers of the Notes included therein, the Prospectus will not include an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading and, in the case of a Shelf Registration Statement, notify the Holders to suspend use of the Prospectus as promptly as practicable after the occurrence of such an event. (l) Not later than the effective date of any such Registration Statement hereunder, the Company shall provide a CUSIP number for the Notes or Exchange Notes, as the case may be, registered under such Registration Statement, and provide the Trustee with printed certificates for such Notes or Exchange Notes, in a form eligible for deposit with The Depository Trust Company. (m) The Company shall use its best efforts to comply with all applicable rules and regulations of the Commission and shall make generally available to its security holders as soon as practicable after the effective date of the applicable Registration Statement an earnings statement satisfying the provisions of Section 11(a) of the Securities Act. (n) The Company shall cause the Indenture to be qualified under the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"), in a timely manner. 13 (o) The Company may require each Holder of Notes to be sold pursuant to any Shelf Registration Statement to furnish to the Company such information regarding the Holder and the distribution of such Notes as the Company may from time to time reasonably require for inclusion in such Registration Statement. (p) The Company shall, if requested, promptly incorporate in a Prospectus supplement or post-effective amendment to a Shelf Registration Statement, such information as the Managing Underwriters, if any, and Majority Holders reasonably agree should be included therein, and shall make all required filings of such Prospectus supplement or post-effective amendment promptly upon notification of the matters to be incorporated in such Prospectus supplement or post-effective amendment. (q) In the case of any Shelf Registration Statement, the Company and the Subsidiary Guarantors shall enter into such agreements (including underwriting agreements) and take all other appropriate actions in order to expedite or to facilitate the registration or the disposition of any Notes included therein, and in connection therewith, if an underwriting agreement is entered into, cause the same to contain indemnification provisions and procedures no less favorable than those set forth in Section 6 (or such other provisions and procedures acceptable to the Majority Holders and the Managing Underwriters, if any) with respect to all parties to be indemnified pursuant to Section 6. (r) In the case of any Shelf Registration Statement, the Company and the Subsidiary Guarantors shall: (i) make reasonably available for inspection by the Holders of Notes to be registered thereunder, any underwriter participating in any disposition pursuant to such Shelf Registration Statement, and any attorney, accountant or other agent retained by the Holders or any such underwriter all relevant financial and other records, pertinent corporate documents and properties of the Company any and its subsidiaries; (ii) cause the Company's and the Subsidiary Guarantors' officers, directors and employees to supply all relevant information reasonably requested by the Holders or any such underwriter, attorney, accountant or agent in connection with any such Registration Statement as is customary for similar due diligence examinations and make such representatives of the Company and the Subsidiary Guarantors as shall be reasonably requested by the Initial Purchaser or Managing Underwriters, if any, available for discussion of any such Registration Statement; PROVIDED, HOWEVER, that any information that is designated in writing by the Company or the Subsidiary 14 Guarantors, in good faith, as confidential at the time of delivery of such information shall be kept confidential by the Holders or any such underwriter, attorney, accountant or agent, unless such disclosure is made in connection with a court proceeding or required by law, or such information becomes available to the public generally or through a third party without an accompanying obligation of confidentiality other than as a result of a disclosure of such information by any such Holder, underwriter, attorney, accountant or agent; (iii) make such representations and warranties to the Holders of Notes registered thereunder and the underwriters, if any, in form, substance and scope as are customarily made by issuers to underwriters in similar underwritten offerings as may be reasonably requested by them; (iv) obtain opinions of counsel to the Company and the Subsidiary Guarantors and updates thereof (which counsel and opinions (in form, scope and substance) shall be reasonably satisfactory to the Managing Underwriters, if any) addressed to each selling Holder and the underwriters, if any, covering such matters as are customarily covered in opinions requested in similar underwritten offerings and such other matters as may be reasonably requested by such Holders and underwriters; (v) obtain "cold comfort" letters and updates thereof from the independent certified public accountants of the Company and the Subsidiary Guarantors (and, if necessary, any other independent certified public accountants of any subsidiary of the Company or of any business acquired by the Company for which financial statements and financial data are, or are required to be, included in the Registration Statement), addressed to the underwriters, if any, and use reasonable efforts to have such letter addressed to the selling Holders of Notes registered thereunder (to the extent consistent with Statement on Auditing Standards No. 72 of the American Institute of Certified Public Accountants (AICPA) ("SAS 72")), in customary form and covering matters of the type customarily covered in "cold comfort" letters in connection with similar underwritten offerings, or if the provision of such "cold comfort" letters is not permitted by SAS No. 72 or if requested by the Initial Purchaser or its counsel in lieu of a "cold comfort" letter, an agreed-upon procedures letter under Statement on Auditing Standards No. 35 of the AICPA, covering matters requested by the Initial Purchaser or its counsel; and (vi) deliver such documents and certificates as may be reasonably requested by the Majority Holders and the Managing Underwriters, if any, and customarily delivered in similar offerings, including those to evidence 15 compliance with Section 4(k) and with any conditions contained in the underwriting agreement or other agreement entered into by the Company. The foregoing actions set forth in clauses (iii), (iv), (v) and (vi) of this Section 4(r) shall be performed at (A) the effectiveness of such Shelf Registration Statement and each post-effective amendment thereto and (B) each closing under any underwriting or similar agreement as and to the extent required thereunder. (s) The Company and the Subsidiary Guarantors shall, in the case of a Shelf Registration, use their best efforts to cause all Notes to be listed on any securities exchange or any automated quotation system on which similar securities issued by the Company are then listed if requested by the Majority Holders, to the extent such Notes satisfy applicable listing requirements. (t) The Company and the Subsidiary Guarantors shall use their best efforts to cause the Exchange Notes or Notes, as the case may be, to be rated by two nationally recognized statistical rating organizations (as such term is defined in Rule 436(g)(2) under the 1933 Act). 5. Registration Expenses; Remedies. (a) The Company and the Subsidiary Guarantors shall bear all expenses incurred in connection with the performance of their obligations under Sections 2, 3 and 4 hereof, including without limitation: (i) all Commission or National Association of Securities Dealers, Inc. registration and filing fees, (ii) all fees and expenses incurred in connection with compliance with state securities or blue sky laws (including reasonable fees and disbursements of counsel for any underwriters or Holders in connection with blue sky qualification of any of the Exchange Notes or Notes), (iii) all expenses of any persons in preparing or assisting in preparing, word processing, printing and distributing any Registration Statement, any Prospectus, any amendments or supplements thereto, any underwriting agreements, securities sales agreements and other documents relating to the performance of and compliance with this Agreement, (iv) all rating agency fees, if any, (v) all fees and disbursements relating to the qualification of the Indenture under applicable securities laws, (vi) the fees and disbursements of the Trustee and its counsel, (vii) the fees and disbursements of counsel for the Company and the Subsidiary Guarantors and, in the case of a Shelf Registration Statement, the fees and disbursements, of one counsel for the Holders (which counsel shall be selected by the Majority Holders and which counsel may also be counsel for the Initial Purchaser) and in the case of any Exchange Offer Registration Statement, the reasonable fees and expenses of counsel to the Initial Purchaser acting in connection therewith and (viii) the fees and disbursements of the independent public accountants of the Company and the Subsidiary Guarantors, including the expenses of any special audits or "cold comfort" letters required by or incident to such performance and compliance, but excluding fees and expenses of counsel to the underwriters (other than fees and expenses set forth in clause (ii) above) or the Holders and underwriting 16 discounts and commissions and transfer taxes, if any, relating to the sale or disposition of Notes by a Holder. (b) The Notes provide that if (i) the Company fails to file any of the Registration Statements required by this Agreement on or before the date specified for such filing, (ii) any of such Registration Statements is not declared effective by the Commission on or prior to the date specified for such effectiveness (the "Effectiveness Target Date"), (iii) the Company fails to consummate the Exchange Offer within 30 business days of the Effectiveness Target Date with respect to Exchange Offer Registration Statement or (iv) the Shelf Registration Statement or the Exchange Offer Registration Statement is declared effective but thereafter ceases to be effective or usable in connection with resales of the Notes during the periods specified in this Agreement (each such event referred to in clauses (i) through (iv) above a "Registration Default"), then the Company will pay liquidated damages ("Liquidated Damages") to each Holder of Notes, with respect to the first 90-day period immediately following the occurrence of such Registration Default in an amount equal to $0.05 per week per $1,000 principal amount of Notes held by such Holder. The amount of the Liquidated Damages will increase by an additional $0.05 per week per $1,000 principal amount of Notes with respect to each subsequent 90-day period until all Registration Defaults have been cured, up to a maximum amount of Liquidated Damages of $0.30 per week per $1,000 principal amount of Notes. Upon the filing of the required Registration Statement, the consummation of the Exchange Offer or the effectiveness of a Shelf Registration Statement, as the case may be, Liquidated Damages will cease to accrue from the date of such filing, consummation or effectiveness, as the case may be; PROVIDED, HOWEVER, that, if after the date such Liquidated Damages cease to accrue, a different event specified in clause (i), (ii), (iii) or (iv) above occurs, Liquidated Damages may again commence accruing pursuant to the foregoing provisions. (c) Without limiting the remedies available to the Initial Purchaser and the Holders, the Company and the Subsidiary Guarantors acknowledge that any failure by the Company and the Subsidiary Guarantors to comply with their respective obligations under Sections 2 and 3 hereof may result in material irreparable injury to the Initial Purchaser or the Holders for which there is no adequate remedy at law, that it will not be possible to measure damages for such injuries precisely and that, in the event of any such failure, the Initial Purchaser or any Holder may obtain such relief as may be required to specifically enforce the Company's and the Subsidiary Guarantors' obligations under Sections 2 and 3 hereof. 6. INDEMNIFICATION AND CONTRIBUTION. (a) In connection with any Registration Statement, the Company and each Guarantor jointly and severally agree to indemnify and hold harmless each Holder of Notes covered thereby (including the Initial Purchaser and, with respect to any Prospectus delivery as contemplated by Sections 2(e) and 4(h) hereof, each Exchanging Dealer) the directors, officers, employees and agents of such 17 Holder and each person who controls such Holder within the meaning of either the Securities Act or the Exchange Act, against any and all losses, claims, damages or liabilities, joint or several, to which they or any of them may become subject under the Securities Act, the Exchange Act or other Federal or state statutory law or regulation, at common law or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in such Registration Statement as originally filed or in any amendment thereof, or in any preliminary Prospectus or Prospectus, or in any amendment thereof or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein (in the case of the Prospectus, in light of the circumstances under which they were made) not misleading, and agrees to reimburse each such indemnified party, as incurred, for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage or liability (or action in respect thereof); PROVIDED, HOWEVER, that the Company and each Guarantor will not be liable in any case to the extent that any such loss, claim, damage or liability arises out of or is based upon any such untrue statement or alleged untrue statement or omission or alleged omission made therein in reliance upon and in conformity with written information furnished to the Company by or on behalf of any such Holder specifically for inclusion therein; PROVIDED FURTHER, HOWEVER, that the Company and each Guarantor will not be liable in any case with respect to any untrue statement or omission or alleged untrue statement or omission made in any preliminary Prospectus or Prospectus, or in any amendment thereof or supplement thereto to the extent that any such loss, claim, damage or liability (or action in respect thereof) resulted from the fact that any Holder or underwriter, in the case of a Shelf Registration sold Notes or Exchange Notes to a person to whom there was not sent or given, at or prior to the written confirmation of such sale, a copy of the Prospectus as then amended or supplemented in any case where such delivery is required by the Securities Act, if the Company had previously complied with the provisions of Section 4(c)(2) and 4(f) or 4(g) hereof and if the untrue statement contained in or omission from such preliminary Prospectus or Prospectus was corrected in the Prospectus or then amended or supplemented. This indemnity agreement will be in addition to any liability that the Company or any Guarantor may otherwise have. The Company and each Guarantor also agree jointly and severally to indemnify or contribute to Losses of, as provided in Section 6(d) hereof, any underwriters of Notes registered under a Shelf Registration Statement, their employees, officers, directors and agents and each person who controls such underwriters on the same basis as that of the indemnification of the Initial Purchaser and the selling Holders provided in this Section 6(a) and shall, if requested by any Holder, enter into an underwriting agreement reflecting such agreement, as provided in Section 4(q) hereof. (b) Each Holder of Notes covered by a Registration Statement (including the Initial Purchaser and, with respect to any Prospectus delivery as contemplated by 18 Sections 2(e) and 4(h) hereof, each Exchanging Dealer) severally agrees to indemnify and hold harmless (i) the Company and each Guarantor, (ii) each of the directors of the Company and each Guarantor, (iii) each of the officers of the Company and the Subsidiary Guarantors who signs such Registration Statement and (iv) each Person who controls the Company or any Guarantor within the meaning of either the Securities Act or the Exchange Act to the same extent as the foregoing indemnity from the Company and each Guarantor to each such Holder, but only with respect to written information furnished to the Company by or on behalf of such Holder specifically for inclusion in the documents referred to in the foregoing indemnity. This indemnity agreement will be in addition to any liability that any such Holder may otherwise have. (c) Promptly after receipt by an indemnified party under this Section 6 of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party under this Section 6, notify the indemnifying party in writing of the commencement thereof; but the failure so to notify the indemnifying party (i) will not relieve the indemnifying party from liability under paragraph (a) or (b) above unless and to the extent it did not otherwise learn of such action and such failure results in the forfeiture by the indemnifying party of substantial rights and defenses, and (ii) will not, in any event, relieve the indemnifying party from any obligations to any indemnified party other than the indemnification obligation provided in paragraph (a) or (b) above. The indemnifying party shall be entitled to appoint counsel (including local counsel) of the indemnifying party's choice at the indemnifying party's expense to represent the indemnified party in any action for which indemnification is sought (in which case the indemnifying party shall not thereafter be responsible for the fees and expenses of any separate counsel retained by the indemnified party or parties except as set forth below); PROVIDED, HOWEVER, that such counsel shall be reasonably satisfactory to the indemnified party. Notwithstanding the indemnifying party's election to appoint counsel to represent the indemnified party in an action, the indemnified party shall have the right to employ separate counsel (including local counsel), and the indemnifying party shall bear the reasonable fees, costs and expenses of such separate counsel (and local counsel) if (i) the use of counsel chosen by the indemnifying party to represent the indemnified party would present such counsel with a conflict of interest, (ii) the actual or potential defendants in, or targets of, any such action include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded that there may be legal defenses available to it and/or other indemnified parties that are different from or additional to those available to the indemnifying party, (iii) the indemnifying party shall not have employed counsel satisfactory to the indemnified party to represent the indemnified party within a reasonable time after notice of the institution of such action or (iv) the indemnifying party shall authorize the indemnified party to employ separate counsel at the expense of the indemnifying party. An indemnifying party will not, without the prior written consent of the indemnified parties, settle or compromise or consent to the entry of any judgment with respect to any pending or threatened claim, action, suit or proceeding in respect of which 19 indemnification or contribution may be sought hereunder (whether or not the indemnified parties are actual or potential parties to such claim or action) unless such settlement, compromise or consent includes an unconditional release of each indemnified party from all liability arising out of such claim, action, suit or proceeding. (d) In the event that the indemnity provided in paragraph (a) or (b) of this Section 6 is unavailable to or insufficient to hold harmless an indemnified party for any reason, then each applicable indemnifying party, in lieu of indemnifying such indemnified party, shall have a joint and several obligation to contribute to the aggregate losses, claims, damages and liabilities (including legal or other expenses reasonably incurred in connection with investigating or defending the same) (collectively "Losses") to which such indemnified party may be subject in such proportion as is appropriate to reflect the relative benefits received by such indemnifying party, on the one hand, and such indemnified party, on the other hand, from the Initial Placement and the Registration Statement that resulted in such Losses; PROVIDED, HOWEVER, that in no case shall the Initial Purchaser or any subsequent Holder of any Note or Exchange Note be responsible, in the aggregate, for any amount in excess of the purchase discount or commission applicable to such Note, or in the case of an Exchange Note, applicable to the Note that was exchangeable into such Exchange Note, as set forth on the cover page of the Final Memorandum, nor shall any underwriter be responsible for any amount in excess of the underwriting discount or commission applicable to the Notes purchased by such underwriter under the Registration Statement that resulted in such Losses. If the allocation provided by the immediately preceding sentence is unavailable for any reason, the indemnifying party and the indemnified party shall contribute in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of such indemnifying party, on the one hand, and such indemnified party, on the other hand, in connection with the statements or omissions that resulted in such Losses as well as any other relevant equitable considerations. Benefits received by the Company and the Subsidiary Guarantors shall be deemed to be equal to the sum of (x) the total net proceeds from the Initial Placement (before deducting expenses) as set forth on the cover page of the Final Memorandum and (y) the total amount of additional interest that the Company was not required to pay as a result of registering the Notes covered by the Registration Statement that resulted in such Losses. Benefits received by the Initial Purchaser shall be deemed to be equal to the total purchase discounts and commissions as set forth on the cover page of the Final Memorandum, and benefits received by any other Holders shall be deemed to be equal to the value of receiving Notes or Exchange Notes, as applicable, registered under the Securities Act. Benefits received by any underwriter shall be deemed to be equal to the total underwriting discounts and commissions, as set forth on the cover page of the Prospectus forming a part of the Registration Statement that resulted in such Losses. Relative fault shall be determined by reference to whether any alleged untrue statement or omission relates to information provided by the indemnifying party, on the one hand, or by the indemnified party, on the other hand. The parties agree that it would not be just and equitable if contribution were determined by pro rata allocation or any other method of allocation that 20 did not take account of the equitable considerations referred to above. Notwithstanding the provisions of this paragraph (d), no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this Section 6, each person who controls a Holder within the meaning of either the Securities Act or the Exchange Act and each director, officer, employee and agent of such Holder shall have the same rights to contribution as such Holder, and each person who controls the Company or any Guarantor within the meaning of either the Securities Act or the Exchange Act, each officer of the Company or any Guarantor who shall have signed the Registration Statement and each director of the Company and each Guarantor shall have the same rights to contribution as the Company and each Guarantor, subject in each case to the applicable terms and conditions of this paragraph (d). (e) The provisions of this Section 6 will remain in full force and effect, regardless of any investigation made by or on behalf of any Holder or the Company or any Guarantor or any of the officers, directors or controlling persons referred to in Section 6 hereof, and will survive the sale by a Holder of Notes covered by a Registration Statement. 7. MISCELLANEOUS. (a) NO INCONSISTENT AGREEMENT. The Company and the Subsidiary Guarantors have not, as of the date hereof, entered into, nor shall any of them, on or after the date hereof, enter into, any agreement that conflicts with the rights granted to the Holders herein or otherwise conflicts with the provisions hereof. (b) AMENDMENTS AND WAIVERS. The provisions of this Agreement, including the provisions of this sentence, may not be amended, qualified, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given, unless the Company has obtained the written consent of the Holders of at least a majority of the then outstanding aggregate principal amount of Notes (or, after the consummation of any Exchange Offer in accordance with Section 2 hereof, of Exchange Notes); PROVIDED that, with respect to any matter that directly or indirectly affects the rights of the Initial Purchaser hereunder, the Company shall obtain the written consent of the Initial Purchaser. Notwithstanding the foregoing (except the foregoing proviso), a waiver or consent to departure from the provisions hereof with respect to a matter that relates exclusively to the rights of Holders whose Notes are being sold pursuant to a Registration Statement and that does not directly or indirectly affect the rights of other Holders may be given by the Majority Holders, determined on the basis of Notes being sold rather than registered under such Registration Statement. 21 (c) NOTICES. All notices and other communications provided for or permitted hereunder shall be made in writing by hand-delivery, first-class mail, telex, telecopier, or air courier guaranteeing overnight delivery: (i) if to a Holder, at the most current address given by such Holder to the Company in accordance with the provisions of this Section 7(c), which address initially is, with respect to each Holder, the address of such Holder maintained by the Registrar under the Indenture, with a copy in like manner to NationsBanc Capital Markets, Inc.; (ii) if to the Initial Purchaser, at NationsBank Corporate Center, 100 North Tryon Street NCl-007-07-01, Charlotte, North Carolina 28255-0001; and (iii) if to the Company or any Guarantor, c/o the Company at 2250 South Tenth Street, San Jose, California 95112, Attention: Dave Worthington, with copies to J.F. Lehman & Company, 450 Park Avenue, Fifth Floor, New York, NY 10022, Attention: Keith Oster. All such notices and communications shall be deemed to have been duly given when received. The Initial Purchaser, on the one hand, or the Company or any Guarantor, on the other, by notice to the other party or parties may designate additional or different addresses for subsequent notices or communications. (d) SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit of and be binding upon the successors and assigns of each of the parties, including, without the need for an express assignment or any consent by the Company or any Guarantor thereto, subsequent Holders of Notes and/or Exchange Notes. The Company and the Subsidiary Guarantors hereby agree to extend the benefits of this Agreement to any Holder of Notes and/or Exchange Notes and any such Holder may specifically enforce the provisions of this Agreement as if an original party hereto. (e) COUNTERPARTS. This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same Agreement. (f) HEADINGS. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. (g) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. 22 (h) Severability. In the event that any one or more of the provisions contained herein, or the application thereof in any circumstances, is held invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions hereof shall not be in any way impaired or affected thereby, it being intended that all of the rights and privileges of the parties shall be enforceable to the fullest extent permitted by law. (i) Notes Held by the Company, etc. Whenever the consent or approval of Holders of a specified percentage of principal amount of Notes or Exchange Notes is required hereunder, Notes or Exchange Notes, as applicable, held by the Company or its Affiliates (other than subsequent Holders of Notes or Exchange Notes if such subsequent Holders are deemed to be Affiliates solely by reason of their holdings of such Notes or Exchange Notes) shall not be counted in determining whether such consent or approval was given by the Holders of such required percentage. Please confirm that the foregoing correctly sets forth the agreement among the Company, the Subsidiary Guarantors and you. Very truly yours, BURKE INDUSTRIES, INC., as successor-in-interest to JFL Merger Co. By: /s/ KEITH OSTER --------------------------------- Name: Keith Oster Title: BURKE FLOORING PRODUCTS, INC. BURKE CUSTOM PROCESSING, INC. BURKE RUBBER COMPANY, INC. Each, a Subsidiary Guarantor By: /s/ KEITH OSTER --------------------------------- Name: Keith Oster Title: The foregoing Agreement is hereby accepted as of the date first above written. NATIONSBANC CAPITAL MARKETS, INC. By: /s/ DAVID APPLE ------------------------------- Name: David Apple Title: ANNEX A Each broker-dealer that receives Exchange Notes for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a prospectus in connection with any resale of such Exchange Notes. The Letter of Transmittal states that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. This Prospectus, as it may be amend or supplemented from time to time, may be used by a broker-dealer in connection with resales of Exchange Notes received in exchange for Notes where such Notes were acquired by such broker-dealer as a result of market-making activities or other trading activities. The Company has agreed that, starting on the Expiration Date (as defined herein) and ending on the close of business one year after the Expiration Date, it will make this Prospectus available to any broker-dealer for use in connection with any such resale. See "Plan of Distribution." ANNEX B Each broker-dealer that receives Exchange Notes for its own account in exchange for Notes, where such Notes were acquired by such broker-dealer as a result of market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such Exchange Notes. See "Plan of Distribution." ANNEX C Each broker-dealer that receives Exchange Notes for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a prospectus in connection with any resale of such Exchange Notes. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of Exchange Notes received in exchange for Notes where such Notes were acquired as a result of market-making activities or other trading activities. The Company has agreed that, starting on the Expiration Date and ending on the close of business one year after the Expiration Date, it will make this Prospectus, as amended or supplemented, available to any broker-dealer for use in connection with any such resale. In addition, until such date all dealers effecting transactions in the Exchange Notes may be required to deliver a prospectus. ANNEX D If the undersigned is a broker-dealer that will receive Exchange Notes for its own account in exchange for Notes, it represents that the Notes to be exchanged for the Exchange Notes were acquired by it as a result of market-making activities or other trading activities and acknowledges that it will deliver a prospectus in connection with any resale of such Exchange Notes; however, by so acknowledging and by delivering a prospectus, the undersigned will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. EX-10.1 4 EXH 10.1 LOAN SECURITY AGREEMENT EXHIBIT 10.1 [EXECUTION COPY] - -------------------------------------------------------------------------------- $15,000,000 LOAN AND SECURITY AGREEMENT Dated as of August 20, 1997 Between BURKE INDUSTRIES, INC. (the Borrower) and THE FINANCIAL INSTITUTIONS PARTY HERETO FROM TIME TO TIME (the Lenders) and NATIONSBANK, N.A. (the Agent) - -------------------------------------------------------------------------------- TABLE OF CONTENTS(1) Page ---- ARTICLE 1 - DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . 1 SECTION 1.1 DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . 1 SECTION 1.2 GENERAL INTERPRETIVE RULES . . . . . . . . . . . . . . 30 SECTION 1.3 EXHIBITS AND SCHEDULES . . . . . . . . . . . . . . . . 32 ARTICLE 2 - REVOLVING CREDIT FACILITY . . . . . . . . . . . . . . . . . . 33 SECTION 2.1 REVOLVING CREDIT LOANS . . . . . . . . . . . . . . . . 33 SECTION 2.2 MANNER OF BORROWING REVOLVING CREDIT LOANS . . . . . . 33 SECTION 2.3 REPAYMENT OF REVOLVING CREDIT LOANS. . . . . . . . . . 35 SECTION 2.4 REVOLVING CREDIT NOTE. . . . . . . . . . . . . . . . . 35 SECTION 2.5 EXTENSION OF REVOLVING CREDIT FACILITY . . . . . . . . 36 ARTICLE 2A - LETTER OF CREDIT FACILITY. . . . . . . . . . . . . . . . . . 37 SECTION 2A.1 AGREEMENT TO ISSUE . . . . . . . . . . . . . . . . . . 37 SECTION 2A.2 AMOUNTS. . . . . . . . . . . . . . . . . . . . . . . . 37 SECTION 2A.3 CONDITIONS . . . . . . . . . . . . . . . . . . . . . . 37 SECTION 2A.4 ISSUANCE OF LETTERS OF CREDIT. . . . . . . . . . . . . 38 SECTION 2A.5 DUTIES OF NATIONSBANK. . . . . . . . . . . . . . . . . 38 SECTION 2A.6 PAYMENT OF REIMBURSEMENT OBLIGATIONS . . . . . . . . . 39 SECTION 2A.7 PARTICIPATIONS . . . . . . . . . . . . . . . . . . . . 39 SECTION 2A.8 INDEMNIFICATION, EXONERATION . . . . . . . . . . . . . 40 SECTION 2A.9 SUPPORTING LETTER OF CREDIT; CASH COLLATERAL ACCOUNT . 42 ARTICLE 3 - GENERAL LOAN PROVISIONS . . . . . . . . . . . . . . . . . . . 43 SECTION 3.1 INTEREST . . . . . . . . . . . . . . . . . . . . . . . 43 SECTION 3.2 CERTAIN FEES . . . . . . . . . . . . . . . . . . . . . 44 SECTION 3.3 MANNER OF PAYMENT. . . . . . . . . . . . . . . . . . . 45 SECTION 3.4 GENERAL. . . . . . . . . . . . . . . . . . . . . . . . 45 SECTION 3.5 LOAN ACCOUNTS; STATEMENTS OF ACCOUNT . . . . . . . . . 46 SECTION 3.6 REDUCTION OF COMMITMENTS; TERMINATION OF AGREEMENT . . 46 SECTION 3.7 MAKING LOANS . . . . . . . . . . . . . . . . . . . . . 47 SECTION 3.8 SETTLEMENT AMONG LENDERS . . . . . . . . . . . . . . . 48 SECTION 3.9 [RESERVED] . . . . . . . . . . . . . . . . . . . . . . 50 SECTION 3.10 PAYMENTS NOT AT END OF INTEREST PERIOD; FAILURE TO BORROW. . . . . . . . . . . . . . . . . . . . . . . 51 SECTION 3.11 ASSUMPTIONS CONCERNING FUNDING OF EURODOLLAR RATE LOANS . . . . . . . . . . . . . . . . . . . . . . 51 SECTION 3.12 CONVERSION OR CONTINUATION . . . . . . . . . . . . . . 51 SECTION 3.13 DURATION OF INTEREST PERIODS; MAXIMUM NUMBER OF EURODOLLAR RATE LOANS; MINIMUM INCREMENTS . . . . . 52 - --------------------------- (1) This Table of Contents is included for reference purposese only and does not constitute part of the Loan and Security Agreement. i SECTION 3.14 CHANGED CIRCUMSTANCES. . . . . . . . . . . . . . . . . 52 SECTION 3.15 INCREASED CAPITAL. . . . . . . . . . . . . . . . . . . 53 SECTION 3.16 CASH COLLATERAL ACCOUNT; INVESTMENT ACCOUNTS . . . . . 54 SECTION 3.17 FUNDS TRANSFER SERVICES. . . . . . . . . . . . . . . . 55 ARTICLE 4 - CONDITIONS PRECEDENT. . . . . . . . . . . . . . . . . . . . . 57 SECTION 4.1 CONDITIONS PRECEDENT TO REVOLVING CREDIT LOANS . . . . 57 SECTION 4.2 ALL LOANS; LETTERS OF CREDIT . . . . . . . . . . . . . 60 SECTION 4.3 CONDITIONS AS COVENANTS. . . . . . . . . . . . . . . . 61 ARTICLE 5 - REPRESENTATIONS AND WARRANTIES OF BORROWER. . . . . . . . . . 62 SECTION 5.1 REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . 62 SECTION 5.2 SURVIVAL OF REPRESENTATIONS AND WARRANTIES, ETC. . . . 72 ARTICLE 6 - SECURITY INTEREST . . . . . . . . . . . . . . . . . . . . . . 73 SECTION 6.1 SECURITY INTEREST. . . . . . . . . . . . . . . . . . . 73 SECTION 6.2 CONTINUED PRIORITY OF SECURITY INTEREST. . . . . . . . 73 ARTICLE 7 - COLLATERAL COVENANTS. . . . . . . . . . . . . . . . . . . . . 76 SECTION 7.1 COLLECTION OF RECEIVABLES. . . . . . . . . . . . . . . 76 SECTION 7.2 VERIFICATION AND NOTIFICATION. . . . . . . . . . . . . 77 SECTION 7.3 DISPUTES, RETURNS AND ADJUSTMENTS. . . . . . . . . . . 77 SECTION 7.4 INVOICES . . . . . . . . . . . . . . . . . . . . . . . 78 SECTION 7.5 DELIVERY OF INSTRUMENTS. . . . . . . . . . . . . . . . 78 SECTION 7.6 SALES OF INVENTORY . . . . . . . . . . . . . . . . . . 78 SECTION 7.7 OWNERSHIP AND DEFENSE OF TITLE . . . . . . . . . . . . 78 SECTION 7.8 INSURANCE. . . . . . . . . . . . . . . . . . . . . . . 78 SECTION 7.9 LOCATION OF OFFICES AND COLLATERAL . . . . . . . . . . 79 SECTION 7.10 RECORDS RELATING TO COLLATERAL . . . . . . . . . . . . 80 SECTION 7.11 INSPECTION . . . . . . . . . . . . . . . . . . . . . . 80 SECTION 7.12 INFORMATION AND REPORTS. . . . . . . . . . . . . . . . 81 SECTION 7.13 POWER OF ATTORNEY. . . . . . . . . . . . . . . . . . . 82 SECTION 7.14 ASSIGNMENT OF CLAIMS ACT . . . . . . . . . . . . . . . 82 ARTICLE 8 - AFFIRMATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . 83 SECTION 8.1 PRESERVATION OF CORPORATE EXISTENCE AND SIMILAR MATTERS. . . . . . . . . . . . . . . . . . . . 83 SECTION 8.2 COMPLIANCE WITH APPLICABLE LAW . . . . . . . . . . . . 83 SECTION 8.3 MAINTENANCE OF PROPERTY. . . . . . . . . . . . . . . . 83 SECTION 8.4 CONDUCT OF BUSINESS. . . . . . . . . . . . . . . . . . 83 SECTION 8.5 INSURANCE. . . . . . . . . . . . . . . . . . . . . . . 84 SECTION 8.6 PAYMENT OF TAXES AND CLAIMS. . . . . . . . . . . . . . 84 SECTION 8.7 ACCOUNTING METHODS AND FINANCIAL RECORDS . . . . . . . 84 SECTION 8.8 USE OF PROCEEDS. . . . . . . . . . . . . . . . . . . . 84 SECTION 8.9 HAZARDOUS WASTE AND SUBSTANCES; ENVIRONMENTAL REQUIREMENTS . . . . . . . . . . . . . . . . . . . . . 84 ii ARTICLE 9 - INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . 86 SECTION 9.1 FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . 86 SECTION 9.2 ACCOUNTANTS' CERTIFICATE . . . . . . . . . . . . . . . 87 SECTION 9.3 OFFICER'S CERTIFICATE. . . . . . . . . . . . . . . . . 87 SECTION 9.4 COPIES OF OTHER REPORTS. . . . . . . . . . . . . . . . 87 SECTION 9.5 NOTICE OF LITIGATION AND OTHER MATTERS . . . . . . . . 88 SECTION 9.6 ERISA. . . . . . . . . . . . . . . . . . . . . . . . . 88 SECTION 9.7 REVISIONS OR UPDATES TO SCHEDULES. . . . . . . . . . . 89 ARTICLE 10 - NEGATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . . 90 SECTION 10.1 FINANCIAL RATIOS . . . . . . . . . . . . . . . . . . . 90 SECTION 10.2 DEBT . . . . . . . . . . . . . . . . . . . . . . . . . 90 SECTION 10.3 GUARANTIES . . . . . . . . . . . . . . . . . . . . . . 91 SECTION 10.4 INVESTMENTS. . . . . . . . . . . . . . . . . . . . . . 91 SECTION 10.5 CAPITAL EXPENDITURES . . . . . . . . . . . . . . . . . 91 SECTION 10.6 RESTRICTED DISTRIBUTIONS AND PAYMENTS, ETC.. . . . . . 91 SECTION 10.7 MERGER, CONSOLIDATION AND SALE OF ASSETS . . . . . . . 91 SECTION 10.8 TRANSACTIONS WITH AFFILIATES . . . . . . . . . . . . . 92 SECTION 10.9 LIENS. . . . . . . . . . . . . . . . . . . . . . . . . 92 SECTION 10.10 [RESERVED] . . . . . . . . . . . . . . . . . . . . . . 92 SECTION 10.11 BENEFIT PLANS. . . . . . . . . . . . . . . . . . . . . 92 SECTION 10.12 AMENDMENTS OF OTHER AGREEMENTS . . . . . . . . . . . . 92 SECTION 10.13 MINIMUM AVAILABILITY . . . . . . . . . . . . . . . . . 92 ARTICLE 11 - DEFAULT. . . . . . . . . . . . . . . . . . . . . . . . . . . 93 SECTION 11.1 EVENTS OF DEFAULT. . . . . . . . . . . . . . . . . . . 93 SECTION 11.2 REMEDIES . . . . . . . . . . . . . . . . . . . . . . . 95 SECTION 11.3 APPLICATION OF PROCEEDS. . . . . . . . . . . . . . . . 98 SECTION 11.4 POWER OF ATTORNEY. . . . . . . . . . . . . . . . . . . 98 SECTION 11.5 MISCELLANEOUS PROVISIONS CONCERNING REMEDIES . . . . . 99 ARTICLE 12 - ASSIGNMENTS. . . . . . . . . . . . . . . . . . . . . . . . . 101 SECTION 12.1 SUCCESSORS AND ASSIGNS; PARTICIPATIONS . . . . . . . . 101 SECTION 12.2 REPRESENTATION OF LENDERS. . . . . . . . . . . . . . . 103 ARTICLE 13 - AGENT . . . . . . . . . . . . . . . . . . . . . . . . . . . 104 SECTION 13.1 APPOINTMENT OF AGENT . . . . . . . . . . . . . . . . . 104 SECTION 13.2 DELEGATION OF DUTIES . . . . . . . . . . . . . . . . . 104 SECTION 13.3 EXCULPATORY PROVISIONS . . . . . . . . . . . . . . . . 104 SECTION 13.4 RELIANCE BY AGENT. . . . . . . . . . . . . . . . . . . 105 SECTION 13.5 NOTICE OF DEFAULT. . . . . . . . . . . . . . . . . . . 105 SECTION 13.6 NON-RELIANCE ON AGENT AND OTHER LENDERS. . . . . . . . 105 SECTION 13.7 INDEMNIFICATION. . . . . . . . . . . . . . . . . . . . 106 SECTION 13.8 AGENT IN ITS INDIVIDUAL CAPACITY . . . . . . . . . . . 106 SECTION 13.9 SUCCESSOR AGENT. . . . . . . . . . . . . . . . . . . . 107 iii SECTION 13.10 NOTICES FROM AGENT TO LENDERS. . . . . . . . . . . . . 107 ARTICLE 14 - MISCELLANEOUS. . . . . . . . . . . . . . . . . . . . . . . . 108 SECTION 14.1 NOTICES. . . . . . . . . . . . . . . . . . . . . . . . 108 SECTION 14.2 EXPENSES . . . . . . . . . . . . . . . . . . . . . . . 109 SECTION 14.3 STAMP AND OTHER TAXES. . . . . . . . . . . . . . . . . 110 SECTION 14.4 SETOFF . . . . . . . . . . . . . . . . . . . . . . . . 110 SECTION 14.5 CONSENT TO ADVERTISING AND PUBLICITY . . . . . . . . . 111 SECTION 14.6 REVERSAL OF PAYMENTS . . . . . . . . . . . . . . . . . 111 SECTION 14.7 ACCOUNTING MATTERS . . . . . . . . . . . . . . . . . . 111 SECTION 14.8 AMENDMENTS.. . . . . . . . . . . . . . . . . . . . . . 111 SECTION 14.9 ASSIGNMENT.. . . . . . . . . . . . . . . . . . . . . . 113 SECTION 14.10 PERFORMANCE OF BORROWER'S DUTIES . . . . . . . . . . . 113 SECTION 14.11 INDEMNIFICATION. . . . . . . . . . . . . . . . . . . . 113 SECTION 14.12 ALL POWERS COUPLED WITH INTEREST . . . . . . . . . . . 113 SECTION 14.13 SURVIVAL . . . . . . . . . . . . . . . . . . . . . . . 114 SECTION 14.14 TITLES AND CAPTIONS. . . . . . . . . . . . . . . . . . 114 SECTION 14.15 SEVERABILITY OF PROVISIONS . . . . . . . . . . . . . . 114 SECTION 14.16 GOVERNING LAW JURISDICTION; CONSENT TO SERVICE OF PROCESS; WAIVER OF JURY TRIAL . . . . . . . . . . . 114 SECTION 14.17 COUNTERPARTS . . . . . . . . . . . . . . . . . . . . . 115 SECTION 14.18 REPRODUCTION OF DOCUMENTS. . . . . . . . . . . . . . . 115 SECTION 14.19 PRO-RATA PARTICIPATION . . . . . . . . . . . . . . . . 116 SECTION 14.20 CONFIDENTIALITY. . . . . . . . . . . . . . . . . . . . 116 iv ANNEX A COMMITMENTS ANNEX B WIRE TRANSFER PROCEDURES EXHIBIT A FORM OF REVOLVING CREDIT NOTE EXHIBIT B FORM OF BORROWING BASE CERTIFICATE EXHIBIT C FORM OF ASSIGNMENT AND ACCEPTANCE EXHIBIT D FORM OF SETTLEMENT REPORT Schedule 1.1A Permitted Investments Schedule 1.1B Permitted Liens Schedule 1.1C Letter of Credit Fees Schedule 4.1(a)(9) Landlord's Waivers Schedule 5.1(a) Organization Schedule 5.1(b) Capitalization Schedule 5.1(c) Subsidiaries; Ownership of Stock Schedule 5.1(e) Compliance with Laws Schedule 5.1(g) Governmental Approvals Schedule 5.1(h) Title to Properties Schedule 5.1(i) Liens Schedule 5.1(j) Indebtedness and Guaranties Schedule 5.1(k) Litigation Schedule 5.1(l) Tax Matters Schedule 5.1(p) ERISA Schedule 5.1(t) Location of Offices and Receivables Schedule 5.1(u) Location of Inventory Schedule 5.1(v) Equipment Schedule 5.1(w) Real Estate Schedule 5.1(x) Corporate and Fictitious Names Schedule 5.1(aa) Employee Relations Schedule 5.1(bb) Proprietary Rights Schedule 5.1(cc) Trade Names Schedule 5.1(dd) Bank Accounts Schedule 10.8 Recapitalization Documents LOAN AND SECURITY AGREEMENT Dated as of August 20, 1997 BURKE INDUSTRIES, INC., a California corporation, the financial institutions party to this Agreement from time to time, and NATIONSBANK, N.A., a national banking association, as agent for the Lenders, agree as follows: ARTICLE 1 DEFINITIONS SECTION 1.1 DEFINITIONS. For the purposes of this Agreement: ACCOUNT DEBTOR means a Person who is obligated on a Receivable. ACQUIRE or ACQUISITION, as applied to any Business Unit or Investment, means the acquiring or acquisition of such Business Unit or Investment by purchase, exchange, issuance of stock or other securities, or by merger, reorganization or any other method. AFFILIATE means, with respect to a Person, (a) any partner, officer, manager, director, employee or managing agent of such Person, (b) any spouse, parents, siblings, children or grandchildren of such Person, and (c) any other Person (other than a Subsidiary), (i) that directly or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, such given Person, (ii) that directly or indirectly beneficially owns or holds 10% or more of any class of voting stock or voting membership, partnership or other interest of such Person or any Subsidiary of such Person, or (iii) 10% or more of the voting stock or membership, partnership or other interest of which is directly or indirectly beneficially owned or held by such Person or a Subsidiary of such Person. The term "control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through ownership of voting securities or membership, partnership or other voting interest, by contract or otherwise. AGENT means NationsBank, N.A., a national banking association, and any successor agent appointed pursuant to SECTION 13.9 hereof. AGENT'S OFFICE means the office of the Agent specified in or determined in accordance with the provisions of SECTION 14.1. AGREEMENT means and includes this Agreement, including all Schedules, Exhibits and other attachments hereto, and all amendments, modifications and supplements hereto and thereto. AGREEMENT DATE means the date as of which this Agreement is dated. APPLICABLE LAW means all applicable provisions of constitutions, statutes, rules, regulations and orders of all governmental bodies and of all orders and decrees of all courts and arbitrators, including, without limitation, Environmental Laws. APPLICABLE MARGIN means (a) as to Prime Rate Loans, 0%, and (b) as to Eurodollar Rate Loans, 2.5%. ASSET DISPOSITION means (i) the sale, lease, conveyance or other disposition of any assets (including, without limitation, by way of merger, consolidation or sale and leaseback transaction or similar arrangement) by the Borrower or any of its Subsidiaries other than in the ordinary course (including inventory), whether in a single transaction or a series of related transactions (a) having a fair market value in excess of $1.0 million or (b) for aggregate net proceeds in excess of $1.0 million. For the purposes of this definition, the term "Asset Disposition" does not include any transfer of properties or assets (i) that is governed by SECTION 10.7, (ii) between or among the Borrower and the other Loan Parties pursuant to transactions that do not violate any other covenant herein, (iii) a Restricted Payment or Permitted Investment that is permitted by SECTION 10.4 or SECTION 10.6 (including, without limitation, any formation of or contribution of assets to a joint venture), (iv) leases or subleases, in the ordinary course of business, to third parties of real property owned in fee or leased by the Borrower or its Subsidiaries, (v) any disposition of property of the Borrower or any of its Subsidiaries that, in the reasonable judgment of the Borrower, has become uneconomic, obsolete or worn out, (vi) the sale of Cash Equivalents and (vii) any exchange of like property pursuant to Section 1031 of the Code. ASSIGNMENT and ACCEPTANCE means an assignment and acceptance in the form attached hereto as EXHIBIT C assigning all or a portion of a Lender's interests, rights and obligations under this Agreement pursuant to SECTION 12.1. BENEFIT PLAN means an employee benefit plan as defined in Section 3(3) of ERISA (other than a Multiemployer Plan) in respect of which the Borrower or any Related Company is, or within the immediately preceding six years was, an "employer" as defined in Section 3(5) of ERISA, including such plans as may be established after the Agreement Date. BORROWER means, Burke and shall include, where appropriate in the context, each Subsidiary of Burke which becomes a Borrowing Subsidiary after the Effective Date. BORROWING means the borrowing of a group of Loans of a single Type made by all Lenders on a single date and, in the case of Eurodollar Rate Loans, having a single Interest Period, and shall mean and include the continuation or conversion of an existing Loan or Loans in whole or in part. BORROWING BASE means at any time an amount equal to the sum of: (a) 85% (or such lesser percentage as the Agent may in its reasonable credit judgment determine from time to time) of the face value of Eligible Receivables due and owing at such time, PLUS (b) 50% (or such lesser percentage as the Agent may in its reasonable credit judgment determine from time to time) of the lesser of cost determined on a FIFO (or first-in-first-out) accounting basis and fair market value of Eligible Inventory, at such time, MINUS 2 (c) the Letter of Credit Reserve and such reserves as the Agent in its reasonable credit judgment may establish from time to time. BORROWING BASE CERTIFICATE means a certificate in the form attached hereto as EXHIBIT B or in such other form as may be acceptable to the Agent. BORROWING SUBSIDIARY means each Subsidiary of Burke which becomes a party to this Agreement as a Borrower after the Effective Date by executing Borrowing Subsidiary Documents. BORROWING SUBSIDIARY DOCUMENTS means each of the agreements, instruments and documents, in form and substance satisfactory to the Agent, executed by a Borrowing Subsidiary by which such Subsidiary becomes a party to this Agreement as a borrower and undertakes joint and several liability with Burke and each other Borrower for the Secured Obligations and grants a Lien on all of its assets as security for the Secured Obligations. BURKE means, at all times, prior to the effective date of the Merger, Burke Industries, Inc., a California corporation, and from and after the effective date of the Merger, means the surviving corporation of the Merger. BUSINESS DAY means any day other than a Saturday, Sunday or other day on which banks in Atlanta, Georgia are authorized to close and, when used with respect to Eurodollar Rate Loans, means any such day on which dealings are also carried on in the applicable interbank Eurodollar market. BUSINESS UNIT means the assets constituting the business or a division or operating unit thereof of any Person. CAPITAL EXPENDITURES means, with respect to any Person, all expenditures made and liabilities incurred for the acquisition of assets (other than assets which constitute a Business Unit or Inventory) which are not, in accordance with GAAP, treated as expense items for such Person in the year made or incurred or as a prepaid expense applicable to a future year or years. CAPITALIZED LEASE means a lease that is required to be capitalized for financial reporting purposes in accordance with GAAP. CAPITALIZED LEASE OBLIGATION means Indebtedness represented by obligations under a Capitalized Lease, and the amount of such Indebtedness shall be the capitalized amount of such obligations determined in accordance with GAAP. CASH COLLATERAL means collateral consisting of cash or Cash Equivalents on which the Agent, for the benefit of itself as Agent and the Lenders, has a first priority Lien. CASH COLLATERAL ACCOUNT means a special interest-bearing deposit account consisting of cash maintained at an office of the Agent or an Affiliate of the Agent and under the sole 3 dominion and control of the Agent, for its benefit and for the benefit of the Lenders, established pursuant to the provisions of SECTION 3.16 for purposes set forth therein. CASH EQUIVALENTS means (a) marketable direct obligations issued or unconditionally guaranteed by the United States Government or issued by any agency thereof and backed by the full faith and credit of the United States, in each case maturing within one year from the date of acquisition thereof; (b) commercial paper maturing no more than one year from the date issued and, at the time of acquisition thereof, having a rating of at least A-1 from S&P's Corporation or at least P-1 from Moody's; (c) certificates of deposit, Eurodollar deposits or bankers' acceptances issued in Dollar denominations and maturing within one year from the date of issuance thereof issued by any commercial bank organized under the laws of the United States of America or any state thereof or the District of Columbia having combined capital and surplus of not less than $100,000,000 and, unless issued by the Agent or a Lender, not subject to set-off or offset rights in favor of such bank arising from any banking relationship with such bank; (d) repurchase agreements with a term of not more than seven days for underlying securities of the types described in clauses (a), (b) and (c) above with any financial institution meeting the requirements of clause (c) above; and (e) shares of money market mutual funds or similar funds having assets in excess of $500,000,000. CASH FLOW means, for any accounting period of the Borrower, an amount equal to the sum of the consolidated Net Income of the Borrower and its Consolidated Subsidiaries for such accounting period, plus depreciation, amortization and other non-cash charges against Net Income for such period, to the extent the same were included in the computation of consolidated Net Income, minus cash outlays for Capital Expenditures (other than Financed Capex) for such period. CODE means the Internal Revenue Code of 1986. COLLATERAL means and includes all of the Borrower's and each other Loan Party's right, title and interest in and to each of the following, wherever located and whether now or hereafter existing or now owned or hereafter acquired or arising: (a) (i) all rights to the payment of money or other forms of consideration of any kind (whether classified under the UCC as accounts, contract rights, chattel paper, general intangibles or otherwise) including, but not limited to, accounts receivable, letters of credit and the right to receive payment thereunder, chattel paper, tax refunds, insurance proceeds, any rights under contracts not yet earned by performance and not evidenced by an instrument or chattel paper, notes, drafts, instruments, documents, acceptances and all other debts, obligations and liabilities 4 in whatever form from any Person, (ii) all guaranties, security and Liens securing payment thereof, (iii) all goods, whether now owned or hereafter acquired, and whether sold, delivered, undelivered, in transit or returned, evidenced by, or the sale or lease of which may have given rise to, any such right to payment or other debt, obligation or liability, and (iv) all proceeds of any of the foregoing (the foregoing, collectively, RECEIVABLES), (b) (i) all inventory, (ii) all goods intended for sale or lease or for display or demonstration, (iii) all work in process, (iv) all raw materials and other materials and supplies of every nature and description used or which might be used in connection with the manufacture, packing, shipping, advertising, selling, leasing or furnishing of goods or services or otherwise used or consumed in the conduct of business, and (v) all documents evidencing and general intangibles relating to any of the foregoing (the foregoing, collectively, INVENTORY), (c) (i) all machinery, apparatus, equipment, motor vehicles, tractors, trailers, rolling stock, fittings, fixtures and other tangible personal property (other than Inventory) of every kind and description, (ii) all tangible personal property (other than Inventory) and fixtures used in the Borrower's business operations or owned by the Borrower or in which the Borrower has an interest, and (iii) all parts, accessories and special tools and all increases and accessions thereto and substitutions and replacements therefor, excluding, however, any such property that is subject to a lease or Lien permitted to exist by this Agreement which prohibits the creation of the Security Interest therein (the foregoing, collectively, EQUIPMENT), (d) all general intangibles, choses in action and causes of action and all other intangible personal property of every kind and nature (other than Receivables), including, without limitation, Proprietary Rights, corporate or other business records, inventions, designs, blueprints, plans, specifications, trade secrets, goodwill, computer software, customer lists, registrations, licenses, franchises, tax refund claims, reversions or any rights thereto and any other amounts payable to such Person from any Benefit Plan, Multiemployer Plan or other employee benefit plan, rights and claims against carriers and shippers, rights to indemnification, business interruption insurance and proceeds thereof, property, casualty or any similar type of insurance and any proceeds thereof, the beneficiary's interest in proceeds of insurance covering the lives of key employees and any letter of credit, guarantee, claims, security interest or other security for the payment by an Account Debtor of any of the Receivables (the foregoing, collectively, GENERAL INTANGIBLES), (e) any demand, time, savings, passbook, money market or like depository account, and all certificates of deposit, maintained with a bank, savings and loan association, credit union or like organization, other than an account evidenced by a certificate of deposit that is an instrument under the UCC (the foregoing, collectively, DEPOSIT ACCOUNTS), (f) all certificated and uncertificated securities, all security entitlements, all securities accounts, all commodity contracts and all commodity accounts, including all Pledged Collateral (as defined in the Pledge Agreement) (the foregoing, collectively, INVESTMENT PROPERTY), (g) (i) any investment account maintained by or on behalf of the Borrower with the Agent or any Lender or any Affiliate of the Agent or any Lender, (ii) any agreement governing 5 such account, (iii) all cash, money, notes, securities, instruments, goods, accounts, documents, chattel paper, general intangibles and other property now or hereafter held by the Agent or any Lender or any Affiliate of the Agent or any Lender on behalf of the Borrower in connection with such investment account or deposited by the Borrower or on the Borrower's behalf to such investment account or otherwise credited thereto for the Borrower's benefit, or distributable to the Borrowers from such investment account, together with all contracts for the sale or purchase of the foregoing, (iv) all of the Borrower's right, title and interest with respect to the deposit, investment, allocation, disposition, distribution or withdrawal of the foregoing, (v) all of the Borrower's right, title and interest with respect to the making of amendments, modifications or additions of or to the terms and conditions under which the investment account or investments maintained therein is to be maintained by the Borrower, any Lender or any Affiliate of the Agent or any Lender on the Borrower's behalf, and (vi) all of the Borrower's books, records and receipts pertaining to or confirming any of the foregoing (the foregoing, collectively, INVESTMENT ACCOUNTS), (h) all cash or other property deposited with the Agent or any Lender or any Affiliate of the Agent or any Lender or which the Agent, for its benefit and for the benefit of the Lenders, or any Lender or such Affiliate is entitled to retain or otherwise possess as collateral pursuant to the provisions of this Agreement or any of the Loan Documents or any agreement relating to any Letter of Credit, including, without limitation, amounts on deposit in the Cash Collateral Account, (i) all Real Estate, (j) all goods and other property, whether or not delivered, (i) the sale or lease of which gives or purports to give rise to any Receivable, including, but not limited to, all merchandise returned or rejected by or repossessed from customers, or (ii) securing any Receivable, including, without limitation, all rights as an unpaid vendor or lienor (including, without limitation, stoppage in transit, replevin and reclamation) with respect to such goods and other properties, (k) all mortgages, deeds to secure debt and deeds of trust on real or personal property, guaranties, leases, security agreements and other agreements and property which secure or relate to any Receivable or other Collateral or are acquired for the purpose of securing and enforcing any item thereof, (l) all documents of title, including bills of lading and warehouse receipts, policies and certificates of insurance, securities, chattel paper and other documents and instruments, (m) all files, correspondence, computer programs, tapes, disks and related data processing software which contain information identifying or pertaining to any of the Collateral or any Account Debtor or showing the amounts thereof or payments thereon or otherwise necessary or helpful in the realization thereon or the collection thereof, (n) any and all products and cash and non-cash proceeds of the foregoing (including, but not limited to, any claims to any items referred to in this definition and any claims against 6 third parties for loss of, damage to or destruction of any or all of the Collateral or for proceeds payable under or unearned premiums with respect to policies of insurance) in whatever form, including, but not limited to, cash, negotiable instruments and other instruments for the payment of money, chattel paper, security agreements and other documents. Notwithstanding anything herein to the contrary, the Collateral shall not include (i) any agreement with a third party existing on the date hereof that prohibits the grant of a Lien on (but not merely the assignment of or of any interest in) such agreement or any of the Borrower's rights thereunder without the consent of such party or under which a consent to such grant is otherwise required, which consent has not been obtained, except to the extent rights under such agreement are covered by Section 9-318 of the UCC; or (ii) any license, permit or other Governmental Approval that, under the terms and conditions of such Governmental Approval or under Applicable Law, cannot be subjected to a Lien in favor of the Agent without the consent of the relevant party which consent has not been obtained; PROVIDED, HOWEVER, that the Collateral shall include all items excluded pursuant to clauses (i) or (ii) from and after the date on which the requisite consent is obtained. COLLATERAL AVAILABILITY means the excess, if any, of the Borrowing Base in effect on the date of determination over the aggregate outstanding principal amount of Revolving Credit Loans. COMMITMENT means, as to each Lender, the amount set forth opposite such Lender's name on ANNEX A hereto as reduced from time to time pursuant to the terms hereof, representing such Lender's obligation, upon and subject to the terms and conditions of this Agreement, to make its Proportionate Share of Loans under the Revolving Credit Facility and to participate Ratably in Letters of Credit. COMMITMENT PERCENTAGE means, as to any Lender at the time of determination, the result, expressed as a percentage, obtained by dividing such Lender's Commitment at such time by the aggregate Commitments at such time. CONSOLIDATED SUBSIDIARIES means, as to the Borrower, each Loan Party and each other Subsidiary whose accounts are at the time in question, in accordance with GAAP and pursuant to the written consent of the Required Lenders, which consent may be withheld in their absolute discretion conditioned upon, INTER ALIA, the execution and delivery of Borrowing Subsidiary Documents, guaranties, security agreements, mortgages and other documents required by the Required Lenders in their absolute discretion, consolidated with those of the Borrower. CONTAMINANT means any waste, pollutant, hazardous substance, toxic substance, hazardous waste, special waste, petroleum or petroleum-derived substance or waste, or any constituent of any such substance or waste. CONTROLLED DISBURSEMENT ACCOUNT means one or more accounts maintained by and in the name of the Borrower with a Disbursing Bank for the purposes of disbursing Revolving Credit Loan proceeds and other amounts held by such Disbursing Bank. 7 COPYRIGHTS means and includes, in each case whether now existing or hereafter arising; (a) all copyrights, rights and interests in copyrights, works protectable by copyright, copyright registrations and copyright applications; (b) all renewals of any of the foregoing; (c) all income, royalties, damages and payments now or hereafter due and/or payable under any of the foregoing, including, without limitation, damages or payments for past or future infringements of any of the foregoing; (d) the right to sue for past, present and future infringements of any of the foregoing; and (e) all rights corresponding to any of the foregoing throughout the world. CURRENT ASSETS means, with respect to any Person, the aggregate amount of assets of such Person which should properly be classified as current assets in accordance with GAAP, after deducting adequate reserves in each case where a reserve is appropriate in accordance with GAAP. CURRENT LIABILITIES means, with respect to any Person, the aggregate amount of all Liabilities of such Person which should properly be classified as current liabilities in accordance with GAAP. CURRENT MATURITIES means, when used in connection with Funded Debt, as of any date of determination, the principal amount of such Debt coming due on such date or during the 12-month period following such date in accordance with the terms of any instrument or agreement evidencing such Debt or relating thereto. DEBT means, without duplication, (a) Indebtedness for money borrowed, (b) Indebtedness, whether or not in any such case the same was for money borrowed, (i) represented by notes payable, drafts accepted and reimbursement obligations under letters of credit and similar instruments that represent extensions of credit, (ii) constituting obligations evidenced by bonds, debentures, notes or similar instruments, or (iii) issued or assumed as full or partial payment for property (other than trade payables incurred in the ordinary course of business), (c) Indebtedness that constitutes a Capitalized Lease Obligation, (d) Indebtedness that is such by virtue of clause (c) of the definition thereof, but only to the extent that the obligations Guaranteed are obligations that would constitute Debt, and (e) Hedging Obligations. DEFAULT means any of the events specified in SECTION 11.1 which, with the passage of time or giving of notice, or both, would constitute an Event of Default. DEFAULT MARGIN means 2.0%. DEPOSIT ACCOUNT has the meaning set forth in the definition "COLLATERAL." 8 DISBURSING BANK means any commercial bank with which a Controlled Disbursement Account is maintained after the Effective Date. DOLLAR and $ means freely transferable United States dollars. EBIT for any accounting period means Net Income for such period before provision for interest expense and income taxes. EBITDA for any accounting period, means EBIT for such period, before provision for depreciation expense and amortization in such period. EFFECTIVE DATE means the later of: (a) the Agreement Date, and (b) the first date on which all of the conditions set forth in SECTIONS 4.1 AND 4.2 shall have been fulfilled or waived by the Lenders. EFFECTIVE INTEREST RATE means each rate of interest per annum on the Revolving Credit Loans in effect from time to time pursuant to the provisions of SECTIONS 3.1(a), (b), (c) AND (d). ELIGIBLE ASSIGNEE means (i) a commercial bank organized under the laws of the United States, or any State thereof, having total assets in excess of $10,000,000,000; (ii) any commercial finance company or asset-based lender, organized under the laws of the United States or any state thereof, that is an Affiliate of a commercial bank having total assets in excess of $10,000,000,000; (iii) any Lender listed on the signature page of this Agreement; and (iv) as to any Lender, such of its Affiliates as are commercial banks or trust companies, organized under the laws of an OECD member country and acting through a branch in the United States; PROVIDED in each case that the representation contained in SECTION 12.2 hereof shall be applicable with respect to such institution or Lender. ELIGIBLE INVENTORY means items of Inventory of the Borrower (including each Borrowing Subsidiary) held for sale in the ordinary course of the business of the Borrower (but not including packaging or shipping materials or maintenance supplies) which meet all of the following requirements: (a) such Inventory is owned by the Borrower, is subject to the Security Interest, which is perfected as to such Inventory, and is subject to no other Lien whatsoever other than a Permitted Lien; (b) such Inventory consists of raw materials or finished goods and does not consist of work-in-process, supplies or consigned goods; (c) such Inventory is in good condition and meets all standards applicable to such goods, their use or sale imposed by any governmental agency, or department or division thereof, having regulatory authority over such matters; (d) such Inventory is currently either usable or saleable, at prices approximating at least the cost thereof, in the normal course of the Borrower's business; (e) such Inventory is not obsolete or returned or repossessed or used goods taken in trade; (f) such Inventory is located within the United States at one of the locations listed in SCHEDULE 5.1(u); (g) such Inventory is in the possession and control of the Borrower and not any third party and if located in a warehouse or other facility leased by the Borrower, the lessor has delivered to the Agent a waiver and consent 9 in form and substance satisfactory to the Agent, provided that, for a period of three months following the Effective Date, up to $3,000,000 in value of Inventory located in warehouses or leased facilities shall not be subject to the waiver and consent requirement of this CLAUSE (g); and (h) such Inventory is not determined by the Agent in its reasonable credit judgment to be ineligible for any other reason. ELIGIBLE RECEIVABLE means a Receivable of the Borrower (including each Borrowing Subsidiary) that consists of the unpaid portion of the obligation stated on the invoice issued to an Account Debtor with respect to Inventory sold and shipped to or services performed for such Account Debtor in the ordinary course of business, net of any credits or rebates owed by the Borrower to the Account Debtor and net of any commissions payable by the Borrower to third parties and that meets all of the following requirements: (a) such Receivable is owned by the Borrower and represents a complete BONA FIDE transaction which requires no further act under any circumstances on the part of the Borrower to make such Receivable payable by the Account Debtor; (b) such Receivable is not unpaid more than 120 days after the date of the original invoice or past due more than 60 days after its due date, which shall not be later than 60 days after the invoice date; (c) such Receivable does not arise out of any transaction with any Subsidiary, Affiliate, creditor, lessor or supplier of the Borrower; (d) such Receivable is not owing by an Account Debtor more than 50% of whose then-existing accounts owing to the Borrower do not meet the requirements set forth in CLAUSE (b) above; (e) if the Account Debtor with respect thereto is located outside of the United States of America, the goods which gave rise to such Receivable were shipped after receipt by the Borrower from the Account Debtor of an irrevocable letter of credit that has been confirmed by a financial institution acceptable to the Agent, is in form and substance acceptable to the Agent, payable in the full face amount of the face value of the Receivable in Dollars at a place of payment located within the United States and has been duly assigned to the Agent; (f) the Account Debtor with respect to such Receivable is not located in a state which imposes conditions on the enforceability of Receivables with which the Borrower has not complied; (g) such Receivable is not subject to the Assignment of Claims Act of 1940, as amended from time to time, or any Applicable Law now or hereafter existing similar in effect thereto, as determined in the sole discretion of the Agent, or to any provision prohibiting its assignment or requiring notice of or consent to such assignment unless requirements thereunder relating to the perfection or enforcement of the Security Interest therein have been complied with, provided that Receivables subject to the Assignment of Claims Act up to $2,000,000 in the aggregate at any time shall not be excluded from Eligible Receivables by this CLAUSE (g); (h) the Borrower is not in breach of any express or implied representation or warranty with respect to the goods the sale of which gave rise to such Receivable; (i) the Account Debtor with respect to such Receivable is not insolvent or the subject of any bankruptcy or insolvency proceedings of any kind or of any other proceeding or action, threatened or pending, which might, in the Lender's sole judgment, have a Materially Adverse Effect on such Account Debtor; (j) the goods the sale of which gave rise to such Receivable were shipped or delivered to the Account Debtor on an absolute sale basis and not on a bill and hold sale basis, a consignment sale basis, a guaranteed sale basis, a sale or return basis or on the basis of any other similar understanding, and such goods have not been returned or rejected; (k) such Receivable is not owing by an Account Debtor or a group of affiliated Account Debtors whose then-existing accounts owing to the Borrower exceed in face amount 20% of the Borrower's total Eligible 10 Receivables; (l) such Receivable is evidenced by an invoice or other documentation in form acceptable to the Agent containing only terms normally offered by the Borrower, and dated no later than the date of shipment; (m) such Receivable is a valid, legally enforceable obligation of the Account Debtor with respect thereto and is not subject to any present, or contingent (and no facts exist which are the basis for any future), offset, deduction or counterclaim, dispute or other defense on the part of such Account Debtor; (n) such Receivable is not evidenced by chattel paper or an instrument of any kind; (o) such Receivable does not arise from the performance of services, including services under or related to any warranty obligation of the Borrower or out of service charges by the Borrower or other fees for the time value of money, provided that Receivables for services aggregating up to $50,000 shall not be excluded from Eligible Receivables by this CLAUSE (o); (p) such Receivable is subject to the Security Interest, which is perfected as to such Receivable, and is subject to no other Lien whatsoever other than a Permitted Lien and the goods giving rise to such Receivable were not, at the time of the sale thereof, subject to any Lien other than a Permitted Lien; and (q) such Receivable is not determined by the Agent in its reasonable credit judgment to be ineligible for any other reason. ENVIRONMENTAL LAWS means all federal, state, local and foreign laws now or hereafter in effect relating to pollution or protection of the environment, including laws relating to emissions, discharges, Releases or threatened Releases of pollutants, Contaminants, chemicals, or industrial, toxic or hazardous substances or wastes into the environment (including, without limitation, ambient air, surface water, ground water, or land), or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, removal, transport, or handling of pollutants, Contaminants, chemicals, or industrial, toxic or hazardous substances or wastes, and any and all regulations, notices or demand letters issued, entered, promulgated or approved thereunder; such laws and regulations include but are not limited to the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901 ET SEQ., as amended; the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. Section 9601 ET SEQ., as amended; the Toxic Substances Control Act, 15 U.S.C. Section 2601 ET SEQ., as amended; the Clean Air Act, 46 U.S.C. Section 7401 ET SEQ., as amended; and state and federal lien and environmental cleanup programs. ENVIRONMENTAL LIEN means a Lien in favor of any governmental entity for (a) any liability under Environmental Laws or (b) damages arising from, or costs incurred by such governmental entity in response to, a Release or threatened Release of Contaminant into the environment. EQUIPMENT has the meaning set forth in the definition "COLLATERAL." ERISA means the Employee Retirement Income Security Act of 1974, as in effect from time to time. ERISA EVENT means (a) a "Reportable Event" as defined in Section 4043(c) of ERISA, but excluding any such event as to which the provision for 30 days' notice to the PBGC is waived under applicable regulations, (b) the filing of a notice of intent to terminate a Benefit Plan subject to Title IV of ERISA or the treatment of an amendment to such a Benefit Plan as a termination under Section 4041 of ERISA, (c) the institution of proceedings by the PBGC to terminate a 11 Benefit Plan subject to Title IV of ERISA or the appointment of a trustee to administer any such Benefit Plan or an event or condition that would constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Benefit Plan subject to Section 4042, (d) the imposition of any liability under Title IV of ERISA other than for PBGC premiums due but not yet payable, (e) the filing of an application for a minimum funding waiver under Section 412 of the Code, (f) a withdrawal by a Borrower or any Related Employer from a Benefit Plan subject to Section 4063 of ERISA during a plan year in which it was a "substantial employer" as defined in Section 4001(a)(2) of ERISA), (g) a Benefit Plan intending to qualify under Section 401(a) of the Code losing such qualified status, (h) the failure to make a material required contribution to a Benefit Plan, (i) a Borrower or any Related Company being in "default" (as defined in Section 4219(c)(5) of ERISA) with respect to payments to a Multiemployer Plan because of its complete or partial withdrawal (as described in Section 4023 or 4205 of ERISA) from such Multiemployer Plan, or (j) the occurrence of a material non-exempt prohibited transaction within the meaning of Section 4975 of the Code or Section 406 of ERISA with respect to any Benefit Plan that is not cured within 30 days after the Borrower has knowledge thereof. EURODOLLAR RATE means, with respect to any Eurodollar Rate Loan for the Interest Period applicable thereto, a simple per annum interest rate determined pursuant to the following formula: Eurodollar Rate = INTERBANK OFFERED RATE --------------------------------- 1 - Eurodollar Reserve Percentage The Eurodollar Rate shall be adjusted automatically as of the effective date of any change in the Eurodollar Reserve Percentage. EURODOLLAR RATE LOAN means any Loan bearing interest at a rate determined by reference to the Eurodollar Rate. EURODOLLAR RESERVE PERCENTAGE means that percentage (expressed as a decimal) which is in effect from time to time under Regulation D of the Board of Governors of the Federal Reserve System, as such regulation may be amended from time to time, or any successor regulation, as the maximum reserve requirement (including, without limitation, any basic, supplemental, emergency, special, or marginal reserves) applicable with respect to Eurocurrency liabilities as that term is defined in Regulation D (or against any other category of liabilities that includes deposits by reference to which the interest rate of Eurodollar Rate Loans is determined), whether or not any Lender has any Eurocurrency liabilities subject to such reserve requirement at that time. Eurodollar Rate Loans shall be deemed to constitute Eurocurrency liabilities and as such shall be deemed subject to reserve requirements without benefits of credits for proration, exceptions or offsets that may be available from time to time to any Lender. EVENT OF DEFAULT means any of the events specified in SECTION 11.1, provided that any requirement for notice or lapse of time or any other condition has been satisfied. 12 FEDERAL FUNDS EFFECTIVE RATE means, for any period, a fluctuating interest rate per annum equal for each day during such period to the weighted average of the rates on overnight federal funds transactions with members of the Federal Reserve system arranged by federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for such day on such transactions received by NationsBank from three federal funds brokers of recognized standing selected by NationsBank. FINANCED CAPEX means Capital Expenditures funded with the proceeds of Permitted Purchase Money Debt (excluding Loans) and those represented by Capitalized Lease Obligations. FINANCIAL OFFICER means the Vice President-Finance, Treasurer or Controller of the Borrower. FINANCING STATEMENTS means any and all Uniform Commercial Code financing statements, in form and substance satisfactory to the Agent, executed and delivered by the Borrower to the Agent, naming the Agent, for the benefit of the Lenders, as secured party and the Borrower as debtor, in connection with this Agreement. FISCAL MONTH means each of the 12 consecutive four or five week periods beginning on the first day of a Fiscal Year and occurring in the pattern of two four-week periods, followed by a five-week period (except that in each Fiscal Year comprising 53 weeks, the 1st Fiscal Month also has five weeks). FISCAL QUARTER means each of the four periods of three Fiscal Months beginning on the first day of a Fiscal Year and on the day following the last day of each succeeding Fiscal Quarter. FISCAL YEAR means the period beginning on the Saturday after the Friday closest to December 31 of one calendar year and ending on the Friday closest to December 31 of the immediately succeeding calendar year. FIXED CHARGE COVERAGE RATIO means the ratio, of (i) EBITDA minus Unfunded Capex, in each case of the Borrower and its Consolidated Subsidiaries for the indicated accounting period to (ii) the sum of accrued interest expense plus payments of Capitalized Lease Obligations plus payments of Debt other than the Loans or any other revolving Debt permitted under this Agreement plus Restricted Distributions with respect to capital stock of the Borrower, in each case of the Borrower and its Consolidated Subsidiaries for the indicated accounting period. FUNDED DEBT means Debt having a maturity of more than 12 months from the date of determination or having a maturity of less than 12 months from such date but by its terms being renewable or extendible beyond 12 months from such date at the option of the Person liable thereon. 13 GAAP means generally accepted accounting principles in effect on the Agreement Date consistently applied and maintained throughout the period indicated and, when used with reference to the Borrower or any Subsidiary, consistent with the prior financial practice of the Borrower, as reflected on the financial statements referred to in SECTION 5.1(n); PROVIDED, HOWEVER, that, in the event that changes shall be mandated by the Financial Accounting Standards Board or any similar accounting authority of comparable standing, or shall be recommended by the Borrower's independent public accountants, such changes shall be included in GAAP as applicable to the Borrower only from and after such date as the Borrower, the Required Lenders and the Agent shall have amended this Agreement to the extent necessary to reflect any such changes in the financial covenants set forth in ARTICLE 10. GENERAL INTANGIBLES has the meaning set forth in the definition "COLLATERAL." GOVERNMENTAL APPROVALS means all authorizations, consents, approvals, licenses and exemptions of, registrations and filings with, and reports to, all governmental bodies, whether federal, state, local or foreign national or provincial and all agencies thereof. GUARANTOR means each of Burke Flooring Products, Inc., Burke Custom Processing, Inc. and Burke Rubber Company, Inc. each a California corporation and a Wholly Owned Subsidiary of the Borrower. GUARANTY, GUARANTEED or to GUARANTEE as applied to any obligation of another Person shall mean and include (a) a guaranty (other than by endorsement of negotiable instruments for collection in the ordinary course of business), directly or indirectly, in any manner, of any part or all of such obligation of such other Person, and (b) an agreement, direct or indirect, contingent or otherwise, and whether or not constituting a guaranty, the practical effect of which is to assure the payment or performance (or payment of damages in the event of nonperformance) of any part or all of such obligation of such other Person whether by (i) the purchase of securities or obligations, (ii) the purchase, sale or lease (as lessee or lessor) of property or the purchase or sale of services primarily for the purpose of enabling the obligor with respect to such obligation to make any payment or performance (or payment of damages in the event of nonperformance) of or on account of any part or all of such obligation, or to assure the owner of such obligation against loss, (iii) the supplying of funds to or in any other manner investing in the obligor with respect to such obligation, (iv) repayment of amounts drawn down by beneficiaries of letters of credit, or 14 (v) the supplying of funds to or investing in a Person on account of all or any part of such Person's obligation under a Guaranty of any obligation or indemnifying or holding harmless, in any way, such Person against any part or all of such obligation. HEDGING OBLIGATIONS means the obligations of any Person under (i) interest rate swap agreements, interest rate cap agreements and interest rate collar agreements and (ii) other agreements or arrangements designed to protect such Person against fluctuations in interest rates or the value of foreign currencies or prices of commodities, PROVIDED, that such obligations are incurred in the ordinary course of business of such Person and bear a reasonable relationship to the principal amount of a Debt of such Person or reasonably anticipated receipts or payment obligations of such Person in the designated foreign currency or such Person's obligation to supply or requirements for such commodities. INDEBTEDNESS of any Person means, without duplication, all Liabilities of such Person, and to the extent not otherwise included in Liabilities, the following: (a) all obligations for money borrowed or for the deferred purchase price of property or services or in respect of drafts accepted or similar instruments or reimbursement obligations under letters of credit, (b) all obligations (including, during the noncancellable term of any lease in the nature of a title retention agreement, all future payment obligations under such lease discounted to their present value in accordance with GAAP) secured by any Lien to which any property or asset owned or held by such Person is subject, whether or not the obligation secured thereby shall have been assumed by such Person, (c) all obligations of other Persons which such Person has Guaranteed, including, but not limited to, all obligations of such Person consisting of recourse liability with respect to accounts receivable sold or otherwise disposed of by such Person, (d) all obligations of such Person in respect of interest rate hedging agreements, and (e) in the case of the Borrower (without duplication) all obligations under the Revolving Credit Loans. INTERBANK OFFERED RATE means, for any Eurodollar Rate Loan for any Interest Period therefor, the rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) appearing on Telerate Page 3750 in Dollars at approximately 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period for a term comparable to such Interest Period. If for any reason such rate is not available, the term "Interbank Offered Rate" shall mean, for any Eurodollar Rate Loan for any Interest Period therefor, the rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) appearing on Reuters Screen LIBO Page as the London interbank offered rate for deposits in Dollars at approximately 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period for a term comparable to such Interest Period; PROVIDED, HOWEVER, is more than one rate as specified on Reuters Screen LIBO Page, the applicable rate shall be the arithmetic mean of all such rates. 15 INTEREST PAYMENT DATE means the first day of each calendar month commencing on September 1, 1997 and continuing thereafter until the Secured Obligations have been irrevocably paid in full and on the date such Secured Obligations are due (whether at maturity, by reason of acceleration or otherwise). INTEREST PERIOD means with respect to each Eurodollar Rate Loan, the period commencing on the date of the making or continuation of or conversion to such Eurodollar Rate Loan and ending one, two, three, six or, if offered by the Agent, nine or twelve, months thereafter, as the Borrower may elect in the applicable Notice of Borrowing or Notice of Conversion or Continuation; PROVIDED, that: (i) any Interest Period that would otherwise end on a day that is not a Business Day shall, subject to the provisions of CLAUSE (iii) below, be extended to the next succeeding Business Day unless such Business Day falls in the next calendar month, in which case such Interest Period shall end on the immediately preceding Business Day; (ii) any Interest Period that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall, subject to CLAUSE (iii) below, end on the last Business Day of a calendar month; (iii) any Interest Period that would otherwise end after the Termination Date shall end on the Termination Date; and (iv) notwithstanding CLAUSE (iii) above, no Interest Period shall have a duration of less than one month and if any applicable Interest Period would be for a shorter period, such Interest Period shall not be available hereunder. INVENTORY has the meaning set forth in the definition "COLLATERAL." INVESTMENT means, with respect to any Person: (a) the acquisition or ownership by such Person of any share of capital stock, evidence of Indebtedness or other security issued by any other Person, (b) any loan, advance or extension of credit to, or contribution to the capital of, any other Person, excluding advances to employees in the ordinary course of business for business expenses or relocation, (c) any Guaranty of the obligations of any other Person, (d) any other investment (other than the Acquisition of a Business Unit) in any other Person, and (e) any commitment or option to make any of the investments listed in CLAUSES (a) through (d) above if, in the case of an option, the consideration therefor exceeds $100 and to the extent of such consideration. 16 INVESTMENT ACCOUNT has the meaning set forth in the definition "COLLATERAL." INVESTMENT PROPERTY has the meaning set forth in the definition of "COLLATERAL." IRS means the Internal Revenue Service. JFLCO means JFL Merger Co., a California corporation. JFLEI means J.F. Lehman Equity Investors I, L.P., a Delaware limited partnership. LENDER means at any time any financial institution party to this agreement at such time, including any such Person becoming a party hereto pursuant to the provisions of ARTICLE 12, and LENDERS means at any time all of the financial institutions party to this Agreement at such time, including any such Persons becoming parties hereto pursuant to the provisions of ARTICLE 12. LETTER OF CREDIT means each standby letter of credit issued for the account of the Borrower or any Borrowing Subsidiary by NationsBank pursuant to ARTICLE 2A. LETTER OF CREDIT AVAILABILITY means, as of the date of determination, the aggregate amount of additional Letter of Credit Obligations which may be incurred at the time of determination in accordance with SECTION 2A.2, which shall be an amount equal to the lesser of (i) the Letter of Credit Facility minus the Letter of Credit Obligations and (ii) the Revolving Credit Availability, in each case, on such date. LETTER OF CREDIT DOCUMENTS means the documents, agreements and other writings required by NationsBank to be executed and/or delivered in connection with the issuance of a Letter of Credit not inconsistent with the provisions of this Agreement, including, without limitation, any letter of credit application and Reimbursement Agreement not inconsistent with the provisions of this Agreement. LETTER OF CREDIT FACILITY means a subfacility of the Revolving Credit Facility providing for the issuance of Letters of Credit described in ARTICLE 2A up to an aggregate amount of Letter of Credit Obligations at any one time outstanding not to exceed the amount of $1,000,000. LETTER OF CREDIT FEES means fees charged by NationsBank for its account and for the account of the Lenders in connection with the issuance of a Letter of Credit determined in accordance with SCHEDULE 1.1C - LETTER OF CREDIT FEES attached hereto. LETTER OF CREDIT OBLIGATIONS means the aggregate face amount of all outstanding Letters of Credit available to be drawn (assuming all conditions to drawing are satisfied), plus the aggregate amount of any unreimbursed drawings under any Letters of Credit. LETTER OF CREDIT RESERVE means, at any time, an amount equal to the Letter of Credit Obligations at such time. LIABILITIES of any Person means all items (except for items of capital stock, additional paid-in capital or retained earnings, or of general contingency or deferred tax reserves) which in 17 accordance with GAAP would be included in determining total liabilities as shown on the liability side of a balance sheet of such Person as at the date as of which Liabilities are to be determined. LIEN as applied to the property of any Person means: (a) any mortgage, deed to secure debt, deed of trust, lien, pledge, charge, lease constituting a Capitalized Lease Obligation, conditional sale or other title retention agreement, or other security interest, security title or encumbrance of any kind in respect of any property of such Person, or upon the income or profits therefrom, (b) any arrangement, express or implied, under which any property of such Person is transferred, sequestered or otherwise identified for the purpose of subjecting the same to the payment of Indebtedness or performance of any other obligation in priority to the payment of the general, unsecured creditors of such Person, (c) any Indebtedness which is unpaid more than 30 days after the same shall have become due and payable and which if unpaid might by law (including, but not limited to, bankruptcy and insolvency laws), or otherwise, be given any priority whatsoever over the claims of general unsecured creditors of such Person, (d) the filing of, or any agreement to give, any financing statement under the UCC or its equivalent in any jurisdiction, excluding informational financing statements relating to property leased by the Borrower, and (e) in the case of Real Estate, reservations, exceptions, encroachments, easements, rights-of-way, covenants, conditions, restrictions, leases and other title exceptions and encumbrances. LOAN means any Revolving Credit Loan, as well as all such loans collectively, as the context requires. LOAN ACCOUNT and LOAN ACCOUNTS shall have the meanings ascribed thereto in SECTION 3.5. LOAN DOCUMENTS means collectively this Agreement, the Notes, the Security Documents and each other instrument, agreement or document executed by the Borrower, or any Subsidiary of the Borrower, or any Affiliate of the Borrower or such Subsidiary in connection with this Agreement whether prior to, on or after the Effective Date and each other instrument, agreement or document referred to herein or contemplated hereby. LOAN PARTY means each of the Borrower, each Guarantor and each Borrowing Subsidiary. LOAN YEAR means each period of 12 consecutive months commencing on the Effective Date and on each anniversary thereof. 18 MARGIN STOCK means margin stock as defined in Section 221.1(h) of Regulation U, as the same may be amended or supplemented from time to time. MATERIALLY ADVERSE EFFECT means any act, omission, situation, circumstance, event or undertaking which, singly or in any combination with one or more other acts, omissions, situations, circumstances, events or undertakings, could reasonably be expected by the Agent to have, a materially adverse effect upon (a) the business, assets, properties, liabilities, condition (financial or otherwise), or results of operations of the Borrower and its Subsidiaries taken as a whole, (b) the value of the Collateral, the Security Interest or the priority of the Security Interest, (c) the respective ability of the Borrower or any of its Subsidiaries to perform any obligations under this Agreement or any other Loan Document to which it is a party, or (d) the legality, validity, binding effect or enforceability of any Loan Document or the ability of the Agent or any Lender to enforce any rights or remedies under or in connection with any Loan Document. MERGER means the merger of JFLCo and Burke, with Burke as the surviving corporation, consummated pursuant to and in accordance with the terms of the Merger Agreement as part of the Recapitalization. MERGER AGREEMENT means the Agreement and Plan of Merger dated as of August 8, 1997 among JFLEI, JFLCo, Burke and certain shareholders of Burke. MOODY'S means Moody's Investors Service, Inc. MORTGAGES means and includes any and all of the mortgages, deeds of trust, deeds to secure debt, assignments and other instruments executed and delivered by the Borrower to or for the benefit of the Agent by which the Agent, on behalf of the Lenders, acquires a Lien on the Borrower's Real Estate or a collateral assignment of the Borrower's interest under leases of Real Estate, and all amendments, modifications and supplements thereto. MULTIEMPLOYER PLAN means a "multiemployer plan" as defined in Section 4001(a)(3) of ERISA to which the Borrower or a Related Company is required to contribute or has contributed within the immediately preceding six years. NATIONSBANK means NationsBank, N.A. NET AMOUNT means, with respect to any Investments made by any Person, the gross amount of all such Investments minus the aggregate amount of all cash received and the fair value, at the time of receipt by such Person, of all property received as payments of principal or premiums, returns of capital, liquidating dividends or distributions, proceeds of sale or other dispositions with respect to such Investments. NET INCOME or NET LOSS means, as applied to any Person for any accounting period, the net income or net loss, as the case may be, of such Person for the period in question after giving effect to deduction of or provision for all operating expenses, all taxes and reserves (including reserves for deferred taxes) and all other proper deductions, all determined in accordance with GAAP, provided that there shall be excluded: (a) the net income or net loss of any Person 19 accrued prior to the date it becomes a Subsidiary of, or is merged into or consolidated with, the Person whose Net Income is being determined or a Subsidiary of such Person; (b) the net income or net loss of any Person (other than a consolidated Subsidiary of such Person) in which the Person whose Net Income is being determined or any Subsidiary of such Person has an ownership interest, except, in the case of net income, to the extent that any such income has actually been received by such Person or a Subsidiary of such Person in the form of cash dividends or similar distributions; (c) any restoration of any contingency reserve, except to the extent that provision for such reserve was made out of income during such period; (d) any net gains or losses on the sale or other disposition, not in the ordinary course of business, of Investments, Business Units and other capital assets, provided that there shall also be excluded any related charges for taxes thereon; (e) any net gain arising from the collection of the proceeds of any insurance policy; (f) any write-up of any asset; and (g) any other extraordinary or non-recurring item. NET OUTSTANDINGS of any Lender means, at any time, the sum of (a) all amounts paid by such Lender (other than pursuant to Section 13.7) to the Agent in respect of Loans by such Lender, minus (b) all amounts received by the Agent and paid by the Agent to such Lender for application, pursuant to this Agreement, to reduction of the outstanding principal balance of the Loans of such Lender. NET PROCEEDS means proceeds received by the Borrower or any of its Subsidiaries in cash from any Asset Disposition (including, without limitation, payments under notes or other debt securities received in connection with any Asset Disposition), net of: (a) the transaction costs of such sale, lease, transfer or other disposition; (b) any tax liability arising from such transaction; and (c) amounts applied to repayment of Indebtedness (other than the Secured Obligations) secured by a Lien on the asset or property disposed. NET WORTH means, with respect to any Person, such Person's total shareholder's equity (including capital stock, additional paid-in capital and retained earnings, after deducting treasury stock) which would appear as such on a balance sheet of such Person prepared in accordance with GAAP. NON-RATABLE LOAN means a Prime Rate Loan made by NationsBank in accordance with the provisions of SECTION 3.8(b)(ii). NOTE means any of the Revolving Credit Notes and NOTES means more than one such Note. NOTICE OF BORROWING means a written notice, or telephonic notice followed by a confirming same-day written notice, requesting a Borrowing of either a Prime Rate Loan or a Eurodollar Rate Loan, which is given by telex or facsimile transmission in accordance with the applicable provisions of Section 2.2 and which specifies (i) the amount of the requested Borrowing, (ii) the date of the requested Borrowing, and (iii) if the requested Borrowing is of a Eurodollar Rate Loan, the duration of the applicable Interest Period. NOTICE OF CONVERSION OR CONTINUATION has the meaning specified in SECTION 3.12. 20 OPERATING LEASE means any lease (other than a lease constituting a Capitalized Lease Obligation) of real or personal property. PBGC means the Pension Benefit Guaranty Corporation and any successor agency. PATENT ASSIGNMENT means the Assignment for Security-Patents, dated on or about the Effective Date, made by the Borrower to the Agent. PATENTS means and includes, in each case whether now existing or hereafter arising: (i) any and all patents and patent applications, (ii) inventions and improvements described and claimed therein, (iii) reissues, divisions, continuations, renewals, extensions and continuations-in-part thereof, (iv) income, royalties, damages, claims and payments now or hereafter due and/or payable under and with respect thereto, including, without limitation, damages and payments for past and future infringements thereof, (v) rights to sue for past, present and future infringements thereof, and (vi) all rights corresponding to any of the foregoing throughout the world. PERMITTED INVESTMENTS means Investments of the Borrower or any Subsidiary in: (a) Cash Equivalents, (b) sales of inventory on credit in the ordinary course of business, (c) shares of capital stock, evidence of Indebtedness or other security acquired by the Borrower or such Subsidiary in consideration for or as evidence of (i) past-due or restructured Receivables in an aggregate face amount of such Receivables at any time not to exceed $100,000 or (ii) proceeds of an Asset Disposition as permitted hereby, (d) the Borrower or any Borrowing Subsidiary, (e) any Guarantor, (f) Guaranties permitted pursuant to SECTION 10.3, (g) those items described on SCHEDULE 1.1A - PERMITTED INVESTMENTS, (h) Investments in Hedging Obligations, and (i) other Investments not in excess of $500,000 in the aggregate in any Fiscal Year of the Borrower, 21 PERMITTED LIENS means: (a) Liens securing taxes, assessments and other governmental charges or levies (excluding any Lien imposed pursuant to any of the provisions of ERISA) or the claims of materialmen, mechanics, carriers, warehousemen, landlords, buyers, banks and other non-consensual Liens incurred in the ordinary course of business, for labor, materials, supplies, rentals or services, but (i) in all cases only if payment shall not at the time be required to be made in accordance with SECTION 8.6, and (ii) in the case of warehousemen or landlords, from and after 90 days from the Effective Date, only if such Liens are junior to the Security Interest in any of the Collateral, (b) Liens consisting of deposits or pledges made in the ordinary course of business in connection with, or to secure payment of, obligations under workers' compensation, unemployment insurance or similar legislation or under payment, performance or similar bonds, (c) Liens constituting encumbrances in the nature of zoning restrictions, easements, and rights or restrictions of record on the use of real property, which do not materially detract from the value of such property or impair the use thereof in the business of the Borrower or its Subsidiaries, (d) Purchase Money Liens servicing Permitted Purchase Money Debt, (e) Liens shown on SCHEDULE 1.1B - PERMITTED LIENS, (f) Liens of the Agent, for the benefit of the Lenders, arising under this Agreement and the other Loan Documents, (g) any attachment or judgment Lien in existence less than 30 days after the entry thereof or with respect to which (i) .execution has been stayed, (ii) payment is covered by insurance (and the insurer has acknowledged liability) or (iii) the Borrower or Subsidiary is in good faith prosecuting an appeal or other appropriate proceedings for review, has set aside on its books such reserves as may be required by GAAP with respect to such judgment or award and there is no substantial risk of loss of any Collateral, (h) Liens existing on assets of any Person at the time such Person becomes a Subsidiary, provided (i) such Lien was not created in contemplation of such Person becoming a Subsidiary, and (ii) such Lien does not encumber any assets other than the assets subject to such Lien at the time such Person becomes a Subsidiary, (i) other Liens not affecting Eligible Inventory or Eligible Receivables arising in the ordinary course of business of the Borrower or any Subsidiary that (i) do not arise in connection with Debt (other than trade payables created in the ordinary course of business), (ii) do not in the aggregate materially detract from the value of the assets subject thereto or materially impair the use thereof in the operation of such business and (iii) do not secure obligations aggregating in excess of $500,000 at any one time outstanding, 22 (j) Liens not affecting Eligible Inventory or Eligible Receivables securing Hedging Obligations, (k) Liens that encumber documents and other property relating to letters of credit and the products and proceeds thereof, securing reimbursement obligations with respect to such letters of credit, (l) Liens upon specific items of Inventory, other than Eligible Inventory, or other goods and proceeds of the Borrower or any Subsidiary securing its obligations in respect of bankers' acceptances issued or created for the account of any Person to facilitate the purchase, shipping, or storage of such inventory or other goods, and (m) any Lien constituting a renewal, extension or replacement, in whole or in part, of any Lien described in the foregoing clauses (a) through (l), provided that any such extension, renewal or replacement is no more restrictive than the Lien so extended, renewed or replaced and does not secure any additional amount of obligations or extend to any additional Collateral. PERMITTED PURCHASE MONEY DEBT means Purchase Money Debt of the Borrower or any Subsidiary incurred after the Agreement Date, (a) which is secured by a Purchase Money Lien, (b) the aggregate principal amount of which does not exceed an amount equal to 100% of the lesser of (i) the cost (including the principal amount of such Debt, whether or not assumed) of the tangible personal property (other than Inventory) or fixtures installed on or improvements to Real Estate (other than Real Estate subject to a Mortgage) subject to such Lien, and (ii) the fair value of such tangible property (described in clause (i)) at the time of its acquisition, and (c) which, when aggregated with the principal amount of all other such Debt and Capitalized Lease Obligations of the Borrower and its Subsidiaries at the time outstanding, does not exceed $3,000,000. PERSON means an individual, corporation, limited liability company, partnership, association, trust or unincorporated organization, or a government or any agency or political subdivision thereof. PLEDGE AGREEMENT means the Stock Pledge Agreement dated as of the Effective Date, between the Borrower and the Agent, whereby the Borrower pledges the outstanding shares of capital stock issued by and any intercompany notes owing to the Borrower by any domestic Subsidiary. 23 PREFERRED STOCK means shares of the Borrower's 11.5% Cumulative Redeemable Preferred Stock par value $.01 per share. PRIME RATE means during the period from the Effective Date through the last day of the month in which the Effective Date falls, the per annum rate of interest publicly announced by the Agent at its principal office as its "prime rate" as in effect on the Effective Date, and thereafter during each succeeding calendar month, means such "prime rate" as in effect on the last Business Day of the immediately preceding calendar month. Any change in an interest rate resulting from a change in the Prime Rate shall become effective as of 12:01 a.m. on the first day of the month following the month in which such change was announced. The Prime Rate is a reference used by the Agent in determining interest rates on certain loans and is not intended to be the lowest rate of interest charged on any extension of credit to any debtor. The Agent lends at rates above and below the Prime Rate. PRIME RATE LOAN means any Revolving Credit Loan that bears interest at a rate computed with reference to the Prime Rate , and PRIME RATE LOANS means more than one such Loan. PRINCIPAL means (i) J.F. Lehman & Company, (ii) each Affiliate of J.F. Lehman & Company as of the Agreement Date, and (iii) each officer or employee (including their respective immediate family members) of J.F. Lehman & Company as of the Agreement Date. PRO FORMA means the PRO FORMA balance sheet of the Borrower as [OF JULY 4, 1997], immediately after giving effect to the transactions contemplated by this Agreement and the Recap Documents. PROPORTIONATE SHARE or RATABLE SHARE or RATABLE (and with corollary meaning RATABLY) means, as to a Lender, such Lender's share of an amount in Dollars or other property at the time of determination equal to (i) the Commitment Percentage of such Lender, or (ii) if the Commitments are terminated, the result, expressed as a percentage obtained by dividing the principal amount of the Loans then owing to such Lender by the total principal amount of all Loans then owing to all Lenders, or (iii) if no Loans are outstanding, the result, expressed as a percentage obtained by dividing the Secured Obligations owing to such Lender by the total amount of Secured Obligations then owing to all Lenders. PROPRIETARY RIGHTS means all of the Borrower's now owned and hereafter arising or acquired: Patents, Copyrights, Trademarks, including, without limitation, the Proprietary Rights set forth on Schedule 5.1(bb) hereto, and all other rights under any of the foregoing, all extensions, renewals, reissues, divisions, continuations, and continuations-in-part of any of the foregoing, and all rights to sue for past, present and future infringement of any of the foregoing. PURCHASE MONEY DEBT means Debt (including Capitalized Leases) created to finance the payment of all or any part of the purchase price of (not in excess of the fair market value thereof) or cost of constructing any tangible personal property (other than Inventory) or fixtures or improvements to Real Estate (other than Real Estate subject to a Mortgage) and incurred at the time of or within 30 days prior to or after the acquisition of a tangible asset or completion of construction or such improvements. 24 PURCHASE MONEY LIEN means any Lien securing Purchase Money Debt, but only if such Lien shall at all times be confined solely to the property (other than Inventory) the purchase price (or construction cost or cost of improvements) of which was financed through the incurrence of the Purchase Money Debt secured by such Lien. REAL ESTATE means all of the Borrower's now or hereafter owned or leased estates in real property, including, without limitation, all fees, leaseholds and future interests, together with all of the Borrower's now or hereafter owned or leased interests in the improvements and emblements thereon, the fixtures attached thereto and the easements appurtenant thereto, including, without limitation the real property described on SCHEDULE 5.1(w). RECAPITALIZATION means the issuance of the Senior Notes, the execution and delivery of the Senior Note Indenture and related documents, the issuance of the Preferred Stock and the Warrants, the execution and delivery of the Shareholders Agreement, and the execution and delivery of this Agreement by Burke, and the consummation of the Merger. RECAP DOCUMENTS means the Merger Agreement, the Senior Note Indenture and the other agreements, certificates, opinions and other documents delivered in connection with consummation of the transactions contemplated thereby (other than the Loan Documents). RECEIVABLES has the meaning set forth in the definition "COLLATERAL." REGISTER has the meaning specified in SECTION 12.1(d). REGULATION U means Regulation U of the Board of Governors of the Federal Reserve System (or any successor), as the same may be amended or supplemented from time to time. REIMBURSEMENT AGREEMENT means, with respect to a Letter of Credit, such form of application therefor and form of reimbursement agreement therefor (whether in a single document or several documents) as NationsBank may employ in the ordinary course of business for its own account, with such modifications thereto as may be agreed upon by NationsBank and the Borrower, provided that such application and agreement and any modifications thereto are not inconsistent with the terms of this Agreement. REIMBURSEMENT OBLIGATIONS means the reimbursement or repayment obligations of the Borrower to NationsBank pursuant to SECTION 2A.6 or pursuant to a Reimbursement Agreement with respect to amounts that have been drawn under Letters of Credit. RELATED COMPANY means any (i) corporation or limited liability company which is a member of the same controlled group of corporations (within the meaning of Section 414(b) of the Code) as the Borrower; (ii) partnership, limited liability company or other trade or business (whether or not incorporated) under common control (within the meaning of Section 414(c) of the Code) with the Borrower; (iii) member of the same affiliated service group (within the meaning of Section 414(m) of the Code) as the Borrower, any corporation described in CLAUSE (i) above or any entity described in CLAUSE (ii) above; or (iv) any other entity required to be aggregated with the Borrower pursuant to Section 414(o) of the Code. 25 RELATED PARTY with respect to any Principal means (i) any controlling stockholder or 80% (or more) owned Subsidiary of such Principal or (ii) trust, corporation, partnership, or other entity, the beneficiaries, stockholders, partners, owners or Persons beneficially holding an 80% or more interest in which are such Principal and/or such other Persons referred to in the immediately preceding clause (i). RELEASE means release, spill, emission, leaking, pumping, injection, deposit, disposal, discharge, dispersal, leaching or migration into the indoor or outdoor environment or into or out of any property, including the movement of Contaminants through or in the air, soil, surface water or groundwater. REMEDIAL ACTION means actions required to (i) clean up, remove, treat or in any other way address Contaminants in the indoor or outdoor environment; (ii) prevent the Release or threat of Release or minimize the further Release of Contaminants so they do not migrate or endanger or threaten to endanger public health or welfare or the indoor or outdoor environment; or (iii) perform pre-remedial studies and investigations and post-remedial monitoring and care. REQUIRED LENDERS means, at any time, any combination of Lenders whose Commitment Percentages at such time aggregate in excess of 50%. RESTRICTED DISTRIBUTION by any Person means (i) its retirement, redemption, purchase, or other acquisition or retirement for value of any capital stock or other equity securities (except equity securities acquired on the conversion thereof into other equity securities of such Person member interests) or partnership interests issued by such Person, (ii) the declaration or payment of any dividend or distribution in cash or property on or with respect to any such securities (other than dividends payable solely in shares of its capital stock or other equity securities) or partnership interests, excluding, however, any such dividend, distribution or payment to a Loan Party by any Subsidiary of the Borrower, (iii) any other payment by such Person in respect of such securities, member interests or partnership interests. RESTRICTED PAYMENT means (a) any redemption or prepayment or other retirement, prior to the stated maturity thereof or prior to the due date of any regularly scheduled installment or amortization payment with respect thereto, of any Debt (other than the Loans) or of any Indebtedness, which Debt or Indebtedness is junior and subordinate to the Secured Obligations, (b) the payment by any Person of the principal amount of or interest on any Indebtedness (other than trade debt) owing to an Affiliate of such Person or to any Affiliate of any such Affiliate other than such payments among Loan Parties and (c) the payment of any management, consulting or similar fee by any Person to any Affiliate of such Person. REVOLVING CREDIT AVAILABILITY means the lesser of (i) the Revolving Credit Facility minus the sum of the Letter of Credit Reserve and the aggregate outstanding principal amount of all Revolving Credit Loans and (ii) the Borrowing Base minus the sum of the aggregate outstanding principal amount of all Revolving Credit Loans. REVOLVING CREDIT FACILITY means the credit facility providing for Revolving Credit Loans based upon the Borrowing Base described in SECTION 2.1 up to an aggregate principal amount at 26 any one time outstanding not to exceed $15,000,000 or such lesser or greater amount as shall be agreed upon from time to time in writing by the Agent, the Lenders and the Borrower. REVOLVING CREDIT LOANS means loans made to the Borrower pursuant to SECTION 2.1 and any Non-Ratable Loans. REVOLVING CREDIT NOTE means each Revolving Credit Note made by the Borrower payable to the order of a Lender evidencing the obligation of the Borrower to pay the aggregate unpaid principal amount of the Loans made to it by such Lender under the Revolving Credit Facility (and any promissory note or notes that may be issued from time to time in substitution, renewal, extension, replacement or exchange therefor whether payable to such Lender or to a different Lender in connection with a Person becoming a Lender after the Effective Date or otherwise) substantially in the form of EXHIBIT A hereto, with all blanks properly completed, either as originally executed or as the same may from time to time be supplemented, modified, amended, renewed, extended or refinanced. S&P means Standard & Poor's Ratings Group. SCHEDULE OF INVENTORY means a schedule delivered by the Borrower to the Agent pursuant to the provisions of SECTION 7.12(b). SCHEDULE OF RECEIVABLES means a schedule delivered by the Borrower to the Agent pursuant to the provisions of SECTION 7.12(a). SECURED OBLIGATIONS means, in each case whether now in existence or hereafter arising, (a) the principal of, and interest and premium, if any, on, the Loans, (b) all Letter of Credit Obligations, and (c) all indebtedness, liabilities, obligations, covenants and duties of the Borrower or any Subsidiary of the Borrower to the Agent or to the Lenders or to any Affiliate of the Agent or the Lender of every kind, nature and description arising under or in respect of this Agreement, the Notes or any of the other Loan Documents, whether direct or indirect, absolute or contingent, due or not due, contractual or tortious, liquidated or unliquidated, and whether or not evidenced by any note, and whether or not for the payment of money, including without limitation, fees required to be paid pursuant to ARTICLE 3 and expenses required to be paid or reimbursed pursuant to SECTION 14.2 and any Hedging Obligations of the Borrower or such Subsidiary to the Agent, any Lender or any such Affiliate. SECURITY DOCUMENTS means each of the following: (a) the Mortgage, (b) the Financing Statements, (c) the Pledge Agreement, 27 (d) the Subsidiary Guaranty, (e) the Subsidiary Security Agreement, and (f) each other writing executed and delivered by any Loan Party or any other Person securing the Secured Obligations, including, without limitation, the Borrowing Subsidiary Documents. SECURITY INTEREST means the Liens of the Agent, for the benefit of itself as Agent and the Lenders and Affiliates of the Lenders, on and in the Collateral effected hereby or by any of the Security Documents or pursuant to the terms hereof or thereof. SENIOR NOTES means the Borrower's 10% Senior Notes due 2007 in the original principal amount of $110,000,000, issued pursuant to the Senior Note Indenture, including Exchange Notes issued (and as defined) thereunder. SENIOR NOTE INDENTURE means the Indenture dated as of August 20, 1997, between the Borrower and United States Trust Company of New York, Trustee. SETTLEMENT DATE means each Business Day after the Effective Date selected by the Agent in its sole discretion subject to and in accordance with the provisions of SECTION 3.8(c)(i) as of which a Settlement Report is delivered by the Agent and on which settlement is to be made among the Lenders in accordance with the provisions of SECTION 3.8. SETTLEMENT REPORT means each report, substantially in the form attached hereto as EXHIBIT D, prepared by the Agent and delivered to each Lender and setting forth, among other things, as of the Settlement Date indicated thereon and as of the next preceding Settlement Date, the aggregate principal balance of all Revolving Credit Loans outstanding, each Lender's Proportionate Share thereof, each Lender's Net Outstandings and all Non-Ratable Loans made, and all payments of principal, interest and fees received by the Agent from the Borrower during the period beginning on such next preceding Settlement Date and ending on such Settlement Date. SOLVENT and with corollary meaning SOLVENCY means when applied to a Loan Party, that such Loan Party has capital sufficient to carry on its business and transactions in which it is about to engage and is able to pay its Indebtedness as it matures and owns property having a value, both at fair valuation and at present fair salable value, greater than the amount of its Indebtedness. SUBSIDIARY (a) when used to determine the relationship of a Person to another Person, means a Person of which an aggregate of more than 50% of the stock of any class or classes or more than 50% of other ownership interests is owned of record or beneficially by such other Person, or by one or more Subsidiaries of such other Person, or by such other Person and one or more Subsidiaries of such Person, 28 (i) if the holders of such stock, or other ownership interests (A) are ordinarily, in the absence of contingencies, entitled to vote for the election of a majority of the directors (or other individuals performing similar functions) of such Person, even though the right so to vote has been suspended by the happening of such a contingency, or (B) are entitled, as such holders, to vote for the election of a majority of the directors (or individuals performing similar functions) of such Person, whether or not the right so to vote exists by reason of the happening of a contingency, or (ii) in the case of such other ownership interests, if such ownership interests constitute a majority voting interest, and (b) when used without other designation of ownership, means a Subsidiary of the Borrower. SUBSIDIARY GUARANTY means the Guaranty in favor of the Agent executed and delivered by the Guarantors or of the Effective Date. SUBSIDIARY SECURITY AGREEMENT means the Security Agreement executed and delivered by the Guarantors and the Agent as of the Effective Date. SUPPORTING LETTER OF CREDIT has the meaning set forth in SECTION 2A.9. TERMINATION DATE means August 20, 2002, such earlier date as all Secured Obligations shall have been irrevocably paid in full and the Revolving Credit Facility shall have been terminated, or such later date as to which the same may be extended pursuant to the provisions of SECTION 2.5. TRADEMARK ASSIGNMENT means the Assignment for Security - Trademarks, dated on or about the Effective Date, by the Borrower to the Agent. TRADEMARKS means and includes in each case whether now existing or hereafter arising; (a) trademarks (including service marks), trade names and trade styles and the registrations and applications for registration thereof and the goodwill of the business symbolized by the trademarks, (b) licenses of the foregoing, whether as licensee or licensor, (c) renewals thereof, (d) income, royalties, damages and payments now or hereafter due and/or payable with respect thereto, including, without limitation, damages, claims and payments for past and future infringements thereof, (e) rights to sue for past, present and future infringements thereof, including the right to settle suits involving claims and demands for royalties owing, and 29 (f) all rights corresponding to any of the foregoing throughout the world. TYPE when used in respect of any Loan or Borrowing, shall refer to the rate by reference to which interest on such Loan or on the Loans comprising such Borrowing is determined. UNFUNDED CAPEX means all Capital Expenditures other than Financed Capex. UNFUNDED VESTED ACCRUED BENEFITS means with respect to any Benefit Plan that is a pension plan within the meaning of Section 3(2) of ERISA, the amount (if any) by which (a) the present value of all vested nonforfeitable benefits under such Benefit Plan EXCEEDS (b) the fair market value of all such Benefit Plan assets allocable to such benefits, as determined using such reasonable actuarial assumptions and methods as are specified in the Schedule B (Actuarial Information) to the most recent Annual Report (Form 5500) filed with respect to such Benefit Plan. UCC means the Uniform Commercial Code as in effect from time to time in the State of New York. WARRANTS means warrants to purchase shares representing up to 20% of the Borrower's common stock, issued to the initial purchasers of the Preferred Stock. WHOLLY OWNED SUBSIDIARY when used to determine the relationship of a Subsidiary to a Person means a Subsidiary all of the issued and outstanding shares (other than directors' qualifying shares) of the capital stock of which shall at the time be owned by such Person or one or more of such Person's Wholly Owned Subsidiaries or by such Person and one or more of such Person's Wholly Owned Subsidiaries. SECTION 1.2 GENERAL INTERPRETIVE RULES. (a) All accounting terms not specifically defined herein shall have the meanings ascribed thereto by GAAP. (b) The terms accounts, chattel paper, contract rights, documents, equipment, instruments, general intangibles, inventory and proceeds, as and when used in this Agreement or the Security Documents, shall have the meanings given those terms in the UCC. (c) Unless otherwise specified, the words "hereof," "herein," "hereunder" and words of similar import, when used in this Agreement, refer to this Agreement as a whole and not to any particular provision, section or subsection of this Agreement. (d) Wherever from the context it appears appropriate, each term stated in either the singular or plural shall include the singular and plural, and pronouns stated in the masculine, feminine or neuter gender shall include the masculine, the feminine and the neuter. Words denoting individuals include corporations and vice versa. 30 (e) References to any legislation or statute or code, or to any provisions of any legislation or statute or code, shall include any modification or reenactment of, or any legislative, statutory or code provision substituted for, such legislation, statute or code or provision thereof. (f) References to any document or agreement (including this Agreement) shall include references to such document or agreement as amended, novated, supplemented, modified or replaced from time to time, so long as and to the extent that such amendment, novation, supplement, modification or replacement is either not prohibited by the terms of this Agreement or is consented to by the Required Lenders and the Agent. (g) Except where specifically restricted in a Loan Document, references to any Person include its successor or permitted substitutes and assigns permitted or not prohibited under such Loan Document. (h) References to the time of day are to the time of day in the city in which the Agent's Office is located, unless otherwise specified. (i) The terms "payment", "prepayment", "distribution" and similar terms used in the definitions of "Restricted Distribution" and "Restricted Payment" and in SECTION 8.6, shall include payment by means of the transfer of funds or of property and, in the event of a transfer of property, the payment shall be deemed to be in an amount equal to the greater of the fair market value and the book value of the property at the time of the transfer. (j) Titles of Articles and Sections in this Agreement are for convenience only, do not constitute part of this Agreement and neither limit nor amplify the provisions of this Agreement, and all references in this Agreement to Articles, Sections, subsections, paragraphs, clauses, subclauses, Schedules or Exhibits shall refer to the corresponding Article, Section, subsection, paragraph, clause or subclause of, or Schedule or Exhibit attached to, this Agreement, unless specific reference is made to the articles, sections or other subdivisions or divisions of, or to schedules or exhibits to, another document or instrument. (k) Whenever from the context it appears appropriate, the term "Loan", including such terms as used as part of a defined term including the term "Loan", shall mean and include a Loan made by all Lenders to the Borrower as well as a Lender's Proportionate Share of any Loan. (l) Whenever the phrase "to the knowledge of the Borrower" or words of similar import relating to the knowledge of the Borrower are used herein, such phrase shall mean and refer to the actual knowledge of the President or chief financial officer of the Borrower. (m) Each reference herein to "reasonable attorneys' fees" or "reasonable counsel fees" shall mean and refer to the reasonable fees (and expenses) actually incurred by the party retaining such attorneys or counsel, computed on the basis customarily employed by such attorneys or counsel and not on the basis of a percentage of recovery or percentage of claim or other similar basis. Each party hereto knowingly and intentionally waives any benefit of any otherwise applicable statutory provision that would entitle it to recover attorneys' fees on such a percentage of basis. 31 (n) Unless otherwise specified herein, any Lien created or purported to be created hereby or by or pursuant to any Loan Document in favor of the Agent and each payment made to the Agent, is and shall be deemed to have been created in favor of the Agent, for its benefit as Agent and for the Ratable benefit of the Lenders, or made to and received by the Agent for the Ratable benefit of the Lenders. SECTION 1.3 EXHIBITS AND SCHEDULES. All Exhibits and Schedules attached hereto are by reference made a part hereof. 32 ARTICLE 2 REVOLVING CREDIT FACILITY SECTION 2.1 REVOLVING CREDIT LOANS. Upon the terms and subject to the conditions of, and in reliance upon the representations and warranties made under, this Agreement, each Lender agrees, severally, but not jointly, to make Revolving Credit Loans under the Revolving Credit Facility to the Borrower from time to time from the Effective Date to but not including the Termination Date, as requested or deemed requested by the Borrower in accordance with the terms of SECTION 2.2, in amounts equal to such Lender's Proportionate Share of each Revolving Credit Loan requested or deemed requested hereunder up to an aggregate amount at any one time outstanding equal to such Lender's Proportionate Share of the lesser of (i) the Revolving Credit Facility minus the Letter of Credit Reserve and (ii) the Borrowing Base; PROVIDED, HOWEVER, that no Borrowing of a Revolving Credit Loan shall exceed the Revolving Credit Availability at the time and the aggregate principal amount of all outstanding Loans under the Revolving Credit Facility (after giving effect to the Loans requested) shall not exceed the lesser of (i) the Revolving Credit Facility minus the Letter of Credit Reserve and (ii) the Borrowing Base. It is expressly understood and agreed that the Lenders may and at present intend to use the lesser of the amounts described in the foregoing clauses (i) and (ii) as a maximum ceiling on Loans made to the Borrower under the Revolving Credit Facility; PROVIDED, HOWEVER, that it is agreed that should the aggregate outstanding amount of such Loans exceed the ceiling so determined or any other limitation set forth in this Agreement, such Loans shall nevertheless constitute Secured Obligations and, as such, shall be entitled to all benefits thereof and security therefor. The principal amount of any Loans made under the Revolving Credit Facility may be repaid, without premium or penalty, at any time and reborrowed by the Borrower, subject to the terms and conditions of this Agreement, in accordance with the terms of this SECTION 2.1. The Agent's and each Lender's books and records reflecting the date and the amount of each Loans made under the Revolving Credit Facility and each repayment of principal thereof shall constitute PRIMA FACIE evidence of the accuracy of the information contained therein, subject to the provisions of SECTION 3.8. SECTION 2.2 MANNER OF BORROWING REVOLVING CREDIT LOANS. Borrowings under the Revolving Credit Facility shall be made as follows: (a) REQUESTS FOR BORROWING. (i) PRIME RATE LOANS. Unless the Borrower shall previously have requested a Eurodollar Rate Loan and authorized the application of the proceeds thereof to any purpose described in CLAUSES (A) through (D) below and the Lenders shall have disbursed such Eurodollar Rate Loan for such purpose, a request for the Borrowing of a Prime Rate Loan shall be made, or shall be deemed to be made, in the following manner: (A) the Borrower may request a Prime Rate Loan by giving the Agent a Notice of Borrowing, before 11:30 a.m. on the proposed date of the Borrowing, 33 PROVIDED that if such notice is received after 11:30 a.m. on the proposed date of Borrowing, the proposed Borrowing will be postponed automatically to the next Business Day; (B) whenever a check or other item is presented to a Disbursing Bank for payment against a Controlled Disbursement Account in an amount greater than the then available balance in such account, such Disbursing Bank shall, and is hereby irrevocably authorized by the Borrower to, give the Agent notice thereof, which notice shall be deemed to be a request for a Prime Rate Loan on the date of such notice in an amount equal to the excess of such check or other item over such available balance, and such request shall be irrevocable; and (C) unless payment is otherwise made by the Borrower, the becoming due of any Secured Obligations, including interest, required to be paid under this Agreement or any of the other Loan Documents shall be deemed to be a request for a Prime Rate Loan on the due date in such amount, and such request shall be irrevocable. (D) the receipt by the Agent of notification from NationsBank to the effect that a drawing has been made under a Letter of Credit and that the Borrower has failed to reimburse NationsBank therefor in accordance with the terms of the Letter of Credit, the Reimbursement Agreement and ARTICLE 2A, shall be deemed to be a request for a Prime Rate Loan on the date such notification is received in the amount of such drawing which is so unreimbursed. (ii) EURODOLLAR RATE REVOLVING CREDIT LOANS. At any time after the Effective Date, the Borrower may request a Eurodollar Rate Loan under the Revolving Credit Facility by giving the Agent a Notice of Borrowing (which notice shall be irrevocable) not later than 11:30 a.m. on the date three Business Days before the day on which the requested Eurodollar Rate Revolving Credit Loan is to be made. (iii) NOTIFICATION OF LENDERS. In the case of each Eurodollar Rate Loan and, unless the Agent has elected periodic settlements pursuant to SECTION 3.8, in the case of each Prime Rate Loan, the Agent shall promptly notify the Lenders of any Notice of Borrowing given or deemed given pursuant to this SECTION 2.2(a) by 12:00 noon on the proposed Borrowing date (in the case of Prime Rate Loans) or by 3:00 p.m. three Business Days before the proposed Borrowing date (in the case of Eurodollar Rate Loans). Not later than 1:30 p.m. on the proposed Borrowing date, each Lender will make available to the Agent, for the account of the Borrower, at the Agent's Office in funds immediately available to the Agent, such Lender's Proportionate Share of the Prime Rate Loan or Eurodollar Rate Loan, as the case may be. 34 (b) DISBURSEMENT OF LOANS. The Borrower hereby irrevocably authorizes the Agent to and the Agent will disburse the proceeds of each Borrowing requested, or deemed to be requested, pursuant to this SECTION 2.2(a) as follows: (i) the proceeds of each Borrowing requested under SECTIONS 2.2(a)(i)(A) or (B) or 2.2(a)(ii) shall be disbursed by the Agent in Dollars in immediately available funds by wire transfer to a Controlled Disbursement Account or, in the absence of a Controlled Disbursement Account, by wire transfer to such other account as may be agreed upon by the Borrower and the Agent from time to time, and (ii) the proceeds of each Borrowing deemed requested under SECTION 2.2(a)(i)(C) or (D) shall be disbursed by the Agent by way of direct payment of the relevant Secured Obligation. SECTION 2.3 REPAYMENT OF REVOLVING CREDIT LOANS. The Revolving Credit Loans will be repaid as follows: (a) The outstanding principal amount of all the Revolving Credit Loans is due and payable, and shall be repaid by the Borrower in full, not later than the Termination Date; (b) If at any time the aggregate outstanding unpaid principal amount of the Revolving Credit Loans exceeds the lesser of (i) the Revolving Credit Facility minus the Letter of Credit Reserve and (ii) the Borrowing Base in effect at such time, the Borrower shall repay the Revolving Credit Loans in an amount sufficient to reduce the aggregate unpaid principal amount of such Revolving Credit Loans by an amount equal to such excess, together with accrued and unpaid interest on the amount so repaid to the date of repayment; (c) The Borrower hereby instructs the Agent to repay the Revolving Credit Loans outstanding on any day in an amount equal to the amount received by the Agent on such day pursuant to SECTION 7.1(b); PROVIDED that payments received in excess of outstanding Revolving Credit Loans or payments received on account of Eurodollar Rate Loans which would otherwise result in prepayment of such Loans prior to the end of the Interest Period applicable thereto may, upon the instruction of the Borrower to the Agent not later than 1:00 p.m. on any Business Day, be applied to the Cash Collateral Account or any Investment Account; and (d) Each Eurodollar Rate Loan is due and payable on the last day of the Interest Period applicable thereto, except to the extent converted or continued in accordance with SECTION 3.12. Repayments pursuant to SECTION 2.3(b) or (c) shall be applied first to the Prime Rate Revolving Credit Loans and then to Eurodollar Rate Loans. SECTION 2.4 REVOLVING CREDIT NOTE. Each Lender's Revolving Credit Loans and the obligation of the Borrower to repay such Revolving Credit Loans shall also be evidenced by a Revolving Credit Note payable to the order of such Lender. Each Revolving Credit Note 35 shall be dated the Effective Date (or later "effective date" under any Assignment and Acceptance) and be duly and validly executed and delivered by the Borrower. SECTION 2.5 EXTENSION OF REVOLVING CREDIT FACILITY. Upon the request of the Borrower, the Lenders may, in their sole discretion, effective as of any anniversary of the Effective Date, agree to extend the Revolving Credit Facility for a one-year period. 36 ARTICLE 2A LETTER OF CREDIT FACILITY SECTION 2A.1 AGREEMENT TO ISSUE. Upon the terms and subject to the conditions of, and in reliance upon the representations and warranties made under, this Agreement, NationsBank agrees to issue for the account of the Borrower one or more Letters of Credit in accordance with this ARTICLE 2A, from time to time during the period commencing on the Effective Date and ending on the Termination Date. SECTION 2A.2 AMOUNTS. NationsBank shall not have any obligation to issue any Letter of Credit at any time: (a) if, after giving effect to the issuance of the requested Letter of Credit, (i) the aggregate Letter of Credit Obligations of the Borrower would exceed the Letter of Credit Facility then in effect or (ii) the aggregate principal amount of the Revolving Credit Loans outstanding would exceed the Borrowing Base (after reduction for the Letter of Credit Reserve in respect of such Letter of Credit) or (iii) if no Revolving Credit Loans are outstanding, the aggregate Letter of Credit Obligations would exceed the Borrowing Base (without reduction for the Letter of Credit Reserve); or (b) which has a term longer than one calendar year or an expiration date after the last Business Day that is more than 30 days prior to the Termination Date. SECTION 2A.3 CONDITIONS. The obligation of NationsBank to issue any Letter of Credit is subject to the satisfaction of (a) the applicable conditions precedent contained in ARTICLE 4 and (b) the following additional conditions precedent in a manner satisfactory to the Agent and NationsBank: (i) the Borrower shall have delivered to NationsBank and the Agent at such times and in such manner as NationsBank or the Agent may prescribe an application in form and substance satisfactory to NationsBank and the Agent for the issuance of the Letter of Credit, a Reimbursement Agreement and such other documents as may be required pursuant to the terms thereof, and the form and terms of the proposed Letter of Credit shall be reasonably satisfactory to NationsBank and the Agent and not inconsistent with the provisions of this Agreement; and (ii) as of the date of issuance, no order of any court, arbitrator or governmental authority having jurisdiction or authority over NationsBank shall purport by its terms to enjoin or restrain banks generally from issuing letters of credit of the type and in the amount of the proposed Letter of Credit, and no law, rule or regulation applicable to banks generally and no request or directive (whether or not having the force of law) from any governmental authority with jurisdiction over banks generally shall prohibit, or request that NationsBank refrain from, the issuance of letters of credit generally or the issuance of such Letter of Credit. 37 SECTION 2A.4 ISSUANCE OF LETTERS OF CREDIT. (a) REQUEST FOR ISSUANCE. The Borrower shall give NationsBank and the Agent written notice of the Borrower's request for the issuance of a Letter of Credit no later than three (3) Business Days prior to the proposed date of issuance of the Letter of Credit, unless a shorter period is otherwise agreed by NationsBank and the Agent. Such notice shall be irrevocable and shall specify the original face amount of the Letter of Credit requested, the effective date (which date shall be a Business Day) of issuance of such requested Letter of Credit, whether such Letter of Credit may be drawn in a single or in multiple draws, the date on which such requested Letter of Credit is to expire (which date shall be a Business Day earlier than the 30th day prior to the Termination Date), the purpose for which such Letter of Credit is to be issued and the beneficiary of the requested Letter of Credit. The Borrower shall attach to such notice the form of the Letter of Credit that the Borrower requests to be issued. (b) RESPONSIBILITIES OF THE AGENT; ISSUANCE. The Agent shall determine, as of the Business Day immediately preceding the requested effective date of issuance of the Letter of Credit set forth in the notice from the Borrower pursuant to SECTION 2A.4(a), the amount of Letter of Credit Availability. If (i) the form of the Letter of Credit delivered by the Borrower to the Agent is acceptable to NationsBank and the Agent in their reasonable discretion, (ii) the undrawn face amount of the requested Letter of Credit is less than or equal to the Letter of Credit Availability and (iii) the Agent has received a certificate from the Borrower stating that the applicable conditions set forth in SECTION 2A.3 have been satisfied, then NationsBank will cause the Letter of Credit to be issued. (c) NOTICE OF ISSUANCE. Promptly after the issuance of any Letter of Credit, NationsBank shall give the Agent written or facsimile notice, or telephonic notice confirmed promptly thereafter in writing, of the issuance of such Letter of Credit, and the Agent shall give each Lender written or facsimile notice, or telephonic notice confirmed promptly thereafter in writing, of the issuance of such Letter of Credit. (d) NO EXTENSION OR AMENDMENT. No Letter of Credit shall be extended or amended unless the requirements of this SECTION 2A.4 are met as though a new Letter of Credit were being requested and issued. SECTION 2A.5 DUTIES OF NATIONSBANK. Any action taken or omitted to be taken by NationsBank under or in connection with any Letter of Credit, if taken or omitted in the absence of gross negligence or willful misconduct, shall not result in any liability of NationsBank to any Lender or relieve any Lender of its obligations hereunder to NationsBank. In determining whether to pay under any Letter of Credit, NationsBank shall have no obligation to any Lender other than to confirm that any documents required to be delivered under such Letter of Credit in connection with such drawing have been presented and appear on their face to comply with the requirements of such Letter of Credit. 38 SECTION 2A.6 PAYMENT OF REIMBURSEMENT OBLIGATIONS. (a) PAYMENT TO ISSUER. Notwithstanding any provisions to the contrary in any Reimbursement Agreement, the Borrower agrees to reimburse NationsBank for any drawings (whether partial or full) under each Letter of Credit issued by NationsBank and agrees to pay to NationsBank the amount of all other Reimbursement Obligations and other amounts payable to NationsBank under or in connection with such Letter of Credit immediately when due, irrespective of any claim, set-off, defense or other right which the Borrower may have at any time against NationsBank or any other Person. (b) RECOVERY OR AVOIDANCE OF PAYMENTS. In the event any payment by or on behalf of the Borrower with respect to any Letter of Credit (or any Reimbursement Obligation relating thereto) received by NationsBank, or by the Agent and distributed by the Agent to the Lenders on account of their respective participations therein, is thereafter set aside, avoided or recovered from NationsBank or the Agent in connection with any receivership, liquidation or bankruptcy proceeding, the Lenders shall, upon demand by the Agent, pay to the Agent, for the account of the Agent or NationsBank, their respective Proportionate Shares of such amount set aside, avoided or recovered together with interest at the rate required to be paid by the Agent upon the amount required to be repaid by it. SECTION 2A.7 PARTICIPATIONS. (a) PURCHASE OF PARTICIPATIONS. Immediately upon issuance by NationsBank of a Letter of Credit, each Lender shall be deemed to have irrevocably and unconditionally purchased and received without recourse or warranty, an undivided interest and participation in such Letter of Credit, equal to such Lender's Proportionate Share of the face amount thereof (including, without limitation, all obligations of the Borrower with respect thereto, other than amounts owing to NationsBank with respect to the issuance thereof, and any security therefor or guaranty pertaining thereto). (b) SHARING OF LETTER OF CREDIT PAYMENTS. In the event that NationsBank makes a payment under any Letter of Credit and NationsBank shall not have been repaid such amount pursuant to SECTION 2A.6, then NationsBank shall be deemed to have made a Non-Ratable Loan in the amount of such payment, and notwithstanding the occurrence or continuance of a Default or Event of Default at the time of such payment, such Non-Ratable Loan shall be subject to the provisions of SECTION 3.8(b) and the absolute obligations of the Lenders to pay for their respective participation interests therein. (c) SHARING OF REIMBURSEMENT OBLIGATION PAYMENTS. Whenever NationsBank receives a payment from or on behalf of the Borrower on account of a Reimbursement Obligation as to which the Agent has previously received for the account of NationsBank payment from a Lender pursuant to this SECTION 2A.7, NationsBank shall promptly pay to the Agent, for the benefit of such Lender, such Lender's Proportionate Share of the amount of such payment from the Borrower in Dollars. Each such payment shall be made by NationsBank on the Business Day on which NationsBank receives immediately available funds from the Agent pursuant to the 39 immediately preceding sentence, if received prior to 11:00 a.m. on such Business Day, and otherwise on the next succeeding Business Day. (d) DOCUMENTATION. Upon the request of any Lender, the Agent shall furnish to such Lender copies of any Letter of Credit, Reimbursement Agreement or application for any Letter of Credit and such other documentation as may reasonably be requested by such Lender. (e) OBLIGATIONS IRREVOCABLE. The obligations of each Lender to make payments to the Agent with respect to any Letter of Credit and participation therein pursuant to the provisions of SECTION 3.8(b) hereof or otherwise and the obligations of the Borrower to make payments to NationsBank or to the Agent, for the account of Lenders, shall be irrevocable, shall not be subject to any qualification or exception whatsoever and shall be made in accordance with the terms and conditions of this Agreement (assuming, in the case of the obligations of the Lenders to make such payments, that the Letter of Credit has been issued in accordance with SECTION 2A.4), including, without limitation, any of the following circumstances: (i) Any lack of validity or enforceability of this Agreement or any of the other Loan Documents; (ii) The existence of any claim, set-off, defense or other right which the Borrower may have at any time against a beneficiary named in a Letter of Credit or any transferee of any Letter of Credit (or any Person for whom any such transferee may be acting), any Lender, NationsBank or any other Person, whether in connection with this Agreement, any Letter of Credit, the transactions contemplated herein or any unrelated transactions (including any underlying transactions between the Borrower or any other Person and the beneficiary named in any Letter of Credit); (iii) Any draft, certificate or any other document presented under the Letter of Credit upon which payment has been made in good faith and according to its terms proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect; (iv) The surrender or impairment of any Collateral or any other security for the Secured Obligations or the performance or observance of any of the terms of any of the Loan Documents; (v) The occurrence of any Default or Event of Default; or (vi) NationsBank's or the Agent's failure to deliver the notice provided for in SECTION 2A.4(c). SECTION 2A.8 INDEMNIFICATION, EXONERATION. (a) INDEMNIFICATION. In addition to amounts payable as elsewhere provided in this ARTICLE 2A, the Borrower agrees to protect, indemnify, pay and save the Lenders and the Agent harmless from and against any and all claims, demands, liabilities, damages, losses, costs, 40 charges and expenses (including reasonable attorneys' fees) which any Lender or the Agent may incur or be subject to as a consequence, directly or indirectly, of (i) the issuance of any Letter of Credit, other than as a result of its gross negligence or willful misconduct, as determined by a court of competent jurisdiction, or (ii) the failure of NationsBank to honor a drawing under any Letter of Credit as a result of any act or omission, whether such act or omission is rightful or wrongful, of any present or future DE JURE or DE FACTO governmental authority (all such acts or omissions being hereinafter referred to collectively as GOVERNMENT ACTS). (b) ASSUMPTION OF RISK BY THE BORROWER. As among the Borrower, the Lenders and the Agent, the Borrower assumes all risks of the acts and omissions of, or misuse of any of the Letters of Credit by, the respective beneficiaries of such Letters of Credit, subject to the NationsBank's and the Agent's duties imposed herein. In furtherance and not in limitation of the foregoing, subject to the provisions of the applications for the issuance of Letters of Credit, the Lenders and the Agent shall not be responsible for: (i) the form, validity, sufficiency, accuracy, genuineness or legal effect of any document submitted by any Person in connection with the application for and issuance of and presentation of drafts with respect to any of the Letters of Credit, even if it should prove to be in any or all respects invalid, insufficient, inaccurate, fraudulent or forged; (ii) the validity or sufficiency of any instrument transferring or assigning or purporting to transfer or assign any Letter of Credit or the rights or benefits thereunder or proceeds thereof, in whole or in part, which may prove to be invalid or ineffective for any reason; (iii) the failure of the beneficiary of any Letter of Credit to comply duly with conditions required in order to draw upon such Letter of Credit; (iv) errors, omissions, interruptions or delays in transmission or delivery of any messages, by mail, cable, telegraph, telex or otherwise, whether or not they be in cipher; (v) errors in interpretation of technical terms; (vi) any loss or delay in the transmission or otherwise of any document required in order to make a drawing under any Letter of Credit or of the proceeds thereof; (vii) the misapplication by the beneficiary of any Letter of Credit of the proceeds of any drawing under such Letter of Credit; or (viii) any consequences arising from causes beyond the control of the Lenders or the Agent, including, without limitation, any Government Acts. 41 None of the foregoing shall affect, impair or prevent the vesting of any of the Agent's rights or powers under this SECTION 2A.8 nor shall any of the foregoing affect the rights and obligations of the Borrower as the account party and NationsBank as issuer of Letters of Credit, which rights and obligations shall be defined and governed by the Letter of Credit Documents and Applicable Law. (c) EXONERATION. In furtherance and extension, and not in limitation, of the specific provisions set forth above, any action taken or omitted by the Agent, NationsBank or any Lender under or in connection with any of the Letters of Credit or any related certificates, if taken or omitted in good faith, shall not result in any liability of any Lender or the Agent to the Borrower or relieve the Borrower of any of its obligations hereunder to any such Person. SECTION 2A.9 SUPPORTING LETTER OF CREDIT; CASH COLLATERAL ACCOUNT. During the continuation of an Event of Default or if, notwithstanding the provisions of SECTION 2A.2(b), any Letter of Credit is outstanding on the Termination Date, then on or prior to the Termination Date, the Borrower shall, promptly on demand by the Agent, deposit with the Agent, for the ratable benefit of the Lenders, with respect to each Letter of Credit then outstanding, as the Agent shall specify, either (a) a standby letter of credit (a SUPPORTING LETTER OF CREDIT) in form and substance satisfactory to the Agent, issued by an issuer satisfactory to the Agent in its reasonable judgment in an amount equal to the greatest amount for which such Letter of Credit may be drawn, under which Supporting Letter of Credit the Agent shall be entitled to draw amounts necessary to reimburse NationsBank, the Agent and the Lenders for payments made by them under such Letter of Credit or under any reimbursement or guaranty agreement with respect thereto, or (b) Cash Collateral in an amount necessary to reimburse NationsBank, the Agent and the Lenders for payments made by NationsBank, the Agent and the Lenders under such Letter of Credit or under any reimbursement or guaranty agreement with respect thereto. Such Supporting Letter of Credit or Cash Collateral shall be held by the Agent for the benefit of the Lenders, as security for, and to provide for the payment of, the Reimbursement Obligations. In the event the Borrower fails to comply with either CLAUSE (a) or (b) above, the Borrower shall be deemed to have requested a Prime Rate Loan in the amount necessary to provide the Cash Collateral described in clause (b) to be held by the Agent as therein provided. In addition, the Agent may at any time after such Event of Default or Termination Date apply any or all of such Cash Collateral to the payment of any or all of the Secured Obligations then due and payable. The Cash Collateral shall be deposited in the Cash Collateral Account and shall be administered in accordance with the provision of SECTION 3.16. 42 ARTICLE 3 GENERAL LOAN PROVISIONS SECTION 3.1 INTEREST. (a) PRIME RATE LOANS. Subject to the provisions of SECTION 3.1(d), the Borrower will pay interest on the unpaid principal amount of each Prime Rate Loan, for each day from the day such Loan is made until such Loan is paid (whether at maturity, by reason of acceleration, or otherwise) or is converted to a Eurodollar Rate Loan, at a rate per annum equal to the sum of (i) the Applicable Margin and (ii) the Prime Rate, payable monthly in arrears as it accrues on each Interest Payment Date. (b) EURODOLLAR RATE LOANS. Subject to the provisions of SECTION 3.1(d), the Borrower will pay interest on the unpaid principal amount of each Eurodollar Rate Loan for the applicable Interest Period at a rate per annum equal to the sum of (i) the Applicable Margin and (ii) the Eurodollar Rate, payable monthly in arrears as it accrues on each Interest Payment Date and on the last day of such Interest Period, and when such Eurodollar Rate Loan is due (whether at maturity, by reason of acceleration or otherwise). (c) OTHER SECURED OBLIGATIONS. The Borrower will, to the extent permitted by Applicable Law, pay interest on the unpaid principal amount of any Secured Obligation that is due and payable other than the Loans in accordance with SECTIONS 3.1(a) or (d), as applicable, as if such Secured Obligation were a Prime Rate Revolving Credit Loan. (d) DEFAULT RATE. If an Event of Default shall occur and be continuing, at the election of the Required Lenders, the unpaid principal amount of the Loans and the other Secured Obligations shall no longer bear interest in accordance with the terms of SECTION 3.1(a), 3.1(b) or 3.1(c), but shall bear interest for each day from the date of such Event of Default until Event of Default shall have been cured or waived, at a rate per annum equal to the sum of (i) the Default Margin and (ii) the rate otherwise applicable to such Loan, payable on demand. The interest rate provided for in the preceding sentence shall, to the extent permitted by Applicable Law, apply to and accrue on the amount of any judgment entered with respect to any Secured Obligation and shall continue to accrue at such rate during any proceeding described in SECTION 11.1(g) or (h). (e) CALCULATION OF INTEREST. The interest rates provided for in SECTIONS 3.1(a), (b), (c) and (d) shall be computed on the basis of a year of 360 days and the actual number of days elapsed. Each interest rate determined with reference to the Prime Rate shall be adjusted automatically as of the opening of business on the effective date of each change in the Prime Rate. (f) MAXIMUM RATE. It is not intended by the Lenders, and nothing contained in this Agreement or the Notes shall be deemed, to establish or require the payment of a rate of interest in excess of the maximum rate permitted by Applicable Law (the MAXIMUM RATE). If, in any month, the Effective Interest Rate, absent such limitation, would have exceeded the Maximum Rate, then the Effective Interest Rate for that month shall be the Maximum Rate, and, if in future 43 months, the Effective Interest Rate would otherwise be less than the Maximum Rate, then the Effective Interest Rate shall remain at the Maximum Rate until such time as the amount of interest paid hereunder equals the amount of interest which would have been paid if the same had not been limited by the Maximum Rate. In the event that, upon payment in full of the Secured Obligations, the total amount of interest paid or accrued under the terms of this Agreement is less than the total amount of interest which would have been paid or accrued if the Effective Interest Rate had at all times been in effect, then the Borrower shall, to the extent permitted by Applicable Law, pay to the Lenders an amount equal to the excess, if any, of (i) the lesser of (A) the amount of interest which would have been charged if the Maximum Rate had, at all times, been in effect and (B) the amount of interest which would have accrued had the Effective Interest Rate, at all times, been in effect or (ii) the amount of interest actually paid or accrued under this Agreement. In the event the Lenders receive, collect or apply as interest any sum in excess of the Maximum Rate, such excess amount shall be applied to the reduction of the principal balance of the Secured Obligations, and if no such principal is then outstanding, such excess or part thereof remaining, shall be paid to the Borrower. For the purposes of computing the Maximum Rate, to the extent permitted by Applicable Law, all interest and charges, discounts, amounts, premiums or fees deemed to constitute interest under applicable law, shall be amortized, prorated, allocated and spread in substantially equal parts throughout the full term of this Agreement. The provisions of this SECTION 3.1(f) shall be deemed to be incorporated into every Loan Document (whether or not any provision of this SECTION 3.1(f) is specifically referred to therein). SECTION 3.2 CERTAIN FEES. (a) ORIGINATION FEE. On the Effective Date, as additional consideration for the extensions of credit provided for hereunder, the Borrower shall pay to the Agent for the Ratable benefit of the Lenders, in addition to any interest due under this Agreement, an origination fee in an amount equal to 2% of the aggregate Commitments in effect on the Effective Date. The origination fee provided for herein shall compensate the Lenders for the internal costs associated with the origination, structuring, processing, approving and closing of the transactions contemplated by this Agreement, including, but not limited to, administrative, general overhead and lost opportunity costs, but not including any out-of-pocket expenses for which the Borrower has agreed to reimburse the Agent or any Lender, including, without limitation, the Agent's or any Lender's out-of-pocket expenses incurred in connection with its due diligence examination of the Borrower and the closing of the transactions contemplated by this Agreement. The origination fee shall be fully earned on the Effective Date and shall not be subject to refund or rebate. (b) AGENT FEE. For administration and other services performed by the Agent in connection with its continuing administration of this Agreement, the Borrower shall pay to the Agent, for its own account, and not for the account of the Lenders, an annual fee of $25,000, payable on the Effective Date and on each anniversary of the Effective Date for so long as any Secured Obligation shall remain outstanding or the Revolving Credit Facility shall not have been terminated. 44 (c) COMMITMENT FEE. In connection with and as consideration for the holding available for the use of the Borrower hereunder the full amount of the Revolving Credit Facility, the Borrower will pay a fee to the Agent, for the Ratable benefit of the Lenders, for each day from the Effective Date until the Termination Date, in an amount equal to 1/2 of 1% per annum of the unused portion of the Revolving Credit Facility for such day. Such fee shall be payable quarterly in arrears on the first day of each January, April, July and October and on the date of any permanent reduction in the Revolving Credit Facility. (d) LETTER OF CREDIT FEES. As consideration for the issuance by NationsBank of a Letter of Credit, the Borrower agrees to pay to NationsBank all applicable Letter of Credit Fees. Such fees shall be payable to NationsBank in advance on the date of issuance of each Letter of Credit and shall be calculated according to the face amount of such Letter of Credit based on its stated term. In the event any Letter of Credit is canceled or terminated prior to the expiration of its stated term, the Lender will make appropriate adjustments in such fees based on the actual average daily face amount of outstanding Letters of Credit and will refund to the Borrower the amount of any excess fee paid pursuant to this Section 3.2(d). (e) GENERAL. All fees shall be fully earned by the Agent of the Lenders, as the case may be, when due and payable and, except as otherwise set forth herein or required by applicable law, shall not be subject to refund or rebate. All fees are for compensation for services and are not, and shall not be deemed to be, interest or a charge for the use of money. SECTION 3.3 MANNER OF PAYMENT. (a) Except as otherwise expressly provided in SECTION 7.1(b), each payment (including prepayments) by the Borrower on account of the principal of or interest on the Loans or of any other amounts payable to the Lenders under this Agreement or any Note shall be made not later than 12:00 noon on the date specified for payment under this Agreement to the Agent, for the account of the Lenders, at the Agent's Office, in Dollars, in immediately available funds and shall be made without any setoff, counterclaim or deduction whatsoever. Any payment received after such time but before 2:00 p.m. on such day shall be deemed a payment on such date for the purposes of SECTION 11.1, but for all other purposes shall be deemed to have been made on the next succeeding Business Day. (b) The Borrower hereby irrevocably authorizes each Lender and each Affiliate of such Lender and each participant herein to charge any account of the Borrower or any other Loan Party maintained with such Lender or such Affiliate or participant with such amounts as may be necessary from time to time to pay any Secured Obligations (whether or not owed to such Lender, Affiliate or participant) which are not paid when due. The Lenders will use reasonable efforts to give the Borrower notice of any such charge. SECTION 3.4 GENERAL. If any payment under this Agreement or any Note shall be specified to be made on a day which is not a Business Day, it shall be made on the next succeeding day which is a Business Day and such extension of time shall in such case be included in computing interest, if any, in connection with such payment. 45 SECTION 3.5 LOAN ACCOUNTS; STATEMENTS OF ACCOUNT. (a) Each Lender shall open and maintain on its books a loan account in the Borrower's name (each, a LOAN ACCOUNT and collectively, the LOAN ACCOUNTS). Each such Loan Account shall show as debits thereto each Loan made under this Agreement by such Lender to the Borrower and as credits thereto all payments received by such Lender and applied to principal of such Loans, so that the balance of the Loan Account at all times reflects the principal amount due such Lender from the Borrower. (b) The Agent shall maintain on its books a control account for the Borrower in which shall be recorded (i) the amount of each disbursement made hereunder, (ii) the amount of any principal or interest due or to become due from the Borrower hereunder, and (iii) the amount of any sum received by the Agent hereunder from the Borrower and each Lender's share therein. (c) The entries made in the accounts pursuant to SUBSECTIONS (a) and (b) shall be PRIMA FACIE evidence, in the absence of manifest error, of the existence and amounts of the obligations of the Borrower therein recorded and in case of discrepancy between such accounts, in the absence of manifest error, the accounts maintained pursuant to SUBSECTION (b) shall be controlling. (d) The Agent will account separately to the Borrower monthly with a statement of Loans, charges and payments made to and by the Borrower pursuant to this Agreement, and such accounts rendered by the Agent shall be deemed final, binding and conclusive, save for manifest error, unless the Agent is notified by the Borrower in writing to the contrary within 30 days of the date the account to the Borrower was so rendered. Such notice by the Borrower shall be deemed an objection to only those items specifically objected to therein. Failure of the Agent to render such account shall in no way affect the rights of the Agent or of the Lenders hereunder. SECTION 3.6 REDUCTION OF COMMITMENTS; TERMINATION OF AGREEMENT. (a) The Borrower shall have the right Ratably to reduce the unused Commitments, without charge, by giving the Agent not less than three Business Days' prior written notice of such reduction, which reduction shall be effective on the Business Day specified in the Borrower's notice and shall be in an amount equal to $500,000 or an integral multiple in excess thereof and shall not reduce the Revolving Credit Facility below the sum of the amount of the aggregate Letter of Credit Reserve. As of the date of reduction set forth in such notice, the Revolving Credit Facility shall be permanently reduced to the amount stated in the Borrower's notice for all purposes herein, and the Borrower shall pay the amount necessary to reduce the amount of the Revolving Credit Loans outstanding under the Revolving Credit Facility to an amount equal to or less than the Revolving Credit Facility as so reduced, (b) Subject to the provisions of SECTION 3.10, the Borrower shall have the right, at any time, to terminate this Agreement upon not less than 30 Business Days' prior written notice, which notice shall specify the effective date of such termination. Upon receipt of such notice, the Agent shall promptly notify each Lender thereof. On the date specified in such notice, such termination shall be effected, provided, that the Borrower shall, on or prior to such date, pay to the Agent, for its account and the account of the Lenders, in same day funds, an amount equal to 46 all Secured Obligations (other than with respect to Letter of Credit Obligations) outstanding on such date, including, without limitation, all (i) accrued interest thereon, (ii) all accrued fees provided for hereunder, and (iii) any amounts payable as Cash Collateral or to the Lenders pursuant to SECTIONS 3.10, 3.15, 3.16, 14.2, 14.3, and 14.14 and, in addition thereto, shall deliver to the Agent, in respect of each outstanding Letter of Credit, either a Supporting Letter of Credit or Cash Collateral as provided in SECTION 2A.9. Additionally, the Borrower shall provide the Agent and the Lenders with customary indemnification in respect of returned and dishonored payment items in form and substance satisfactory to the Agent. Following a notice of termination as provided for in this SECTION 3.6(b) and upon payment in full of the amounts specified in this SECTION 3.6(b), and execution and delivery of any required indemnification, this Agreement shall be terminated and the Agent, the Lenders and the Borrower shall have no further obligations to any other party hereto, except for the obligations to the Agent and the Lenders pursuant to Section 14.13 hereof, which shall survive any termination of this Agreement. SECTION 3.7 MAKING LOANS. (a) NATURE OF OBLIGATIONS OF LENDERS TO MAKE LOANS. The obligations of the Lenders under this Agreement to make the Loans are several and are not joint or joint and several. (b) ASSUMPTION BY AGENT. Subject to the provisions of SECTION 3.8 and notwithstanding the occurrence of a Default or Event of Default or other failure of any condition to the making of Loans under the Revolving Credit Facility hereunder subsequent to the Initial Loans, unless the Agent shall have received notice from a Lender in accordance with the provisions of SECTION 3.7(c) prior to a proposed Borrowing date that such Lender will not make available to the Agent such Lender's Proportionate Share of the Revolving Credit Loan to be borrowed on such date, the Agent may assume that such Lender will make such Proportionate Share available to the Agent in accordance with SECTION 2.2(a), and the Agent may, in reliance upon such assumption, make available to the Borrower on such date a corresponding amount. If and to the extent such Lender shall not make such Proportionate Share available to the Agent, such Lender and the Borrower severally agree to repay to the Agent forthwith on demand such corresponding amount, together with interest thereon for each day from the date such amount is made available to the Borrower until the date such amount is repaid to the Agent (i) by the Borrower, at the Effective Interest Rate or, if lower, subject to SECTION 3.1(f), the Maximum Rate or (ii) by such Lender, at the Federal Funds Effective Rate. If such Lender shall repay to the Agent such corresponding amount, the amount so repaid shall constitute such Lender's Proportionate Share of the Loan made on such Borrowing date for purposes of this Agreement. The failure of any Lender to make its Proportionate Share of any Loan available shall not (without regard to whether a Borrower shall have returned the amount thereof to the Agent in accordance with this SECTION 3.7) relieve it or any other Lender of its obligation, if any, hereunder to make its Proportionate Share of the Loan available on such Borrowing date, but no Lender shall be responsible for the failure of any other Lender to make its Proportionate Share of a Loan available on the Borrowing date. 47 (c) NOTICE OF INTENTION NOT TO LEND. Unless and until the Agent shall have received written notice from the Required Lenders as to the existence of a Default, an Event of Default or some other circumstance that would relieve the Lenders of their respective obligations to make Loans hereunder, which notice shall be in writing and shall be signed by the Required Lenders and shall expressly state that the Required Lenders do not intend to make available to the Agent such Lenders' Ratable Shares of Loans made after the effective date of such notice, the Agent shall be entitled to continue to make the assumptions described in SECTION 3.7(b). After receipt of the notice described in the preceding sentence, which shall become effective on the third Business Day after receipt of such notice by the Agent unless otherwise agreed to by the Agent, the Agent shall be entitled to make the assumptions described in SECTION 3.7(b) as to any Loans as to which it has not received a written notice to the contrary prior to 11:00 a.m. on the Business Day next preceding the day on which the Loan is to be made. The Agent shall not be required to make any Loan as to which it shall have received notice by a Lender of such Lender's intention not to make its Ratable Share of such Loan available to the Agent. SECTION 3.8 SETTLEMENT AMONG LENDERS. (a) REVOLVING CREDIT LOANS. It is agreed that each Lender's Net Outstandings are intended by the Lenders to be equal at all times to such Lender's Ratable Share of the aggregate principal amount of all Revolving Credit Loans outstanding. Notwithstanding such agreement, the several and not joint obligation of each Lender to make its Ratable Share of Loans under the Revolving Credit Facility in accordance with the terms of this Agreement and each Lender's right to receive its Ratable Share of principal payments on Revolving Credit Loans, the Lenders agree that in order to facilitate the administration of this Agreement and the Loan Documents that settlement among them may take place on a periodic basis in accordance with the provisions of this SECTION 3.8. (b) SETTLEMENT PROCEDURES. To the extent and in the manner hereinafter provided in this SECTION 3.8, settlement among the Lenders as to Prime Rate Loans may occur periodically on Settlement Dates determined from time to time by the Agent, which may occur before or after the occurrence or during the continuance of a Default or Event of Default and whether or not all of the conditions set forth in SECTION 4.2 have been met. On each Settlement Date payments shall be made by or to NationsBank and the other Lenders in the manner provided in this SECTION 3.8 in accordance with the Settlement Report delivered by the Agent pursuant to the provisions of this SECTION 3.8 in respect of such Settlement Date so that as of each Settlement Date, and after giving effect to the transactions to take place on such Settlement Date, each Lender's Net Outstandings shall equal such Lender's Ratable Share of the Revolving Credit Loans. (i) SELECTION OF SETTLEMENT DATES. If the Agent elects, in its discretion, but subject to the consent of NationsBank, to settle accounts among the Lenders with respect to principal amounts of Prime Rate Loans less frequently than each Business Day, then the Agent shall designate periodic Settlement Dates which may occur on any Business Day after the Effective Date; PROVIDED, HOWEVER, that (A) the Agent shall designate as a Settlement Date any Business Day which is an Interest Payment Date, (B) a Settlement Date shall occur not less often than every five Business Days, and (C) settlements with 48 respect to Eurodollar Rate Loans shall take place on the Borrowing date, each Interest Payment Date and on the last day of each Interest Period applicable thereto. The Agent shall designate a Settlement Date by delivering to each Lender a Settlement Report not later than 12:00 noon on the proposed Settlement Date, which Settlement Report will be in the form of Exhibit D hereto and shall be with respect to the period beginning on the next preceding Settlement Date and ending on such designated Settlement Date. (ii) NON-RATABLE LOANS AND PAYMENTS. Between Settlement Dates, the Agent shall request and NationsBank may (but shall not be obligated to) advance to the Borrower out of NationsBank's own funds, the entire principal amount of any Prime Rate Revolving Credit Loan requested or deemed requested pursuant to SECTION 2.2(a) (any such Loan being referred to as a NON-RATABLE LOAN). The making of each Non-Ratable Loan by NationsBank shall be deemed to be a purchase by NationsBank of a 100% participation in each other Lender's Proportionate Share of such Non-Ratable Loan. All payments of principal, interest and any other amount with respect to such Non-Ratable Loan shall be payable to and received by the Agent for the account of NationsBank. Upon demand by NationsBank, with notice thereof to the Agent, each other Lender shall pay to NationsBank, as the repurchase of such participation, an amount equal to 100% of such Lender's Proportionate Share of the principal amount of such Non-Ratable Loan. Any payments received by the Agent between Settlement Dates which in accordance with the terms of this Agreement are to be applied to the reduction of the outstanding principal balance of Revolving Credit Loans, shall be paid over to and retained by NationsBank for such application, and such payment to and retention by NationsBank shall be deemed, to the extent of each other Lender's Proportionate Share of such payment, to be a purchase by each such other Lender of a participation in the Revolving Credit Loans (including the repurchase of participations in Non-Ratable Loans) held by NationsBank. Upon demand by another Lender, with notice thereof to the Agent, NationsBank shall pay to the Agent, for the account of such other Lender, as a repurchase of such participation, an amount equal to such other Lender's Proportionate Share of any such amounts (after application thereof to the repurchase of any participations of NationsBank in such other Lender's Proportionate Share of any Non-Ratable Loans) paid only to NationsBank by the Agent. (iii) SETTLEMENT. On each Settlement Date each Lender shall transfer to the Agent and the Agent shall transfer to each Lender such amounts as are necessary to insure that, after giving effect to all such transfers, each Lender's Net Outstandings are equal to such Lenders Proportionate Share of the aggregate principal amount of all Revolving Loans then outstanding. (iv) RETURN OF PAYMENTS. If any amounts received by NationsBank in respect of the Secured Obligations are later required to be returned or repaid by NationsBank to the Borrower or any other obligor or their respective representatives or successors in interest, whether by court order, settlement or otherwise, in excess of the NationsBank's Proportionate Share of all such amounts required to be returned by all Lenders, each other Lender shall, upon demand by NationsBank with notice to the Agent, pay to the Agent for the account of NationsBank, an amount equal to the excess of such Lender's 49 Proportionate Share of all such amounts required to be returned by all Lenders over the amount, if any, returned directly by such Lender. (v) PAYMENTS TO AGENT, LENDERS. (A) Payment by any Lender to the Agent shall be made not later than 1:00 p.m. on the Business Day such payment is due, provided that if such payment is due on demand by another Lender, such demand is made on the paying Lender not later than 10:00 a.m. on such Business Day. Payment by the Agent to any Lender shall be made by wire transfer, promptly following the Agent's receipt of funds for the account of such Lender and in the type of funds received by the Agent, PROVIDED that if the Agent receives such funds at or prior to 1:00 p.m., the Agent shall pay such funds to such Lender by 2:00 p.m. on such Business Day. If a demand for payment is made after the applicable time set forth above, the payment due shall be made by 2:00 p.m. on the first Business Day following the date of such demand. (B) If a Lender shall, at any time, fail to make any payment to the Agent required hereunder, the Agent may, but shall not be required to, retain payments that would otherwise be made to such Lender hereunder and apply such payments to such Lender's defaulted obligations hereunder, at such time, and in such order, as the Agent may elect in its sole discretion. (C) With respect to the payment of any funds under this Section 3.8(c), whether from the Agent to a Lender or from a Lender to the Agent, the party failing to make full payment when due pursuant to the terms hereof shall, upon demand by the other party, pay such amount together with interest on such amount at the Federal Funds Effective Rate. (c) SETTLEMENT OF OTHER SECURED OBLIGATIONS. All other amounts received by the Agent on account of, or applied by the Agent to the payment of, any Secured Obligation owed to the Lenders (including, without limitation, fees payable to the Lenders pursuant to SECTIONS 3.2(a) and (c) and proceeds from the sale of, or other realization upon, all or any part of the Collateral following an Event of Default) that are received by the Agent on or prior to 1:00 p.m. on a Business Day will be paid by the Agent to each Lender on the same Business Day, and any such amounts that are received by the Agent after 1:00 p.m. will be paid by the Agent to each Lender on the following Business Day. Unless otherwise stated herein, the Agent shall distribute to each Lender such Lender's Proportionate Share of fees payable to the Lenders pursuant to Sections 3.2(a) and (c) and shall distribute to each Lender such Lender's Proportionate Share (or if different, such Lender's share based upon the amount of the Secured Obligations then owing to each Lender) of the proceeds from the sale of, or other realization upon, all or any part of the Collateral following an Event of Default. SECTION 3.9 [RESERVED] 50 SECTION 3.10 PAYMENTS NOT AT END OF INTEREST PERIOD; FAILURE TO BORROW. If for any reason any payment of principal with respect to any Eurodollar Rate Loan is made on any day prior to the last day of the Interest Period applicable to such Eurodollar Rate Loan or, after having given a Notice of Borrowing with respect to any Eurodollar Rate Loan or a Notice of Conversion or Continuation with respect to any Loan to be continued as or converted into a Eurodollar Rate Loan, such Loan is not made or is not continued as or converted into a Eurodollar Rate Loan due to the Borrower's failure to borrow or to fulfill the applicable conditions set forth in ARTICLE 4, the Borrower shall pay to each Lender an amount sufficient to pay or reimburse such Lender for the payment of any costs and expenses incurred or suffered by such Lender as a result of such failure. The Borrower shall pay such amount upon presentation by such Lender to the Borrower (with a copy to the Agent) of a statement in reasonable detail setting forth the amount and such Lender's calculation thereof pursuant hereto, which statement shall be deemed true and correct absent manifest error. SECTION 3.11 ASSUMPTIONS CONCERNING FUNDING OF EURODOLLAR RATE LOANS. Calculation of all amounts payable to the Lenders under this ARTICLE 3 shall be made as though each Lender had actually funded or committed to fund its Eurodollar Rate Loans through the purchase of an underlying deposit in an amount equal to the amount of such ratable share and having a maturity comparable to the relevant Interest Period for such Eurodollar Rate Loan; PROVIDED, HOWEVER, each Lender may fund its Eurodollar Rate Loans in any manner it deems fit and the foregoing assumption shall be utilized only for the calculation of amounts payable under this ARTICLE 3. SECTION 3.12 CONVERSION OR CONTINUATION. Provided that no Event of Default shall have occurred and be continuing (but subject to the provisions of SECTION 3.14, the Borrower may request that all or any part of any outstanding Loan be converted into a Loan or Loans of a different Type or be continued as a Loan or Loans of the same Type, in the same aggregate principal amount, on any Business Day (which, in the case of continuation of a Eurodollar Rate Loan or conversion of a Eurodollar Rate Loan in whole or in part to a Prime Rate Loan, shall be the last day of the Interest Period applicable to such Loan). In each such case, the Borrower shall notify the Agent in writing (which notice shall be irrevocable) by telecopy not later than 11:30 a.m. on the date two Business Days before the day on which such proposed conversion or continuation is to be effective (and such effective date of any continuation shall be the last day of the Interest Period for the Eurodollar Rate Loan). Each such notice (a NOTICE OF CONVERSION OR CONTINUATION) shall (i) identify the Loan to be converted or continued, the aggregate outstanding principal balance thereof and, if a Eurodollar Rate Loan, the last day of the Interest Period applicable to such Loan, (ii) specify the effective date of such conversion or continuation, (iii) specify the principal amount of such Loan to be converted or continued and, if converted, the Type or Types into which the same is to be converted, and (iv) the Interest Period to be applicable to the Eurodollar Rate Loan as converted or continued. Such telecopied notice shall be immediately followed by a signed, written confirmation thereof by the Borrower in a form acceptable to the Agent, PROVIDED that if such confirmation differs in any 51 respect from the action taken by the Lenders, the records of the Agent shall control absent manifest error. SECTION 3.13 DURATION OF INTEREST PERIODS; MAXIMUM NUMBER OF EURODOLLAR RATE LOANS; MINIMUM INCREMENTS. (a) Subject to the provisions of the definition INTEREST PERIOD, the duration of each Interest Period applicable to a Eurodollar Rate Loan shall be as specified in the applicable Notice of Borrowing or Notice of Conversion or Continuation. The Borrower may elect a subsequent Interest Period to be applicable to any Eurodollar Rate Loan by giving a Notice of Conversion or Continuation with respect to such Loan in accordance with SECTION 3.12. (b) If the Agent does not receive a notice of election in accordance with SECTION 3.12 with respect to the continuation of any Eurodollar Rate Loan within the applicable time limits specified in SECTION 3.12, or if, when such notice must be given, an Event of Default exists or such Type of Loan is not available, the Borrower shall be deemed to have elected to convert such Eurodollar Rate Loan in whole into a Prime Rate Loan on the last day of the Interest Period therefor. (c) Notwithstanding the foregoing, the Borrower may not select an Interest Period that would end, but for the provisions of the definition INTEREST PERIOD, after the Termination Date. (d) In no event shall there be more than 5 Eurodollar Rate Loans outstanding hereunder at any time. (e) Each Eurodollar Rate Loan shall be in a minimum amount of $1,000,000. SECTION 3.14 CHANGED CIRCUMSTANCES. (a) If the introduction of or any change in or in the interpretation of (in each case, after the date hereof) any law or regulation makes it unlawful, or any Governmental Authority asserts, after the date hereof, that it is unlawful, for any Lender to perform its obligations hereunder to make Eurodollar Rate Loans or to fund or maintain Eurodollar Rate Loans hereunder, such Lender shall notify the Agent of such event and the Agent shall notify the Borrower of such event, and the right of the Borrower to select Eurodollar Rate Loans for any subsequent Interest Period or in connection with any subsequent conversion of any Loan shall be suspended until the Agent shall notify the Borrower that the circumstances causing such suspension no longer exist, and the Borrower shall forthwith prepay in full all Eurodollar Rate Loans then outstanding and shall pay all interest accrued thereon through the date of such prepayment or conversion, unless the Borrower, within three Business Days after such notice from the Agent, requests the conversion of all Eurodollar Rate Loans then outstanding into Prime Rate Loans; PROVIDED, that if the date of such repayment or proposed conversion is not the last day of the Interest Period applicable to such Eurodollar Rate Loan, the Borrower shall also pay any amount due pursuant to SECTION 3.10. 52 (b) If the Agent shall, at least one Business Day before the date of any requested Revolving Credit Loan or the effective date of any conversion or continuation of an existing Loan to be made or continued as or converted into a Eurodollar Rate Loan (each such requested Revolving Credit Loan made and Loan to be converted or continued, a PENDING LOAN), notify the Borrower that the Eurodollar Rate will not adequately reflect the cost to the Lenders of making or funding such Pending Loan as a Eurodollar Rate Loan or that the Interbank Offered Rate is not determinable from any interest rate reporting service of recognized standing, then the right of the Borrower to select Eurodollar Rate Loan for such Pending Loan, any subsequent Revolving Credit Loan or in connection with any subsequent conversion or continuation of any Loan shall be suspended until the Agent shall notify the Borrower that the circumstances causing such suspension no longer exist, and each Pending Loan and each such subsequent Loan requested to be made, continued or converted shall be made or continued as or converted into a Prime Rate Loan. SECTION 3.15 INCREASED CAPITAL. (a) If any Lender shall have determined that the adoption of any applicable law, rule, regulation, guideline, directive or request (whether or not having force of law) regarding capital requirements for banks or bank holding companies, or any change therein or in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by such Lender with any of the foregoing, in each case, after the Agreement Date, imposes or increases a requirement by such Lender to allocate capital resources to such Lender's Commitment to make Loans hereunder which has or would have the effect of reducing the return on such Lender's capital to a level below that which such Lender could have achieved (taking into consideration such Lender's then existing policies with respect to capital adequacy and assuming full utilization of such Lender's capital) but for such adoption, change or compliance by any amount deemed by such Lender to be material: (i) such Lender shall promptly after its determination of such occurrence give notice thereof to the Borrower; and (ii) the Borrower shall pay to such Lender as an additional fee from time to time on demand such amount as such Lender certifies to be the amount that will compensate it for such reduction. A certificate of such Lender claiming compensation under this SECTION 3.15 shall be conclusive in the absence of manifest error. Such certificate shall set forth the nature of the occurrence giving rise to such compensation, the additional amount or amounts to be paid to it hereunder and the method by which such amounts were determined. In determining such amount, such Lender may use any reasonable averaging and attribution methods. (b) Before making any demand pursuant to SECTION 3.15(a), each Lender agrees to use its best efforts (consistent with its internal policy and legal and regulatory restrictions) to designate a different lending office if the making of such a designation would avoid the need for such notice or demand, or reduce the amount of such increased cost or reduction in return and would not, in the reasonable judgment of such Lender, be otherwise disadvantageous to such Lender. No demand by any Lender pursuant to SECTION 3.15(a) shall claim compensation for any period more than 180 days prior to the date of such demand. (c) If the obligation of any Lender to make Eurodollar Rate Loans has been suspended pursuant to SECTION 3.14 or if the Borrower becomes obligated to pay additional 53 amounts to any Lender under SECTION 3.15(a), then, unless such Lender has theretofore taken steps to remove or cure, and has removed or cured, the conditions creating the cause for such suspension or obligation to pay additional amounts or has withdrawn its demand under SECTION 3.15(a), the Borrower shall have the right to seek, with the assistance of the Agent, a mutually satisfactory substitute lender or lenders (which may be one or more of the Lenders) to purchase the Loans of such Lender and assume the rights and obligations of such Lender under this Agreement and the other Loan Documents, pursuant to an Assignment and Acceptance and otherwise in accordance with the applicable provisions of ARTICLE 12. SECTION 3.16 CASH COLLATERAL ACCOUNT; INVESTMENT ACCOUNTS. At any time when outstanding Revolving Credit Loans exceed $1,000,000 in the aggregate the Borrower shall comply with the requirements of this SECTION 13.16. (a) CASH COLLATERAL ACCOUNT. The Borrower shall establish a Cash Collateral Account in which to deposit Collateral consisting of cash or Cash Equivalents from time to time. The Cash Collateral Account shall be in the name of the Agent and the Agent shall have sole dominion and control over, and sole access to, the Cash Collateral Account. Neither the Borrower nor any Person claiming on behalf of or through the Borrower shall have any right to withdraw any of the funds held in the Cash Collateral Account. The Borrower agrees that it will not at any time (x) sell or otherwise dispose of any interest in the Cash Collateral Account or any funds held therein or (y) create or permit to exist any Lien upon or with respect to the Cash Collateral Account or any funds held therein, except as provided in or contemplated by this Agreement. The Agent shall exercise reasonable care in the custody and preservation of any funds held in the Cash Collateral Account and shall be deemed to have exercised such care if such funds are accorded treatment substantially equivalent to that which the Agent accords other funds deposited with the Agent, it being understood that the Agent shall not have any responsibility for taking any necessary steps to preserve rights against any parties with respect to any funds held in the Cash Collateral Account. Subject to the right of the Agent to withdraw funds from the Cash Collateral Account as provided herein, the Agent will, so long as no Default or Event of Default shall have occurred and be continuing, from time to time invest funds on deposit in the Cash Collateral Account, reinvest proceeds of any such investments which may mature or be sold, and invest interest or other income received from any such investments, in each case, in Cash Equivalents, as the Borrower may direct prior to the occurrence of a Default or Event of Default and as the Agent may select after the occurrence and during the continuance of a Default or Event of Default. Such proceeds, interest and income which are not so invested or reinvested in Cash Equivalents shall be deposited and held by the Agent in the Cash Collateral Account. The Agent makes no representation or warranty as to, and shall not be responsible for, the rate of return, if any, earned in any Cash Collateral. Any earnings on Cash Collateral shall be held as additional Cash Collateral on the terms set forth in this SECTION 3.16. (b) INVESTMENT ACCOUNTS. The Borrower may from time to time establish one or more Investment Accounts with the Agent, any Lender or any Affiliate of a Lender, for the purpose of investing in Cash Equivalents any cash collateral. The Borrower hereby acknowledges and agrees that each such Investment Account shall constitute Collateral hereunder and shall be maintained with the Agent, a Lender or Affiliate of a Lender as security for the Secured 54 Obligations. Notwithstanding the foregoing, until such time as the Agent shall otherwise instruct the Agent, Lender or Affiliate of a Lender maintaining such account, the Borrower shall be entitled to direct the investment of the funds deposited therein. The Borrower agrees that it will not at any time (x) sell or otherwise dispose of any interest in any Investment Account or any funds held therein other than by application thereof to any Secured Obligation, or (y) create or permit to exist any Lien upon or with respect to any Investment Account or any funds held therein, except as provided in or contemplated by this Agreement. The Borrower agrees that at any time, and from time to time, at the expense of the Borrower, the Borrower will promptly execute and deliver all further instruments and documents, and take all further action, that may be necessary or desirable, or that the Agent or any Lender may request, in order to perfect and protect any security interest in any Investment Account granted or purported to be granted hereby or to enable the Borrower, for its benefit and the benefit of the Lenders, to exercise and enforce its rights and remedies hereunder with respect to such Investment Account. SECTION 3.17 FUNDS TRANSFER SERVICES. (a) The Borrower acknowledges that the Lender has made available to it as ANNEX B hereto a description of security procedures regarding funds transfers executed by the Lender or an affiliate bank at the request of the Borrower (the SECURITY PROCEDURES). The Borrower and the lender agree that the Security Procedures are commercially reasonable. The Borrower further acknowledges that the full scope of the Security Procedures which the Lender or such affiliate bank offers and strongly recommends for funds transfers is available only if the Borrower communicates directly with the Lender or such affiliate bank as applicable in accordance with said procedures. If the Borrower attempts to communicate by any other method or otherwise not in accordance with the Security Procedures, the Lender or such affiliate bank, as applicable, shall not be required to execute such instructions, but if the Lender or such affiliate bank, as applicable, does so, the Borrower will be deemed to have refused the Security Procedures that the Lender or such affiliate bank as applicable offers and strongly recommends, and the Borrower will be bound by any funds transfer, whether or not authorized, which is issued in the Borrower's name and accepted by the Lender or such affiliate bank, as applicable, in good faith. The Lender or such affiliate bank, as applicable, may modify the Security Procedures at such time or times and in such manner as the Lender or such affiliate bank, as applicable, in its sole discretion, deems appropriate to meet prevailing standards of good banking practice. By continuing to use the Lender's or such affiliate bank's, as applicable, wire transfer services after receipt of any modification of the Security Procedures, the Borrower agrees that the Security Procedures, as modified, are likewise commercially reasonable. The Borrower further agrees to establish and maintain procedures to safeguard the Security Procedures and any information related thereto. (b) The Lender or such affiliate bank, as applicable, will generally use the Fedwire funds transfer system for domestic funds transfers, and the funds transfer system operated by the Society for Worldwide International Financial Telecommunication (SWIFT) for international funds transfers. International funds transfers may also be initiated through the Clearing House InterBank Payment System (CHIPs) or international cable. However, the Lender or such affiliate bank, as applicable, may use any means and routes that the Lender or such affiliate bank, as applicable, in its sole discretion, may consider suitable for the transmission of funds. Each payment order, or cancellation thereof, carried out through a funds transfer system or a 55 clearinghouse will be governed by all applicable funds transfer system rules and clearing house rules and clearing arrangements, whether or not the Lender or such affiliate bank, as applicable, is a member of the system, clearinghouse or arrangement and the Borrower acknowledges that the Lender's of such affiliate bank's, as applicable, right to reverse, adjust, stop payment or delay posting of an executed payment order is subject to the laws, regulations, rules, circulars and arrangements described herein. 56 ARTICLE 4 CONDITIONS PRECEDENT SECTION 4.1 CONDITIONS PRECEDENT TO REVOLVING CREDIT LOANS. Notwithstanding any other provision of this Agreement, the obligations of the Lenders to make Loans hereunder is subject to the satisfaction of each of the following conditions, prior to or contemporaneously with the making of the first such Loans: (a) CLOSING DOCUMENTS. The Agent shall have received each of the following, all of which shall be satisfactory in form and substance to the Agent and its special counsel: (1) this Agreement, duly executed and delivered by the Borrower; (2) the Notes, each dated the Effective Date and duly executed and delivered by the Borrower; (3) the Subsidiary Guaranty and the Subsidiary Security Agreement, duly executed and delivered by the Guarantors; (4) the Pledge Agreement duly executed and delivered by the Borrower and the certificates representing the shares covered thereby, in form for transfer by delivery or accompanied by duly executed stock powers in blank; (5) certified copies of the articles of incorporation and by-laws and shareholder agreements, if any, of the Borrower and each Guarantor as in effect on the Effective Date and all corporate action, including shareholder approval, if necessary, taken by the Borrower and each Guarantor or its shareholders to authorize the execution, delivery and performance of the Loan Documents to which it is a party and, in the case of the Borrower, the Borrowings under this Agreement; (6) certificates of incumbency and specimen signatures with respect to each of the officers of the Borrower and each Guarantor who is authorized to execute and deliver any Loan Document on behalf of the Borrower or such Guarantor or any document, certificate or instrument to be delivered in connection with this Agreement or the other Loan Documents and, in the case of the Borrower, to request Borrowings under this Agreement; (7) a certificate evidencing the good standing of the Borrower and each Guarantor in the jurisdiction of its incorporation and in each other jurisdiction in which it is qualified as a foreign corporation to transact business; (8) the Financing Statements duly executed and delivered by the Borrower and each Guarantor, and evidence satisfactory to the Agent that the Financing Statements have been filed in each jurisdiction where such filing may be necessary or appropriate to perfect the Security Interest; 57 (9) landlord's waiver and consent agreements duly executed on behalf of each lessor of real property described on SCHEDULE 4.1(a)(9); (10) the Mortgage (encumbering Real Estate located at 2250 South Tenth Street, San Jose, Santa Clara County, California) duly executed and delivered by the Borrower and evidencing the recording of such instrument in the appropriate jurisdiction for the recording thereof on the Real Estate subject thereto or, at the option of the Agent, in proper form for recording in such jurisdiction; (11) one or more fully paid mortgagee title insurance policies or, at the option of the Lender, unconditional commitments for the issuance thereof with all requirements and conditions to the issuance of the final policy deleted or marked satisfied, issued by a title insurance company satisfactory to the Agent, each in an amount equal to not less than the fair market value of the Real Estate subject to the Mortgage insured thereby, insuring that such Mortgage creates a valid first lien on, and security title to, all Real Estate described therein, with no survey exceptions and no other exceptions which the Agent shall not have approved in writing; (12) such materials and information concerning the Real Estate as the Agent may require, including, without limitation, certificates of occupancy covering the Real Estate subject to the Mortgage, and owner's affidavits as to such matters relating to the Real Estate as the Lender may request; (13) a report from a qualified engineering firm or other qualified consultant acceptable to the Agent with respect to an investigation and assessment of all Real Estate, which shall be based on a thorough review of past and present uses, occupants, ownership and tenancy of the property, adjacent properties or upgradient properties regarding (A) subsurface ground water hazards, soils and/or test boring reports; (B) contact with local, state or federal agencies regarding known or suspected hazardous material contamination of the property or other properties in the area; (C) review of aerial photographs; (D) visual site inspection noting unregulated fills, storage tanks or areas, ground discoloration or soil odors; and (E) other investigative methods deemed necessary by the consultant or the Agent to enable the consultant to report that there is no apparent or likely contamination of the property; (14) if deemed necessary in the sole judgment of the Agent to further investigate suspected or likely contamination, supplemental environmental reports prepared by qualified consultants of the analysis of core drilling or ground water samples from the property, showing no contamination by hazardous materials; (15) [RESERVED]; (16) a Schedule of Inventory, a Schedule of Receivables and a Schedule of Equipment, each prepared as of a recent date; 58 (17) certificates or binders of insurance relating to (i) each of the policies of insurance covering any of the Collateral together with loss payable clauses which comply with the terms of SECTION 7.8 and (ii) each of the policies of insurance required by the Mortgages, together with mortgagee clauses satisfactory to the Lender; (18) a Borrowing Base Certificate prepared as of July 31, 1997 duly executed and delivered by a Financial Officer of the Borrower demonstrating Collateral Availability, after giving effect to any Loans to be made on such day, of not less than $5,000,000, together with such additional evidence of Collateral Availability as the Agent may require; (19) copies of all the financial statements referred to in SECTION 5.1(n) and meeting the requirements thereof; (20) a certificate of the Vice President-Finance of the Borrower stating that, to the best of his knowledge and based on an examination sufficient to enable him to make an informed statement, (a) all of the representations and warranties made or deemed to be made under this Agreement are true and correct in all material respects as of the Effective Date, both with and without giving effect to any Loans to be made at such time and the application of the proceeds thereof, and (b) no Default or Event of Default exists; (21) evidence satisfactory to the Agent of the release and termination of (or agreement to release and terminate) all Liens other than Permitted Liens. (22) [RESERVED]; (23) a signed opinion of Gibson, Dunn & Crutcher LLP, counsel for the Borrower and the Guarantors, opining as to such matters in connection with this Agreement as the Lender or its counsel may reasonably request; (24) an opinion as to the Solvency of the Borrower and its Subsidiaries of Houlihan Lokey Howard & Zukin, prepared on a basis (including, giving PRO FORMA effect to the Recapitalization and the transactions contemplated by this Agreement) and otherwise in form and substance satisfactory to the Agent; (25) the Patent Assignment duly executed and delivered by the Borrower; (26) the Trademark Assignment duly executed and delivered by the Borrower; and (27) such other documents or and Lender, through the Agent, may reasonably request. (b) FEES AND EXPENSES. The Borrower shall have paid all of the fees and all expenses which the Borrower is obligated to pay or reimburse in accordance with the terms of this Agreement, accrued to the Effective Date. 59 (c) SECURITY INTERESTS. The Agent shall have received satisfactory evidence that the Agent (for the benefit of Lenders) has a valid and perfected first priority security interest as of such date in all of the Collateral, subject only to Permitted Liens. (d) RECAPITALIZATION. The Merger and the other transactions contemplated by the Recapitalization shall have been consummated in accordance with the terms and conditions of the Merger Agreement and the other Recap Documents, without the waiver of any material term thereof; the Agent shall have received evidence satisfactory to it of the issuance of the Senior Notes in accordance with the terms of the Senior Note Indenture and receipt by the Borrower of gross cash proceeds of the Senior Notes in an amount not less than $106,700,000; the Agent shall have received evidence satisfactory to it that, after giving effect to the Merger, JFLEI will own not less than 65% of the voting common stock of the Borrower on a fully diluted basis; and the Agent shall have received evidence satisfactory to it that after giving effect to the Merger, the value of contributed equity of the Borrower is not less than $38,000,000, including at least $20,000,000 of cash paid for shares of common stock of JFLCo and not more than $18,000,000 of cash paid for shares of the Preferred Stock. Such evidence shall include copies, certified as correct and complete by an appropriate officer of the Borrower, of the Merger Agreement, the Senior Note Indenture and the other Recap Documents, as well as reliance letters for the benefit of the Agent and the Lenders as to the legal opinions delivered in connection with the consummation of such transactions. (e) MATERIALLY ADVERSE EFFECT. The Lenders and the Agent shall be satisfied that no Materially Adverse Effect has occurred since July 4, 1997. SECTION 4.2 ALL LOANS; LETTERS OF CREDIT. At the time of making of each Loan and the issuance of each Letter of Credit: (a) all of the representations and warranties made or deemed to be made under this Agreement shall be true and correct in all material respects at such time (except any such representations or warranty stated to be made as of a specific date, which representation or warranty shall be true and correct as of such date) both with and without giving effect to the Letter of Credit to be issued or the Loans to be made at such time and the application of the proceeds thereof, and (b) the corporate actions of the Borrower referred to in SECTION 4.1(a)(5) shall remain in full force and effect and the incumbency of officers shall be as stated in the certificates of incumbency delivered pursuant to SECTION 4.1(a)(6) or as subsequently modified and reflected in a certificate of incumbency delivered to the Agent. Each request or deemed request for any Borrowing or the issuance of any Letter of Credit hereunder shall be deemed to be a certification by the Borrower to the Agent and the Lenders as to the matters set forth in SECTION 4.2(a) and (b) and the Agent may, without waiving either condition, consider the conditions specified in SECTIONS 4.2(a) and (b) fulfilled and a representation by the Borrower to such effect made, if no written notice to the contrary is received by the Agent prior to the making of the Loan then to be made or the issuance of the requested Letter of Credit. 60 SECTION 4.3 CONDITIONS AS COVENANTS. In the event that the Lenders make the Initial Loans prior to the satisfaction of all conditions precedent set forth in SECTION 4.1, and such conditions are not waived in writing by the Agent, the Borrower shall nevertheless cause such condition or conditions to be satisfied within 30 days after the making of such Initial Loans. 61 ARTICLE 5 REPRESENTATIONS AND WARRANTIES OF BORROWER SECTION 5.1 REPRESENTATIONS AND WARRANTIES. The Borrower represents and warrants to the Agent and to the Lenders as follows: (a) ORGANIZATION; POWER; QUALIFICATION. The Borrower and each of its Subsidiaries is a corporation, duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation, having the power and authority to own its properties and to carry on its business as now being and hereafter proposed to be conducted and is duly qualified and authorized to do business in each jurisdiction in which the character of its properties or the nature of its business requires such qualification or authorization. The jurisdictions in which each of the Borrower and each of its Subsidiaries is qualified to do business as a foreign corporation are listed on SCHEDULE 5.1(a). (b) CAPITALIZATION; SHAREHOLDER AGREEMENTS. The outstanding capital stock of the Borrower has been duly and validly issued and is fully paid and nonassessable, and the number and owners of such shares of capital stock of the Borrower are set forth on SCHEDULE 5.1(b). The issuance and sales of the Borrower's capital stock have been registered or qualified under applicable federal and state securities laws or are exempt therefrom. Except as set forth on Schedule 5.1(b), there are no shareholders agreements, options, subscription agreements or other agreements or understandings to which the Borrower is a party in effect with respect to the capital stock of the Borrower, including, without limitation, agreements providing for special voting requirements or arrangements for approval of corporate actions or other matters relating to corporate governance or restrictions on share transfer or providing for the issuance of any securities convertible into shares of the capital stock of the Borrower, any warrants or other rights to acquire any shares or securities convertible into such shares, or any agreement that obligates the Borrower, either by its terms or at the election of any other Person, to repurchase such shares under any circumstances. (c) SUBSIDIARIES. SCHEDULE 5.1(c) correctly sets forth the name of each Subsidiary of the Borrower, its jurisdiction of incorporation, the name of its immediate parent or parents, and the percentage of its issued and outstanding securities owned by the Borrower or any other Subsidiary of the Borrower and indicating whether such Subsidiary is a Consolidated Subsidiary. Except as set forth on SCHEDULE 5.1(c), (i) no Subsidiary of the Borrower has issued any securities convertible into shares of such Subsidiary's capital stock or any options, warrants or other rights to acquire any shares or securities convertible into such shares, (ii) the outstanding stock and securities of each Subsidiary of the Borrower are owned by the Borrower or a Wholly Owned Subsidiary of the Borrower, or by the Borrower and one or more of its Wholly Owned Subsidiaries, free and clear of all Liens (other than Permitted Liens), warrants, options and rights of others of any kind whatsoever, and 62 (iii) the Borrower has no Subsidiaries. The outstanding capital stock of each Subsidiary of the Borrower has been duly and validly issued and is fully paid and nonassessable by the issuer, and the number and owners of the shares of such capital stock are set forth on Schedule 5.1(c). (d) AUTHORIZATION OF AGREEMENT, NOTES, LOAN DOCUMENTS AND BORROWING. The Borrower has the right and power, and has taken all necessary action to authorize it, to execute, deliver and perform this Agreement and each of the Loan Documents in accordance with their respective terms. This Agreement and each of the Loan Documents have been duly executed and delivered by the duly authorized officers of the Borrower and each is, or each when executed and delivered in accordance with this Agreement will be, a legal, valid and binding obligation of the Borrower, enforceable in accordance with its terms. (e) COMPLIANCE OF AGREEMENT, NOTES, LOAN DOCUMENTS AND BORROWING WITH LAWS, ETC. Except as set forth on SCHEDULE 5.1(e), the execution, delivery and performance of this Agreement and each of the Loan Documents in accordance with their respective terms and the borrowings hereunder do not and will not, by the passage of time, the giving of notice or otherwise, (i) require any Governmental Approval or violate any Applicable Law relating to the Borrower or any of its Subsidiaries, (ii) conflict with, result in a breach of or constitute a default under the articles or certificate of incorporation, by-laws or any shareholders' agreement of the Borrower or any of its Subsidiaries, (iii) conflict with, result in a breach of or constitute a default under any material provisions of any indenture, agreement or other instrument to which the Borrower or any of its Subsidiaries is a party or by which the Borrower, any of its Subsidiaries or any of the Borrower's or such Subsidiaries' property may be bound or any Governmental Approval relating to the Borrower or any of its Subsidiaries, or (iv) result in or require the creation or imposition of any Lien upon or with respect to any property now owned or hereafter acquired by the Borrower other than the Security Interest. (f) BUSINESS. Each of the Borrower and each Subsidiary is engaged principally in the business of manufacturing or assembling and selling (i) precision aerospace components for commercial and military aircraft, or (ii) resilient floor covering accessories or (iii) engineered commercial products for intermediate and end markets or other businesses reasonably related or complimentary thereto. 63 (g) COMPLIANCE WITH LAW; GOVERNMENTAL APPROVALS. (i) Except as set forth in SCHEDULE 5.1(g), the Borrower and each of its Subsidiaries, to the best of the knowledge of the Borrower, (A) has all Governmental Approvals, including permits relating to federal, state and local Environmental Laws, ordinances and regulations, required by any Applicable Law for it to conduct its business, each of which is in full force and effect, is final and not subject to any pending review on appeal and is not the subject of any pending or, to the knowledge of the Borrower, threatened attack by other direct or collateral proceeding, and (B) is in compliance with each Governmental Approval applicable to it and in compliance with all other Applicable Laws relating to it, including, without being limited to, all Environmental Laws and all occupational health and safety laws applicable to the Borrower, any of its Subsidiaries or their respective properties, except for failures to obtain or maintain Governmental Approvals and instances of noncompliance which could not, singly or in the aggregate, reasonably be expected to cause a Default or Event of Default or have a Materially Adverse Effect and in respect of which reserves against the Borrower's or such Subsidiary's reasonably anticipated liability have been established on the books of the Borrower or such Subsidiary, as applicable, to the extent required by GAAP. (ii) Without limiting the generality of the above, except as disclosed on a report delivered pursuant to Sections 4.1(a)(13) or (14) or with respect to matters which could not reasonably be expected to have, singly or in the aggregate, a Materially Adverse Effect, to the best of the knowledge of the Borrower, except as set forth on Schedule 5.1(g): (A) the operations of the Borrower and each of its Subsidiaries comply in all material respects with all applicable environmental, health and safety requirements of Applicable Law; (B) the Borrower and each of its Subsidiaries has obtained all environmental, health and safety permits necessary for its operation, and all such permits are in good standing and the Borrower and each of its Subsidiaries is in compliance in all material respects with all terms and conditions of such permits; (C) neither the Borrower nor any of its Subsidiaries nor any of their respective present or past property or operations are subject to any order from or agreement with any public authority or private party respecting (x) any environmental, health or safety requirements of Applicable Law, (y) any Remedial Action, or (z) any liabilities and costs arising from the Release or threatened Release of a Contaminant into the environment; 64 (D) none of the operations of the Borrower or of any of its Subsidiaries is subject to any judicial or administrative proceeding alleging a violation of any environmental, health or safety requirement of Applicable Law; (E) none of the present or past operations of the Borrower or any of its Subsidiaries is the subject of any investigation by any public authority evaluating whether any Remedial Action is needed to respond to a Release or threatened Release of a Contaminant into the environment; (F) [RESERVED]; (G) neither the Borrower nor any of its Subsidiaries has filed any notice under any requirement of Applicable Law reporting a Release of a Contaminant into the environment; (H) except in compliance in all material respects with applicable Environmental Laws, during the course of the Borrower's or any of its Subsidiaries' ownership of or operations on the Real Estate, there has been no (1) generation, treatment, recycling, storage or disposal of hazardous waste, as that term is defined under 40 CFR Part 261 or any state equivalent, (2) use of underground storage tanks or surface impoundments, (3) use of asbestos-containing materials, or (4) use of polychlorinated biphenyls (PCBs) used in hydraulic oils, electrical transformers or other equipment; (I) neither the Borrower nor any of its Subsidiaries has entered into any negotiations or agreements with any Person (including, without limitation, any prior owner of any of the Real Estate or other property of the Borrower or any of its Subsidiaries) relating to any Remedial Action or environment-related claim; (J) neither the Borrower nor any of its Subsidiaries has received any notice or claim to the effect that it is or may be liable to any Person as a result of the Release or threatened Release of a Contaminant into the environment; (K) neither the Borrower nor any of its Subsidiaries has any material contingent liability in connection with any Release or threatened Release of any Contaminant into the environment; (L) no Environmental Lien has attached to any of the Real Estate or other property of the Borrower or of any of its Subsidiaries; (M) the presence and condition of all asbestos-containing material which is on or part of the Real Estate (excluding any raw materials used in the manufacture of products or products themselves) do not violate in any material respect any currently applicable requirement of Applicable Law; and 65 (N) since 1989, neither the Borrower nor any of its Subsidiaries has manufactured, distributed or sold products which contain asbestos-containing material. (iii) The Borrower has notified the Lenders and the Agent of the receipt by the Borrower or by any of its Subsidiaries of any notice of a material violation of any Environmental Laws and occupational health and safety laws applicable to the Borrower, any of its Subsidiaries or any of their respective properties. (h) TITLE TO PROPERTIES. Except as set forth in SCHEDULE 5.1(h), the Borrower and each of its Subsidiaries has valid and legal title to or leasehold interest in all personal property and Real Estate owned and other assets used in its business, including those reflected on the most recent balance sheet of the Borrower delivered pursuant to SECTION 5.1(n). (i) LIENS. Except as set forth in SCHEDULE 5.1(i), none of the properties and assets of the Borrower or any Subsidiary of the Borrower is subject to any Lien, except Permitted Liens. Other than the Financing Statements, no financing statement under the Uniform Commercial Code of any State or other instrument evidencing a Lien which names the Borrower or any Subsidiary of the Borrower as debtor has been filed (and has not been terminated) in any State or other jurisdiction, and neither the Borrower nor any Subsidiary of the Borrower has signed any agreement (that remains in effect) authorizing any secured party thereunder to file any such financing statement or instrument, except to perfect those Liens listed on Schedule 5.1(i) and consensual Permitted Liens. No financing statement under the Uniform Commercial Code of any State or other instrument evidencing a Lien which names JFLCo as debtor has been filed (and has not been terminated) in any State or other jurisdiction. (j) INDEBTEDNESS AND GUARANTIES. SCHEDULE 5.1(j) is a complete and correct listing of all (i) Debt and (ii) Guaranties of each of the Borrower and each of its Subsidiaries (other than the Secured Obligations). Each of the Borrower and its Subsidiaries has performed and is in compliance with all of the material terms of such Debt and Guaranties and all instruments and agreements relating thereto, and no default or event of default, or event or condition which with notice or lapse of time, or both, would constitute such a default or event of default, exists with respect to any such Debt or Guaranty as of the Effective Date. (k) LITIGATION. Except as set forth on SCHEDULE 5.1(k), there are no actions, suits or proceedings pending (nor, to the knowledge of the Borrower, are there any actions, suits or proceedings threatened) against the Borrower or such Subsidiaries or any of the Borrower's or any of its Subsidiaries' properties in any court or before any arbitrator of any kind or before or by any governmental body, except actions, suits or proceedings which could not reasonably be expected, singly or in the aggregate, to have a Materially Adverse Effect, and there are no strikes or walkouts in progress, pending or, to the best of the Borrower's knowledge contemplated, relating to any labor contracts to which the Borrower or any of its Subsidiaries is a party, relating to any labor contracts being negotiated, or otherwise, which would have a Materially Adverse Effect. 66 (l) TAX RETURNS AND PAYMENTS. Except as set forth on SCHEDULE 5.1(l), all United States federal, state and local as well as foreign national, provincial and all material local and other tax returns of the Borrower and each of its Subsidiaries required by Applicable Law to be filed have been duly filed, and all United States federal, state and local and foreign national, provincial and local and other taxes, assessments and other governmental charges or levies upon the Borrower and each of its Subsidiaries and the Borrower's and any of its Subsidiaries' property, income, profits and assets which are due and payable have been paid, except any such nonpayment which is at the time permitted under SECTION 8.6. The charges, accruals and reserves on the books of the Borrower and each of its Subsidiaries in respect of United States federal, state and local and foreign national, provincial and local taxes for all fiscal years and portions thereof since 1983 (the last year in respect of which the Internal Revenue Service has examined and closed the income tax returns for the Borrower) are in the judgment of the Borrower adequate, and the Borrower knows of no reason to anticipate any additional assessments for any of such years which, singly or in the aggregate, might have a Materially Adverse Effect. (m) BURDENSOME PROVISIONS. Neither the Borrower nor any of its Subsidiaries is a party to any indenture, agreement, lease or other instrument, or subject to any charter or corporate restriction, Governmental Approval or Applicable Law compliance with the terms of which could reasonably be expected to have a Materially Adverse Effect. (n) FINANCIAL STATEMENTS. (i) The Borrower has furnished to the Agent and the Lenders (A) copies of the audited balance sheet of Burke and its consolidated Subsidiaries as of January 3, 1997, and the related statements of income, cash flow and shareholders' equity for the Fiscal Year then ended, reported on by Ernst & Young LLP, which financial statements are complete and correct and present fairly in all material respects in accordance with GAAP consistently applied the financial position of Burke and its consolidated Subsidiaries as of January 3, 1997, and the results of operations of Burke and its consolidated Subsidiaries for the Fiscal Year then ended and (B) copies of the unaudited balance sheet of Burke and its consolidated Subsidiaries as at July 4, 1997, and the related statements of income and cash flow for the six-month period then ended, which financial statements are complete and correct and present fairly in all material respects in accordance with GAAP, (but for the absence of notes and subject to year-end audit adjustments) consistently applied, the financial position of Burke and its consolidated Subsidiaries as at July 4, 1997 and the results of operations of Burke and its consolidated Subsidiaries for the six-month period then ended. (ii) The Borrower has furnished to the Agent and the Lenders copies of the Pro Forma. The Pro Forma is complete and presents fairly in all material respects, on a PRO FORMA basis, the financial position of the Borrower and its consolidated Subsidiaries as at July 4, 1997 and as of the Effective Date there has been no material change therein. 67 (iii) The Borrower has furnished to the Agent and the Lenders copies of the Projections. The Projections have been prepared by or under the supervision of the Borrower, are complete and have been prepared on the basis of reasonable assumptions and in good faith, utilizing historical financial information that was prepared in accordance with GAAP. (iv) Except as disclosed or reflected in the financial statements described in CLAUSES (i) and (ii) above, the Borrower does not have any material liabilities, contingent or otherwise, and there were no material unrealized or anticipated losses of the Borrower. (o) ADVERSE CHANGE. Since the date of the last financial statements delivered to the Agent pursuant to SECTION 5.1(n), after giving effect to the transactions reflected in the Pro Forma, (i) no material adverse change has occurred in the business, assets, liabilities, financial condition, or results of operations of the Borrower, and (ii) no event has occurred or failed to occur which has had, or may have, singly or in the aggregate, a Materially Adverse Effect. (p) ERISA. Neither the Borrower nor any Related Company maintains or contributes to any Benefit Plan other than those listed on SCHEDULE 5.1(p). Each such Benefit Plan is in substantial compliance with ERISA and the Code, including but not limited to those provisions thereof relating to reporting and disclosure, and neither the Borrower nor any Related Company has received any notice (that has not been withdrawn or corrected) asserting that a Benefit Plan is not in compliance with ERISA. No material liability to the PBGC or to a Multiemployer Plan has been, or is expected to be, incurred by the Borrower or any Related Company. Each Benefit Plan intended to qualify under Section 401(a) of the Code so qualifies and any related trust is exempt from federal income tax under Section 501(a) of the Code. A favorable determination letter from the IRS has been issued (or applied for) with respect to each such plan and trust and nothing has occurred since the date of any such determination letter that has been issued, that would adversely affect such qualification of tax-exempt status. No Benefit Plan subject to the minimum funding standards of the Code has failed to meet such standards. Neither the Borrower nor any Related Company has transferred any pension plan liability in a transaction that could be subject to Sections 4069 or 4212(c) of ERISA. There are no material pending or threatened claims against any Benefit Plan, other than claims for benefits. No non-exempt prohibited transaction within the meaning of Section 4975 of the Code or Section 406 of ERISA has occurred with respect to a Benefit Plan that would result in any material Liability to the Borrower. Except under plans listed on SCHEDULE 5.1(p), no employee or former employee of the Borrower or any Related Company is or may become entitled to any benefit under a Benefit Plan that is a "welfare plan" within the meaning of Section 3(1) of ERISA following such employee's termination of employment. Except as set forth on SCHEDULE 5.1(p), each such welfare plan that is a group health plan has been operated in compliance with the provisions of Section 4980B of the Code and Sections 601-609 of ERISA and any applicable provisions of state law that are similar. 68 (q) ABSENCE OF DEFAULTS. Neither the Borrower nor any of its Subsidiaries is in default under its articles or certificate of incorporation or by-laws and no event has occurred, which has not been remedied, cured or waived, (i) which constitutes a Default or an Event of Default, or (ii) which constitutes, or which with the passage of time or giving of notice, or both, would constitute, a default or event of default by the Borrower or any of its Subsidiaries under any material agreement (other than this Agreement) or judgment, decree or order to which the Borrower or any of its Subsidiaries is a party or by which the Borrower, any of its Subsidiaries or any of the Borrower's or any of its Subsidiaries' properties may be bound or which would require the Borrower or any of its Subsidiaries to make any payment under any thereof prior to the scheduled maturity date therefor, except (A) in the case only of any such agreement, for alleged defaults which are being contested in good faith by appropriate proceedings and with respect to which reserves in respect of the Borrower's or such Subsidiary's reasonably anticipated liability have been established on the books of the Borrower or such Subsidiary in accordance with GAAP, or (B) which would not have a Materially Adverse Effect. (r) ACCURACY AND COMPLETENESS OF INFORMATION. All written information other than annual budgets, reports and other papers and data produced by or on behalf of J.F. Lehman & Company, JFLEI, Burke or the Borrower and furnished by J.F. Lehman & Company, JFLEI, Burke or the Borrower to the Agent or any Lender were, at the time the same were so furnished, complete and correct in all material respects, to the extent necessary to give the recipient a true and accurate knowledge of the subject matter. No fact is known to the Borrower, other than general economic conditions, which has had, or may in the future have (so far as the Borrower can reasonably foresee), a Materially Adverse Effect which has not been set forth in the financial statements or disclosure delivered prior to the Effective Date, in each case referred to in Section 5.1(n), or in such written information, reports or other papers or data or otherwise disclosed in writing to the Agent and the Lenders prior to the Agreement Date. No document other than annual budgets furnished or written statement made to the Agent or any Lender by J.F. Lehman & Company, Burke or the Borrower in connection with the negotiation, preparation or execution of this Agreement or any of the Loan Documents contains or will contain any untrue statement of a fact (that has not been corrected and superseded prior to the Agreement Date) material to the creditworthiness of the Borrower or omits or will omit to state a material fact necessary in order to make the statements contained therein not misleading. (s) SOLVENCY. In each case after giving effect to the Debt represented by the Loans outstanding and to be incurred, the transactions contemplated by this Agreement, and the Recap Documents, the Borrower and each of its Subsidiaries is Solvent. 69 (t) RECEIVABLES. (i) STATUS. (A) Each Receivable reflected as an Eligible Receivable in the computations included in any Borrowing Base Certificate meets the criteria enumerated in CLAUSES (a) through (p) of the definition of Eligible Receivables, except as disclosed in such Borrowing Base Certificate or as disclosed in a timely manner in a subsequent Borrowing Base Certificate or otherwise in writing to the Agent. (B) The Borrower has no knowledge of any fact or circumstance not disclosed to the Agent in a Borrowing Base Certificate or otherwise in writing which would impair the validity or collectibility of any Receivable of $50,000 or more or of Receivables which (regardless of the individual amount thereof) aggregate $100,000 or more. (ii) CHIEF EXECUTIVE OFFICE. As of the Effective Date, the chief executive office of the Borrower and the books and records relating to the Receivables are located at the address or addresses set forth on SCHEDULE 5.1(t); Burke has not maintained its chief executive office or books and records relating to any Receivables at any other address at any time during the year immediately preceding the Agreement Date except as disclosed on SCHEDULE 5.1(t). (u) INVENTORY. (i) SCHEDULE OF INVENTORY. All Inventory included as Eligible Inventory in any Schedule of Inventory or Borrowing Base Certificate delivered to the Agent pursuant to Section 7.13 meets the criteria enumerated in clauses (a) through (g) of the definition of Eligible Inventory, except as disclosed in such Schedule of Inventory or Borrowing Base Certificate or in a subsequent Schedule of Inventory or Borrowing Base Certificate, or as otherwise specifically disclosed in writing to the Agent. (ii) CONDITION. All Inventory is in good condition (ordinary wear and tear excepted), meets all standards imposed by any governmental agency, or department or division thereof, having regulatory authority over such goods, their use or sale, and is currently either usable or salable in the normal course of the Borrower's business, except to the extent reserved against in the financial statements referred to in Section 5.1(n) or delivered pursuant to ARTICLE 9 or as disclosed on a Schedule of Inventory delivered to the Agent pursuant to SECTION 7.13(b). (iii) LOCATION. As of the Effective Date, all Inventory is located on the premises set forth on SCHEDULE 5.1(u) or is Inventory in transit to one of such locations, except as otherwise disclosed in writing to the Agent, and Burke has not, in the last year, located such Inventory at premises other than those set forth on SCHEDULE 5.1(u). 70 (v) EQUIPMENT. As of the Effective Date, all Equipment is in good order and repair (ordinary wear and tear excepted) in all material respects and is located on the premises set forth on SCHEDULE 5.1(v) and has been so located at all times during the last year, except as set forth on SCHEDULE 5.1(v). (w) REAL PROPERTY. As of the Effective Date, the Borrower owns no Real Estate and leases no Real Estate other than that described on SCHEDULE 5.1(w). (x) CORPORATE AND FICTITIOUS NAMES. Except as otherwise disclosed on SCHEDULE 5.1(x), during the five-year period preceding the Agreement Date, neither the Borrower nor any predecessor thereof has been known as or used any corporate or fictitious name other than the corporate name of the Borrower on the Effective Date. (y) FEDERAL RESERVE REGULATIONS. Neither the Borrower nor any of its Subsidiaries is engaged and none will engage, principally or as one of its important activities, in the business of extending credit for the purpose of "purchasing" or "carrying" any "margin stock" (as each of the quoted terms is defined or used in Regulations G and U of the Board of Governors of the Federal Reserve System). No part of the proceeds of any of the Loans will be used for so purchasing or carrying margin stock or, in any event, for any purpose which violates, or which would be inconsistent with, the provisions of Regulation G, T, U or X of such Board of Governors. If requested by the Agent or any Lender, the Borrower will furnish to the Agent and the Lenders a statement or statements in conformity with the requirements of said Regulation G, T, U or X to the foregoing effect. (z) INVESTMENT COMPANY ACT. The Borrower is not an "investment company" or a company "controlled" by an "investment company" (as each of the quoted terms is defined or used in the Investment Company Act of 1940, as amended). (aa) EMPLOYEE RELATIONS. The Borrower and each of its Subsidiaries is not, except as set forth on SCHEDULE 5.1(aa), party to any collective bargaining agreement nor has any labor union been recognized as the representative of the Borrower's or any of its Subsidiaries' employees, and, as of the Effective Date, the Borrower knows of no pending or threatened strikes, work stoppage or other labor disputes involving the Borrower's or any of its Subsidiaries' employees. (bb) PROPRIETARY RIGHTS. SCHEDULE 5.1(bb) sets forth a correct and complete list of all of the Proprietary Rights. None of the Proprietary Rights is subject to any licensing agreement or similar arrangement except as set forth on SCHEDULE 5.1(bb) or as entered into in the sale or distribution of the Borrower's Inventory in the ordinary course of business. To the best of the Borrower's knowledge, none of the Proprietary Rights infringes on or conflicts with any other Person's property, and no other Person's property infringes on or conflicts with the Proprietary Rights, in any manner that would have a Materially Adverse Effect. The Proprietary Rights described on SCHEDULE 5.1(bb) constitute all of the property of such type necessary to the current and anticipated future conduct of the Borrower's business. 71 (cc) TRADE NAMES. All trade names or styles under which the Borrower sells Inventory or Equipment or creates Receivables, or to which instruments in payment of Receivables are made payable, are listed on SCHEDULE 5.1(cc). (dd) BANK ACCOUNTS, LOCKBOXES, ETC. SCHEDULE 5.1(dd) is a complete and correct list of all checking accounts, deposit accounts, lockboxes and other bank accounts (whether general or special) maintained by the Borrower and its Subsidiaries. SECTION 5.2 SURVIVAL OF REPRESENTATIONS AND WARRANTIES, ETC. All representations and warranties set forth in this ARTICLE 5 and all statements contained in any certificate, financial statement, or other instrument, delivered by or on behalf of the Borrower pursuant to or in connection with this Agreement or any of the Loan Documents (including, but not limited to, any such representation, warranty or statement made in or in connection with any amendment thereto) shall constitute representations and warranties made under this Agreement. All representations and warranties made under this Agreement shall be made or deemed to be made at and as of the Agreement Date, at and as of the Effective Date and at and as of the date of each Loan, except that representations and warranties which, by their terms are applicable only to one such date shall be deemed to be made only at and as of such date. All representations and warranties made or deemed to be made under this Agreement shall survive and not be waived by the execution and delivery of this Agreement, any investigation made by or on behalf of the Lender or any borrowing hereunder. 72 ARTICLE 6 SECURITY INTEREST SECTION 6.1 SECURITY INTEREST. (a) To secure the payment, observance and performance of the Secured Obligations, the Borrower hereby mortgages, pledges and assigns all of the Collateral to the Agent, for the benefit of itself as Agent and the Lenders and Affiliates of the Lenders, and grants to the Agent, for the benefit of itself as Agent and the Lenders, including NationsBank as issuer of the Letters of Credit and the lender of Non-Ratable Loans, and Affiliates of the Lenders, a continuing security interest in, and a continuing Lien upon, all of the Collateral. (b) As additional security for all of the Secured Obligations, the Borrower grants to the Agent, for the benefit of itself as Agent and the Lenders and Affiliates of the Lenders, including NationsBank as issuer of the Letters of Credit and the lender of Non-Ratable Loans, a security interest in, and assigns to the Agent, for the benefit of itself as Agent and the Lenders and Affiliates of the Lenders, all of the Borrower's right, title and interest in and to, any deposits or other sums at any time credited by or due from each Lender and each Affiliate of a Lender to the Borrower, or credited by or due from any participant of any Lender to the Borrower, with the same rights therein as if the deposits or other sums were credited by or due from such Lender. The Borrower hereby authorizes each Lender and each Affiliate of such Lender and each participant to pay or deliver to the Agent, for the account of the Lenders, without any necessity on the Agent's or any Lender's part to resort to other security or sources of reimbursement for the Secured Obligations, at any time during the continuation of any Event of Default or in the event that the Agent should make demand for payment hereunder in accordance with the terms hereof and without further notice to the Borrower (such notice being expressly waived), any of the aforesaid deposits (general or special, time or demand, provisional or final) or other sums for application to any Secured Obligation, irrespective of whether any demand has been made or whether such Secured Obligation is mature, and the rights given the Agent, the Lenders, their Affiliates and participants hereunder are cumulative with such Person's other rights and remedies, including other rights of set-off. The Agent will promptly notify the Borrower of its receipt of any such funds for application to the Secured Obligations, but failure to do so will not affect the validity or enforceability thereof. The Agent may give notice of the above grant of a security interest in and assignment of the aforesaid deposits and other sums, and authorization, to, and make any suitable arrangements with, any Lender, any such Affiliate of any Lender or participant for effectuation thereof, and the Borrower hereby irrevocably appoints the Agent as its attorney to collect any and all such deposits or other sums to the extent any such payment is not made to the Agent or any Lender by such Lender, Affiliate or participant. SECTION 6.2 CONTINUED PRIORITY OF SECURITY INTEREST. (a) The Security Interest granted by the Borrower shall at all times be valid, perfected and enforceable against the Borrower and all third parties in accordance with the terms of this Agreement, as security for the Secured Obligations, and the Collateral shall not at any time be 73 subject to any Liens that are prior to, on a parity with or junior to the Security Interest, other than Permitted Liens. (b) The Borrower shall, at its sole cost and expense, take all action that may be necessary or desirable, or that the Agent may reasonably request, so as at all times to maintain the validity, perfection, enforceability and rank of the Security Interest in the Collateral in conformity with the requirements of SECTION 6.2(a), or to enable the Agent and the Lenders to exercise or enforce their rights hereunder, including, but not limited to: (i) paying all taxes, assessments and other claims lawfully levied or assessed on any of the Collateral, except to the extent that such taxes, assessments and other claims constitute Permitted Liens, (ii) using reasonable efforts to obtain after the Agreement Date, landlords', mortgagees', bailees', warehousemen's or processors' releases, subordinations or waivers, and mechanics' releases, subordinations or waivers, (iii) delivering to the Agent, for the benefit of the Lenders, endorsed or accompanied by such instruments of assignment as the Agent may specify, and stamping or marking, in such manner as the Agent may specify, any and all chattel paper, instruments, letters and advices of guaranty and documents evidencing or forming a part of the Collateral, and (iv) executing and delivering financing statements, pledges, designations, hypothecations, notices and assignments in each case in form and substance satisfactory to the Agent relating to the creation, validity, perfection, maintenance or continuation of the Security Interest under the Uniform Commercial Code or other Applicable Law; PROVIDED, HOWEVER, that after the Effective Date, unless a Default or Event of Default exists or the Agent requests that specific action be taken by the Borrower with respect to material Collateral, the Borrower shall not be required to take any action other than the execution and filing of Financing Statements, filings in the United States Patent and Trademark Office, endorsement and delivery of shares of Subsidiaries pursuant to appropriate pledge agreements and stock transfer powers and endorsement and delivery of instruments and chattel paper having a value in excess of $100,000. (c) The Agent is hereby authorized to file one or more financing or continuation statements or amendments thereto without the signature of or in the name of the Borrower for any purpose described in SECTION 6.2(b). The Agent will give the Borrower notice of the filing of any such statements or amendments, which notice shall specify the locations where such statements or amendments were filed. A carbon, photographic, xerographic or other reproduction of this Agreement or of any of the Security Documents or of any financing statement filed in connection with this Agreement is sufficient as a financing statement, to the extent permitted by Applicable Law. 74 (d) The Borrower shall mark its books and records as directed by the Agent and as may be necessary or appropriate to evidence, protect and perfect the Security Interest and shall cause its financial statements to reflect the Security Interest. 75 ARTICLE 7 COLLATERAL COVENANTS Until the Revolving Credit Facility has been terminated and all the Secured Obligations have been paid in full, unless the Required Lenders shall otherwise consent in the manner provided in SECTION 14.9: SECTION 7.1. COLLECTION OF RECEIVABLES. (a) At the request of the Agent, the Borrower will cause all monies, checks, notes, drafts and other payments relating to or constituting proceeds of trade accounts receivable to be forwarded to a lockbox for deposit in a blocked account in accordance with the procedures set out in the corresponding blocked account agreement (which shall be in form and substance satisfactory to the Agent). The Borrower will promptly cause all monies, checks, notes, drafts and other payments relating to or constituting proceeds of other Receivables, of any other Collateral and of any trade accounts receivable that are not forwarded to a lockbox, to be transferred to or deposited in a blocked account. In particular, the Borrower will: (i) advise each Account Debtor on trade accounts receivable to address all remittances with respect to amounts payable on account thereof to a specified lockbox, (ii) advise each other Account Debtor that makes payment to the Borrower by wire transfer, automated clearinghouse (ACH) transfer or similar means to make payment directly to a specified blocked account, and (iii) stamp all invoices relating to trade accounts receivable with a legend satisfactory to the Agent indicating that payment is to be made to the Borrower via a specified lockbox. (b) The Borrower and the Agent shall cause all collected balances in each blocked account to be transmitted daily by wire transfer, ACH transfer, depository transfer check or other means in accordance with the procedures set forth in the corresponding blocked account agreement, to the Agent at the Agent's Office: (i) for application, on account of the Secured Obligations, as provided in SECTIONS 2.3(c), 14.2, and 14.3, such credits to be entered as of the Business Day they are received if they are received prior to 1:30 p.m. and to be conditioned upon final payment in cash or solvent credits of the items giving rise to them, and (ii) with respect to the balance, so long as no Default or Event of Default has occurred and is continuing, for transfer by wire transfer, ACH transfer or depository transfer check to such account of the Borrower as the Borrower and Agent may have agreed. 76 (c) Any monies, checks, notes, drafts or other payments referred to in SUBSECTION (a) of this SECTION 7.1 which, notwithstanding the terms of such subsection, are received by or on behalf of the Borrower will be held in trust for the Agent and will be delivered to the Agent or a depository of a blocked account, as promptly as possible, in the exact form received, together with any necessary endorsements for application by the Agent directly to the Secured Obligations or, if applicable, for deposit in the blocked account maintained with such depository and processing in accordance with the terms of the corresponding blocked account agreement. SECTION 7.2 VERIFICATION AND NOTIFICATION.. The Agent shall have the right at any time and from time to time, (a) in accordance with the Agent's usual procedures, in the name of the Agent, the Lenders or in the name of the Borrower, to verify the validity, amount or any other matter relating to any Receivables by mail, telephone, telegraph or otherwise, (b) to review, audit and make extracts from all records and files related to any of the Receivables, and (c) if an Event of Default has occurred and is continuing, to notify the Account Debtors or obligors under any Receivables of the assignment of such Receivables to the Agent and to direct such Account Debtor or obligors to make payment of all amounts due or to become due thereunder directly to the Agent and, upon such notification and at the expense of the Borrower, to enforce collection of any such Receivables and to adjust, settle or compromise the amount or payment thereof, in the same manner and to the same extent as the Borrower might have done. SECTION 7.3 DISPUTES, RETURNS AND ADJUSTMENTS. (a) In the event any amounts due and owing under any Eligible Receivable for an amount in excess of $250,000 are in dispute between the Account Debtor and the Borrower, the Borrower shall provide the Agent with prompt written notice thereof. (b) The Borrower shall notify the Agent promptly of all returns and credits in excess of $250,000 in respect of any Eligible Receivable, which notice shall specify the Receivable affected. (c) The Borrower may, in the ordinary course of business unless a Default or an Event of Default has occurred and is continuing, grant any extension of time for payment of any Receivable or compromise, compound or settle the same for less than the full amount thereof, or release wholly or partly any Person liable for the payment thereof, or allow any credit or discount whatsoever thereon; PROVIDED that (i) unless the Agent otherwise consents, no such action results in the reduction of more than $500,000 in the amount payable with respect to any Eligible Receivable or of more than $750,000 with respect to all Eligible Receivables in any fiscal year of the Borrower (in each case, excluding the allowance of credits or discounts generally available to Account Debtors in the ordinary course of the Borrower's business), and (ii) the Agent is promptly notified of the amount of such adjustments and the Receivable(s) affected thereby. 77 SECTION 7.4 INVOICES. (a) The Borrower will not use any invoices other than invoices in the form delivered to the Agent prior to the Agreement Date without giving the Agent 30 days' prior notice of the intended use of a different form of invoice together with a copy of such different form. (b) Upon the request of the Agent, the Borrower shall deliver to the Agent, at the Borrower's expense, copies of customers' invoices or the equivalent, original shipping and delivery receipts or other proof of delivery, customers' statements, customer address lists, the original copy of all documents, including, without limitation, repayment histories and present status reports, relating to Receivables and such other documents and information relating to the Receivables as the Agent shall specify. SECTION 7.5 DELIVERY OF INSTRUMENTS. Subject to the provisions of SECTION 6.2(b), in the event any Receivable is at any time evidenced by a promissory note, trade acceptance or any other instrument for the payment of money, the Borrower will notify the Agent and, if requested to do so by the Agent, promptly thereafter deliver such instrument to the Agent, appropriately endorsed to the Agent, for the benefit of the Lenders. SECTION 7.6 SALES OF INVENTORY. All sales of Inventory will be made in compliance with all requirements of Applicable Law. SECTION 7.7 OWNERSHIP AND DEFENSE OF TITLE. (a) Except for Permitted Liens, the Borrower shall at all times be the sole owner or lessee of each and every item of Collateral and shall not create any lien on, or sell, lease, exchange, assign, transfer, pledge, hypothecate, grant a security interest or security title in or otherwise dispose of, any of the Collateral or any interest therein, except for sales of Inventory in the ordinary course of business, for cash or on open account or on terms of payment ordinarily extended to its customers, and except for dispositions that are otherwise expressly permitted under this Agreement. The inclusion of "proceeds" of the Collateral under the Security Interest shall not be deemed a consent by the Agent or the Lenders to any other sale or other disposition of any part or all of the Collateral. (b) The Borrower shall defend its title or leasehold interest in and to, and the Security Interest in, the Collateral against the claims and demands of all Persons. SECTION 7.8 INSURANCE. (a) The Borrower shall at all times maintain insurance on the Inventory and Equipment against loss or damage by fire, theft (excluding theft by employees), burglary, pilferage, loss in transit and such other hazards as the Agent shall reasonably specify, in amounts not to exceed those obtainable at commercially reasonable rates and under policies issued by insurers acceptable to the Agent in the exercise of its reasonable judgment. All premiums on such insurance shall be paid by the Borrower and copies of the policies delivered to the Agent. 78 The Borrower will not use or permit the Inventory or Equipment to be used in violation of Applicable Law or in any manner which might render inapplicable any insurance coverage. (b) All insurance policies required under SECTION 7.8(a) shall name the Agent, for the benefit of the Lenders, as an additional insured and shall contain loss payable clauses in the form submitted to the Borrower by the Agent, or otherwise in form and substance satisfactory to the Required Lenders, naming the Agent, for the benefit of the Lenders, as loss payee, as its interests may appear, and providing that (i) all proceeds thereunder shall be payable to the Agent, for the benefit of the Lenders, (ii) no such insurance shall be affected by any act or neglect of the insurer or owner of the property described in such policy, and (iii) such policy and loss payable clauses may be cancelled, amended or terminated only upon at least ten days' prior written notice given to the Agent. (c) Any proceeds of insurance referred to in this SECTION 7.8(a) which are paid to the Agent, for the account of the Lenders, shall be, at the option of the Required Lenders in their sole discretion, either (i) applied to replace the damaged or destroyed property, or (ii) applied to the payment or prepayment of the Secured Obligations, PROVIDED that in the event that the proceeds from any single casualty do not exceed $500,000, then, upon the Borrower's written request to the Agent, provided that no Default or Event of Default shall have occurred and be continuing, such proceeds shall be disbursed by the Agent to the Borrower pursuant to such procedures as the Agent shall reasonably establish for application to the replacement of the damaged or destroyed property. SECTION 7.9 LOCATION OF OFFICES AND COLLATERAL. (a) The Borrower will not change the location of its chief executive office or the place where it keeps its books and records relating to the Collateral or change its name, its identity or corporate structure without giving the Agent 60 days' prior written notice thereof. (b) All Inventory, other than Inventory in transit to any such location, will at all times be kept by the Borrower at the locations set forth in SCHEDULE 5.1(u) or at other locations as to which the Agent has been given prior notice and the Borrower shall have taken such actions, including the execution and filing of Financing Statements, as the Agent may require to perfect and assure the priority of the Security Interest as required by this Agreement, and shall not, without the prior written consent of the Agent, be removed therefrom except pursuant to sales of Inventory permitted under SECTION 7.7(a). (c) If any Inventory is in the possession or control of any of the Borrower's agents or processors, the Borrower shall notify such agents or processors of the Security Interest (and shall promptly provide copies of any such notice to the Agent and the Lenders) and, upon the occurrence of an Event of Default, shall instruct them (and cause them to acknowledge such 79 instruction) to hold all such Inventory for the account of the account of the Lenders, subject to the instructions of the Agent. SECTION 7.10 RECORDS RELATING TO COLLATERAL. (a) The Borrower will at all times (i) keep complete and accurate records of Inventory on a basis consistent with past practices of the Borrower so as to permit comparison of Inventory records relating to different time periods, itemizing and describing the kind, type and quantity of Inventory and the Borrower's cost thereof and a current price list for such Inventory, and (ii) keep complete and accurate records of all other Collateral on a basis consistent with past practices of the Borrower. (b) The Borrower will prepare a physical listing of all Inventory, wherever located, at least annually. SECTION 7.11 INSPECTION. The Agent and each Lender (by any of their officers, employees or agents) shall have the right, to the extent that the exercise of such right shall be within the control of the Borrower, at any time or times to (a) visit the properties of the Borrower and its Subsidiaries, inspect the Collateral and the other assets of the Borrower and its Subsidiaries and inspect and make extracts from the books and records of the Borrower and its Subsidiaries, including but not limited to management letters prepared by independent accountants, all during customary business hours at such premises; (b) discuss the Borrower's and its Subsidiaries' business, assets, liabilities, financial condition, results of operations and business prospects, insofar as the same are reasonably related to the rights of the Agent or the Lenders hereunder or under any of the Loan Documents, with the Borrower's and its Subsidiaries' (i) principal officers, (ii) independent accountants, and (iii) any other Person (except that any such discussion with any third parties shall be conducted only in accordance with the Agent's or such Lender's standard operating procedures relating to the maintenance of the confidentiality of confidential information of borrowers); and (c) verify the amount, quantity, value and condition of, or any other matter relating to, any of the Collateral (other than Receivables) and in this connection to review, audit and make extracts from all records and files related to any of the Collateral. The Borrower will deliver to the Agent, for the benefit of the Lenders, any instrument necessary for it to obtain records from any service bureau maintaining records on behalf of the Borrower. 80 SECTION 7.12 INFORMATION AND REPORTS. (a) SCHEDULE OF RECEIVABLES. The Borrower shall deliver to the Agent on or before the Effective Date and not later than the 15th day of each calendar month thereafter a Schedule of Receivables which (i) shall be as of the last Business Day of the immediately preceding Fiscal Month, (ii) shall be reconciled to the Borrowing Base Certificate as of such last Business Day, and (iii) shall set forth a detailed aged trial balance of all its then existing Receivables, specifying the names, addresses and balance due for each Account Debtor obligated on a Receivable so listed. (b) SCHEDULE OF INVENTORY. The Borrower shall deliver to the Agent on or before the Effective Date and not later than the 15th day of each calendar month thereafter a Schedule of Inventory as of the last Business Day of the immediately preceding Fiscal Month of the Borrower, itemizing and describing the kind, type and quantity of Inventory of the Borrower, the Borrower's cost thereof and the location thereof. (c) SCHEDULE OF EQUIPMENT. The Borrower shall deliver to the Agent on the Effective Date and thereafter at the request of the Agent (but not more frequently than semi-annually), a Schedule of Equipment, listing and describing the type and location of each item of the Equipment of the Borrower having an original cost greater than $10,000. (d) BORROWING BASE CERTIFICATE. The Borrower shall deliver to the Agent not later than Wednesday of each week after the Effective Date, a Borrowing Base Certificate prepared as of the close of business on the preceding Friday, PROVIDED, HOWEVER, that so long as Collateral Availability equals or exceeds $5,000,000 and no Default or Event of Default exists, the Borrowing Base Certificate shall be prepared as of the last business day of each month and be delivered on or before the 15th day of the following month. (e) NOTICE OF DIMINUTION OF VALUE. The Borrower shall give prompt notice to the Agent of any matter or event which has resulted in, or may result in, the diminution in excess of $500,000 in the value of any of its Collateral, except for any such diminution in the value of any Receivables or Inventory in the ordinary course of business which has been appropriately reserved against, as reflected in financial statements previously delivered to the Agent and the Lenders pursuant to ARTICLE 9. (f) ADDITIONAL INFORMATION. The Agent may in its discretion, during the existence of a Default or Event of Default, from time to time request that the Borrower deliver the schedules, certificates described in SECTIONS 7.12(a), (b), (c) and (d) more or less often and on different schedules than specified in such Sections and the Borrower will comply with such requests. The 81 Borrower will also furnish to the Agent and each Lender such other information with respect to the Collateral as the Agent or any Lender may from time to time reasonably request. SECTION 7.13 POWER OF ATTORNEY. The Borrower hereby appoints the Agent as its attorney, with power (a) to endorse the name of the Borrower on any checks, notes, acceptances, money orders, drafts or other forms of payment or security that may come into the Agent's or any Lender's possession, and, if an Event of Default has occurred and is continuing, (b) to sign the name of the Borrower on any invoice or bill of lading relating to any Receivable, Inventory or other Collateral, on any drafts against customers related to letters of credit, on schedules and assignments of Receivables furnished to the Agent or any Lender by the Borrower, on notices of assignment, financing statements and other public records relating to the perfection or priority of the Security Interest, verifications of account and notices to or from customers. SECTION 7.14 ASSIGNMENT OF CLAIMS ACT. Upon the request of the Agent, during the existence of a Default or Event of Default, the Borrower shall execute any documents or instruments and shall take such steps or actions reasonably required by the Agent so that all monies due or to become due under any contract with the United States of America, the District of Columbia or any state, county, municipality or other domestic or foreign governmental entity, or any department, agency or instrumentality thereof, will be assigned to the Agent, for the benefit of itself and the Lenders, and notice given thereof in accordance with the requirements of the Assignment of Claims Act of 1940, as amended, or any other laws, rules or regulations relating to the assignment of any such contract and monies due to or to become due. 82 ARTICLE 8 AFFIRMATIVE COVENANTS The Borrower covenants and agrees that the Borrower will duly and punctually pay the principal of, and interest on, and all other amounts payable with respect to, the Loans and all other Secured Obligations in accordance with the terms of the Loan Documents and that until the Revolving Credit Facility has been terminated and all the Secured Obligations have been paid in full, unless the Required Lenders shall otherwise consent in the manner provided for in Section 14.9, the Borrower will, and will cause each of its Subsidiaries to: SECTION 8.1 PRESERVATION OF CORPORATE EXISTENCE AND SIMILAR MATTERS. Preserve and maintain its corporate existence, rights, franchises, licenses and privileges in the jurisdiction of its incorporation and qualify and remain qualified as a foreign corporation and authorized to do business in each jurisdiction in which the character of its properties or the nature of its business requires such qualification or authorization. SECTION 8.2 COMPLIANCE WITH APPLICABLE LAW. Comply in all material respects with all Applicable Law relating to the Borrower or such Subsidiary except to the extent being contested in good faith by appropriate proceedings and for which reserves in respect of the Borrower's or such Subsidiary's reasonably anticipated liability have been established in accordance with GAAP. SECTION 8.3 MAINTENANCE OF PROPERTY. In addition to, and not in derogation of, the requirements of Section 7.7 and of the Security Documents, (a) protect and preserve all properties material to its business, including Propriety Rights and maintain all tangible properties in good repair, working order and condition in all material respects, subject to ordinary wear and tear, all tangible properties, and (b) from time to time make or cause to be made all needed and appropriate repairs, renewals, replacements and additions to such properties necessary for the conduct of its business, so that the business carried on in connection therewith may be properly and advantageously conducted at all times. SECTION 8.4 CONDUCT OF BUSINESS. At all times carry on its business in accordance with sound business practices and engage only in the businesses in which the Borrower is engaged on the Effective Date and businesses which are reasonably related or complimentary thereto. 83 SECTION 8.5 INSURANCE. Maintain, in addition to the coverage required by Section 7.8 and the Security Documents, insurance with responsible insurance companies against such risks and in such amounts as is customarily maintained by similar businesses or as may be required by Applicable Law, and from time to time deliver to the Agent or any Lender upon its request a detailed list of the insurance then in effect, stating the names of the insurance companies, the amounts and rates of the insurance, the dates of the expiration thereof and the properties and risks covered thereby. SECTION 8.6 PAYMENT OF TAXES AND CLAIMS. Pay or discharge when due (a) all taxes, assessments and governmental charges or levies imposed upon it or upon its income or profits or upon any properties belonging to it, except that real property AD VALOREM taxes shall be deemed to have been so paid or discharged if the same are paid before they become delinquent, and (b) all lawful claims of materialmen, mechanics, carriers, warehousemen and landlords for labor, materials, supplies and rentals which, if unpaid, might become a Lien on any properties of the Borrower; except that this SECTION 8.6 shall not require the payment or discharge of any such tax, assessment, charge, levy or claim which is being contested in good faith by appropriate proceedings and for which reserves in respect of reasonably anticipated liability have been established in accordance with GAAP. SECTION 8.7 ACCOUNTING METHODS AND FINANCIAL RECORDS. Maintain a system of accounting, and keep such books, records and accounts (which shall be true and complete), as may be required or as may be necessary to permit the preparation of financial statements in accordance with GAAP. SECTION 8.8 USE OF PROCEEDS. (a) Use the proceeds of the Loan only for working capital and general business purposes, and (b) not use any part of such proceeds to purchase or, to carry or reduce or retire or refinance any credit incurred to purchase or carry, any margin stock (within the meaning of Regulation G or U of the Board of Governors of the Federal Reserve System) or, in any event, for any purpose which would involve a violation of such Regulation G or U or of Regulation T or X of such Board of Governors, or for any purpose prohibited by law or by the terms and conditions of this Agreement. SECTION 8.9 HAZARDOUS WASTE AND SUBSTANCES; ENVIRONMENTAL REQUIREMENTS. (a) In addition to, and not in derogation of, the requirements of SECTION 8.2 and of the Security Documents, comply with all Environmental Laws and all Applicable Laws relating to occupational health and safety (except for instances of noncompliance that would not have a 84 Materially Adverse Effect or are being contested in good faith by appropriate proceedings if reserves in respect of the Borrower's or such Subsidiary's reasonably anticipated liability therefor have been established in accordance with GAAP), promptly notify the Agent of its receipt of any notice of a violation of any such Environmental Laws or other such Applicable Laws and indemnify and hold the Agent and the Lenders harmless from all loss, cost, damage, liability, claim and expense incurred by or imposed upon the Agent or any Lender on account of the Borrower's failure to perform its obligations under this SECTION 8.9. (b) Whenever the Borrower gives notice to the Agent pursuant to this SECTION 8.9 or otherwise with respect to a matter that reasonably could be expected to result in liability to the Borrower or any Subsidiary in excess of $1,000,000 in the aggregate, the Borrower shall, at the Agent's request and the Borrower's expense (i) cause an independent environmental engineer acceptable to the Agent to conduct an assessment, including tests where necessary, of the site where the noncompliance or alleged noncompliance with Environmental Laws has occurred and prepare and deliver to the Agent a report setting forth the results of such assessment, a proposed plan to bring the Borrower (or such Subsidiary) into compliance with such Environmental Laws (if such assessment indicates noncompliance) and an estimate of the costs thereof, and (ii) provide to the Agent a supplemental report of such engineer whenever the scope of the noncompliance, or the response thereto or the estimated costs thereof, shall materially adversely change. 85 ARTICLE 9 INFORMATION Until the Revolving Credit Facility has been terminated and all the Secured Obligations have been paid in full, unless the Required Lenders shall otherwise consent in the manner set forth in SECTION 14.9, the Borrower will furnish to the Agent and to each Lender at its offices then designated for notices pursuant to SECTION 14.1, the statements, reports, certificates, and other information provided for in this ARTICLE 9. All written information, reports, statements and other papers and data furnished to the Agent or any Lender by or at the request of the Borrower, whether pursuant to this ARTICLE 9 or any other provision of this Agreement or of any other Loan Document, shall be, at the time the same is so furnished, complete and correct in all material respects to the extent necessary to give the Agent and the Lenders true and accurate knowledge of the subject matter. Specifically, the Borrower will so furnish: SECTION 9.1 FINANCIAL STATEMENTS. (a) AUDITED YEAR-END STATEMENTS. As soon as available, but in any event within 90 days after the end of each Fiscal Year of the Borrower, copies of the consolidating and consolidated balance sheets of the Borrower and its Consolidated Subsidiaries as at the end of such Fiscal Year and the related statements of income, shareholders' equity and cash flows for such Fiscal Year, in each case setting forth in comparative form the figures for the previous Fiscal Year of the Borrower (or of Burke), reported on, as to such consolidated statements, without qualification, by Ernst & Young, LLP or other independent certified public accountants of nationally recognized standing; and (b) MONTHLY FINANCIAL STATEMENTS. As soon as available after the end of each Fiscal Month, but in any event within 30 days after the end of each Fiscal Month, copies of the unaudited consolidated and consolidating balance sheets of the Borrower and its Consolidated Subsidiaries as at the end of such Fiscal Month and the related unaudited consolidated and consolidating statements of income and cash flows for the Borrower and its Consolidated Subsidiaries for such Fiscal Month and for the portion of the Fiscal Year through such Fiscal Month, certified by a Financial Officer of the Borrower as presenting fairly in all material respects the financial condition and results of operations of the Borrower (subject to normal year-end audit adjustments) for the applicable period(s); all such financial statements to be complete and correct in all material respects and prepared in accordance with GAAP (except, with respect to interim financial statements, for the omission of notes and for the effect of normal year-end audit adjustments) applied consistently throughout the periods reflected therein; PROVIDED, HOWEVER, that consolidating financial statements shall not be required with respect to the Borrower and any Consolidated Subsidiary where such Consolidated Subsidiary does not own at least 10% in value of the consolidated assets of the Borrower and its Consolidated Subsidiaries or does not produce at least 10% of the consolidated Net Income of the Borrower and its Consolidated Subsidiaries. 86 (c) ANNUAL BUDGET. As soon as available, but in any event prior to January 31 of each Fiscal Year, the budget (including the Capital Expenditure plan) of the Borrower and its Consolidated Subsidiaries for such Fiscal Year. SECTION 9.2 ACCOUNTANTS' CERTIFICATE. Together with the financial statements referred to in SECTION 9.1(A), a certificate of such accountants addressed to the Agent, (a) stating that in making the examination necessary for the certification of such financial statements, nothing has come to their attention to lead them to believe that any Default or Event of Default exists and, in particular, they have no knowledge of any Default or Event of Default or, if such is not the case, specifying such Default or Event of Default and its nature, and (b) having attached the calculations, prepared by the Borrower and reviewed by such accountants, required to establish whether or not the Borrower is in compliance with the covenants contained in SECTIONS 10.1, 10.2, 10.5, 10.10 and 10.11, as at the date of such financial statements. SECTION 9.3 OFFICER'S CERTIFICATE. At the time that the Borrower furnishes the financial statements pursuant to SECTION 9.1(B) for any Fiscal Month that is the last Fiscal Month of a Fiscal Quarter, a certificate of the President of the Borrower or a Financial Officer (a) setting forth as at the end of such Fiscal Quarter or Fiscal Year, as the case may be, the calculations required to establish whether or not the Borrower was in compliance with the requirements of Sections 10.1, 10.2, 10.5, 10.10 and 10.11, as at the end of each respective period, (b) in the event that there are any Secured Obligations outstanding hereunder, stating that the information on the schedules to this Agreement is complete and accurate as of the date of such certificate or, if such is not the case, attaching to such certificate updated schedules in accordance with the provisions of SECTION 9.7, and (c) stating that, based on a reasonably diligent examination, no Default or Event of Default exists, or, if such is not the case, specifying such Default or Event of Default and its nature, when it occurred, whether it is continuing and the steps being taken by the Borrower with respect to such Default or Event of Default. SECTION 9.4 COPIES OF OTHER REPORTS. (a) Promptly upon receipt thereof, copies of all reports, if any, submitted to the Borrower or its Board of Directors by its independent public accountants, including, without limitation, any management report. (b) As soon as practicable, copies of all registration statements and all regular or periodic reports which the Borrower shall file with the Securities and Exchange Commission or any successor commission. 87 (c) From time to time and as soon as reasonably practicable following each request, such forecasts, data, certificates, reports, statements, opinions of counsel, documents or further information regarding the business, assets, liabilities, financial condition, results of operations or business prospects of the Borrower or any of its Subsidiaries as the Agent or any Lender may reasonably request and that the Borrower has or (except in the case of legal opinions relating to the perfection of the Security Interest in any material Collateral) without unreasonable expense can obtain; PROVIDED, HOWEVER, that the Lenders shall, to the extent reasonably practicable, coordinate examinations of the Borrower's records by their respective internal examiners. The rights of the Agent and the Lenders under this SECTION 9.4 are in addition to and not in derogation of their rights under any other provision of this Agreement or of any other Loan Document. (d) If requested by the Agent or any Lender, the Borrower will furnish to the Agent and the Lenders statements in conformity with the requirements of Federal Reserve Form G-3 or U-1 referred to in Regulation G and U, respectively, of the Board of Governors of the Federal Reserve System. SECTION 9.5 NOTICE OF LITIGATION AND OTHER MATTERS. Prompt notice of: (a) the commencement, to the extent the Borrower is aware of the same, of all proceedings and investigations by or before any governmental or nongovernmental body and all actions and proceedings in any court or before any arbitrator against or in any other way relating to or affecting the Borrower, any of its Subsidiaries or any of the Borrower's or any of its Subsidiaries' properties, assets or businesses, which could reasonably be expected , singly or in the aggregate, to result in the occurrence of a Default or an Event of Default, or have a Materially Adverse Effect, (b) any amendment of the articles of incorporation or by-laws of the Borrower or any of its Subsidiaries, (c) any change in the business, assets, liabilities, financial condition, results of operations or business prospects of the Borrower or any of its Subsidiaries which has had or could reasonably be expected to have, singly or in the aggregate, a Materially Adverse Effect and any change in the executive officers of the Borrower, and (d) any Default or Event of Default or any event which constitutes or which with the passage of time or giving of notice or both would constitute a default or event of default by the Borrower or any of its Subsidiaries under any material agreement (other than this Agreement) to which the Borrower or any of its Subsidiaries is a party or by which the Borrower, any of its Subsidiaries or any of the Borrower's or any of its Subsidiaries' properties may be bound. SECTION 9.6 ERISA. As soon as possible and in any event within 30 days after the Borrower knows, or has reason to know, that: (a) any ERISA Event with respect to a Benefit Plan has occurred or will occur, or 88 (b) the aggregate present value of the Unfunded Vested Accrued Benefits under all Benefit Plans is equal to an amount in excess of $500,000, or (c) the Borrower or any Subsidiary is in "default" (as defined in Section 4219(c)(5) of ERISA) with respect to payments to a Multiemployer Benefit Plan required by reason of the Borrower's or such Subsidiary's complete or partial withdrawal (as described in Section 4203 or 4205 of ERISA) from such Multiemployer Plan, a certificate of the president or a Financial Officer of the Borrower setting forth the details of such event and the action which is proposed to be taken with respect thereto, together with any notice or filing which may be required by the PBGC or other agency of the United States government with respect to such event. SECTION 9.7 REVISIONS OR UPDATES TO SCHEDULES. Should any of the information or disclosures provided on any of the Schedules originally attached hereto become outdated or incorrect in any material respect at the time any Secured Obligations are outstanding hereunder, as part of the officer's certificate required pursuant to SECTION 9.3(B), such revisions or updates to such Schedule(s) as may be necessary or appropriate to update or correct such Schedule(s), PROVIDED that no such revisions or updates to any Schedule(s) shall be deemed to have amended, modified or superseded such Schedule(s) as attached hereto immediately prior to the submission of such revised or updated Schedule(s), or to have cured any breach of warranty or representation resulting from the inaccuracy or incompleteness of any such Schedule(s), unless and until the Required Lenders in their sole and absolute discretion, shall have accepted in writing such revisions or updates to such Schedule(s). 89 ARTICLE 10 NEGATIVE COVENANTS Until the Revolving Credit Facility has been terminated and all the Secured Obligations have been paid in full, unless the Required Lenders shall otherwise consent in the manner set forth in SECTION 14.9, the Borrower will not directly or indirectly and, in the case of SECTIONS 10.2 through 10.14, will not permit its Subsidiaries to: SECTION 10.1 FINANCIAL RATIOS. Permit: (a) MINIMUM FIXED CHARGE COVERAGE RATIO. The Fixed Charge Coverage Ratio of the Borrower and its Consolidated Subsidiaries for the Fiscal Quarter ending December 31, 1997, the two Fiscal Quarter period ending March 31, 1998, the three Fiscal Quarter period ending June 30, 1998 and each four Fiscal Quarter period ending on or after September 30, 1998, to be less than 1.25 to 1. (b) MAXIMUM FUNDED DEBT TO EBITDA RATIO. The ratio of Funded Debt of the Borrower and its Consolidated Subsidiaries as of the last day of each Fiscal Quarter set forth below to EBITDA of the Borrower and its Consolidated Subsidiaries for the four Fiscal Quarter period ending at the end of each such Fiscal Quarter to be less than the ratio set forth opposite such Fiscal Quarter end: Fiscal Quarter Ending Ratio --------------------- ----- December 31, 1997 6.75 to 1 March 31, 1998 6.75 to 1 June 30, 1998 6.75 to 1 September 30, 1998 6.75 to 1 December 31, 1998 5.75 to 1 and each Fiscal Quarter ending thereafter SECTION 10.2 DEBT. Create, assume, or otherwise become or remain obligated in respect of, or permit or suffer to exist or to be created, assumed or incurred or to be outstanding any Debt, except that this Section 10.2 shall not apply to: (a) Debt represented by the Secured Obligations, (b) Debt reflected on SCHEDULE 5.1(j), excluding any such Debt that is to be paid in full on the Effective Date, 90 (c) Debt represented by the Senior Notes and unsecured Guaranties thereof by any Subsidiaries, (d) Permitted Purchase Money Debt, (e) Debt of the Borrower to any Borrowing Subsidiary and Debt of any Borrowing Subsidiary to the Borrower, (f) unsecured Debt in an aggregate principal amount not to exceed $10,000,000 at any time outstanding, and (g) Hedging Obligations. SECTION 10.3 GUARANTIES. Become or remain liable with respect to any Guaranty of any obligation of any other Person, other than as permitted by SECTION 10.2 and obligations of another Loan Party (other than Debt). SECTION 10.4 INVESTMENTS. Acquire, after the Agreement Date, any Business Unit or Investment or, after such date, maintain any Investment other than Permitted Investments; PROVIDED, HOWEVER, that so long as no Default or Event of Default exists immediately before or after giving effect to any of the following, this SECTION 10.4 shall not prohibit (i) any Investment in a Person that is at the time, or contemporaneously with the making of such Investment becomes, a Borrowing Subsidiary, provided that any such Investment in connection with any single Acquisition by the Borrower or any Subsidiary does not exceed $5,000,000 in the aggregate (including Indebtedness assumed), (ii) any Acquisition of a Business Unit by the Borrower or a Borrowing Subsidiary for total consideration (inclusive of assumption of Indebtedness) of up to but not in excess of $5,000,000; (iii) any Acquisition in exchange for common equity securities of the Borrower, provided that immediately after such Acquisition any Subsidiary Acquired becomes a Borrowing Subsidiary, (iv) Investments in Hedging Obligations, or (v) transactions permitted by SECTION 10.8. SECTION 10.5 CAPITAL EXPENDITURES. Make or incur any Unfunded Capital Expenditures in excess of $2,500,000 in the aggregate during any Fiscal Year of the Borrower: SECTION 10.6 RESTRICTED DISTRIBUTIONS AND PAYMENTS, ETC.. Declare or make any Restricted Distribution or Restricted Payment, PROVIDED that so long as no Default or Event of Default exists immediately before or after giving effect to any of the following, this SECTION 10.6 shall not prohibit (i) transactions permitted under SECTION 10.8, (ii) payments in kind and cash dividends with respect to Preferred Stock as provided on the Effective Date, (iii) the purchase, redemption or retirement for value of any shares of capital stock or Subordinated Debt of the Borrower in exchange for, or out of the net cash proceeds of a substantially concurrent issuance and sale (other than to a Subsidiary) of, common equity interests, or (iv) the issuance of capital stock upon the exercise of the Warrants or other options or warrants. SECTION 10.7 MERGER, CONSOLIDATION AND SALE OF ASSETS. Merge or consolidate with any other Person or sell, lease or transfer or otherwise dispose of all or a substantial portion 91 of its assets to any Person other than sales of Inventory in the ordinary course of business, EXCEPT that any Subsidiary may be merged or consolidated with or into the Borrower or any other Loan Party or all or substantially all of the business or assets of any Subsidiary may be sold, leased, transferred or otherwise disposed of, in one transaction or a series of transactions, to the Borrower or any other Loan Party. SECTION 10.8 TRANSACTIONS WITH AFFILIATES. Effect any transaction with any Affiliate on a basis less favorable to the Borrower than would be the case if such transaction had been effected with a Person not an Affiliate, EXCEPT that the foregoing shall not apply to (i) transactions between the Borrower and any Loan Party, (ii) transactions (including Permitted Investments) expressly permitted by SECTION 10.4 or 10.6, (iii) payments to J.F. Lehman & Company of a closing fee of $1,500,000, payable on the Effective Date and an annual management fee of $500,000, payable beginning on the first anniversary of the Effective Date, (iv) loans or advances to officers or employees of the Borrower and its Subsidiaries in the ordinary course of business not to exceed $250,000 in the aggregate at any one time outstanding, (v) transactions in accordance with any agreement to which the Borrower or any Subsidiary is a party as in effect on the Agreement Date as set forth on SCHEDULE 10.8 hereto, as amended with the consent of the Agent, (vi) the entering into, and making of payments of regular and customary compensation under, employment agreements entered into in the ordinary course of business, and (vii) payments of fees and expenses in connection with the Recapitalization as described on SCHEDULE 10.8. SECTION 10.9 LIENS. Create, assume or permit or suffer to exist or to be created or assumed any Lien on any of the Collateral or its other assets, other than Permitted Liens. SECTION 10.10 [RESERVED] SECTION 10.11 BENEFIT PLANS. Permit, or take any action which would result in, (a) an ERISA Event having a Materially Adverse Effect, or (b) the aggregate present value of the Unfunded Vested Accrued Benefits under all Benefit Plans of the Borrower to exceed $500,000. SECTION 10.12 AMENDMENTS OF OTHER AGREEMENTS. Amend the Senior Notes, the Senior Note Agreement, or any related document. SECTION 10.13 MINIMUM AVAILABILITY. Permit Collateral Availability to be less than $500,000 at any time. 92 ARTICLE 11 DEFAULT SECTION 11.1 EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default, whatever the reason for such event and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment or order of any court or any order, rule or regulation of any governmental or nongovernmental body: (a) DEFAULT IN PAYMENT. The Borrower shall fail to pay any amount of principal of any Loan or any Note when and as due (whether at maturity, by reason of acceleration or otherwise). (b) OTHER PAYMENT DEFAULT. The Borrower shall fail to pay, as and when due, any amount of interest on any Loan or any Note and such default shall continue for a period of one business day or the Borrower shall fail to pay, as and when due, any amount of principal of or interest on, any other Secured Obligation, and such default shall continue for a period of five days after written notice thereof has been given to the Borrower by the Agent. (c) MISREPRESENTATION. Any representation or warranty made or deemed to be made by the Borrower under this Agreement or any Loan Document, or any amendment hereto or thereto, shall at any time prove to have been incorrect or misleading in any material respect when made. (d) DEFAULT IN PERFORMANCE. The Borrower shall default in the performance or observance of any term, covenant, condition or agreement to be performed by the Borrower, contained in (i) Articles 6, 7, 9 or 10, or Section 8.1 (insofar as it requires the preservation of the corporate existence of the Borrower), and the Agent shall have delivered to the Borrower written notice of such default, or (ii) this Agreement (other than as specifically provided for otherwise in this SECTION 11.1) and such default shall continue for a period of 30 days after written notice thereof has been given to the Borrower by the Agent. (e) DEBT CROSS-DEFAULT. (i) The Borrower or any Subsidiary shall fail to pay when due and payable the principal of or interest on any Debt (other than the Loans) outstanding in an amount in excess of $5,000,000, or (ii) the maturity of any Debt of the Borrower or any Subsidiary outstanding in a principal amount greater than $5,000,000 shall have (A) been accelerated in accordance with the provisions of any indenture, contract or instrument providing for the creation of or concerning such Debt, or (B) been required to be prepaid prior to the stated maturity 93 thereof, other than by reason of cash flow recapture provisions, asset sales provisions or similar provisions requiring prepayments not related to a default or risk event, or (iii) any event shall have occurred and be continuing which would permit any holder or holders of Debt of the Borrower or any Subsidiary outstanding in a principal amount greater than $5,000,000, any trustee or agent acting on behalf of such holder or holders or any other Person so to accelerate such maturity, and the Borrower or the relevant Subsidiary shall have failed to cure such default prior to the expiration of any applicable cure or grace period. (f) [RESERVED]. (g) VOLUNTARY BANKRUPTCY PROCEEDING. The Borrower or any of its Subsidiaries shall (i) commence a voluntary case under the federal bankruptcy laws (as now or hereafter in effect), (ii) file a petition seeking to take advantage of any other laws, domestic or foreign, relating to bankruptcy, insolvency, reorganization, winding up or composition for adjustment of debts, (iii) consent to or fail to contest in a timely and appropriate manner any petition filed against it in an involuntary case under such bankruptcy laws or other laws, (iv) apply for or consent to, or fail to contest in a timely and appropriate manner, the appointment of, or the taking of possession by, a receiver, custodian, trustee, or liquidator of itself or of a substantial part of its property, domestic or foreign, (v) admit in writing its inability to pay its debts as they become due, (vi) make a general assignment for the benefit of creditors, or (vii) take any corporate action for the purpose of authorizing any of the foregoing. (h) INVOLUNTARY BANKRUPTCY PROCEEDING. A case or other proceeding shall be commenced against the Borrower or any of its Subsidiaries in any court of competent jurisdiction seeking (i) relief under the federal bankruptcy laws (as now or hereafter in effect) or under any other laws, domestic or foreign, relating to bankruptcy, insolvency, reorganization, winding up or adjustment of debts, (ii) the appointment of a trustee, receiver, custodian, liquidator or the like of the Borrower, any of its Subsidiaries or of all or any substantial part of the assets, domestic or foreign, of the Borrower or any of its Subsidiaries, 94 and such case or proceeding shall continue undismissed or unstayed for a period of 60 consecutive calendar days, or an order granting the relief requested in such case or proceeding against the Borrower or any of its Subsidiaries (including, but not limited to, an order for relief under such federal bankruptcy laws) shall be entered. (i) LOAN DOCUMENTS. Any event of default or "Event of Default" under any other Loan Document shall occur or the Borrower shall default in the performance or observance of any material term, covenant, condition or agreement contained in, or the payment of any other sum covenanted to be paid by the Borrower under, any such Loan Document, or any other Loan Document after delivery thereof hereunder shall for any reason cease to be valid and binding, other than a nonmaterial provision rendered unenforceable by operation of law, or the Borrower or other party thereto (other than the Lender) shall so state in writing, or this Agreement or any other Loan Document, after delivery thereof hereunder, shall for any reason (other than any action taken independently by the Lender and except to the extent permitted by the terms thereof) cease to create a valid, perfected and, except as otherwise expressly permitted herein, first priority Lien on, or security interest in, any of the Collateral purported to be covered thereby. (j) JUDGMENT. A final, unappealable judgment or order for the payment of money in an amount that exceeds the uncontested insurance available therefor by $500,000 or more shall be entered against the Borrower by any court and such judgment or order shall continue undischarged or unstayed for 30 days. (k) ATTACHMENT. A warrant or writ of attachment or execution or similar process which exceeds $500,000 in value shall be issued against any property of the Borrower and such warrant or process shall continue undischarged or unstayed for 30 days. (l) ERISA. Any ERISA Event shall occur and the Required Lenders shall have determined that such occurrence would have a Materially Adverse Effect. (m) CHANGE OF CONTROL. JFLEI and its Affiliates shall cease to own, beneficially and of record, at least 50% of the outstanding capital stock of the Borrower or such ownership shall cease to vest in it voting control of the Borrower or any other event shall occur or circumstance exist that constitutes a "Change of Control" as defined in the Senior Note Indenture. SECTION 11.2 REMEDIES. (a) AUTOMATIC ACCELERATION AND TERMINATION OF FACILITIES. Upon the occurrence of an Event of Default specified in SECTION 11.1(g) or (h), (i) the principal of and the interest on the Loans and any Note at the time outstanding, and all other amounts owed to the Agent or the Lenders under this Agreement or any of the other Loan Documents and all other Secured Obligations, shall thereupon become due and payable without presentment, demand, protest, or other notice of any kind, all of which are expressly waived, anything in this Agreement or any of the Loan Documents to the contrary notwithstanding, and (ii) the Revolving Credit Facility and the right of the Borrower to request Borrowings and Letters of Credit under this Agreement shall immediately terminate. 95 (b) OTHER REMEDIES. If any Event of Default shall have occurred, and during the continuance of any Event of Default, the Agent may, and at the direction of the Required Lenders in their sole and absolute discretion shall, do any of the following: (i) declare the principal of and interest on the Loans and any Note at the time outstanding, and all other amounts owed to the Agent or the Lenders under this Agreement or any of the other Loan Documents and all other Secured Obligations, to be forthwith due and payable, whereupon the same shall immediately become due and payable without presentment, demand, protest or other notice of any kind, all of which are expressly waived, anything in this Agreement or the Loan Documents to the contrary notwithstanding; (ii) terminate the Revolving Credit Facility and any other right of the Borrower to request borrowings and Letters of Credit hereunder; (iii) notify, or request the Borrower to notify, in writing or otherwise, any Account Debtor or obligor with respect to any one or more of the Receivables to make payment to the Agent, for the benefit of the Lenders, or any agent or designee of the Agent, at such address as may be specified by the Agent and if, notwithstanding the giving of any notice, any Account Debtor or other such obligor shall make payments to the Borrower, the Borrower shall hold all such payments it receives in trust for the Agent, for the account of the Lenders, without commingling the same with other funds or property of, or held by, the Borrower, and shall deliver the same to the Agent or any such agent or designee of the Agent immediately upon receipt by the Borrower in the identical form received, together with any necessary endorsements; (iv) settle or adjust disputes and claims directly with Account Debtors and other obligors on Receivables for amounts and on terms which the Agent considers advisable and in all such cases only the net amounts received by the Agent, for the account of the Lenders, in payment of such amounts, after deductions of costs and attorneys' fees, shall constitute Collateral and the Borrower shall have no further right to make any such settlements or adjustments or to accept any returns of merchandise; (v) enter upon any premises in which Inventory or Equipment may be located and, without resistance or interference by the Borrower, take physical possession of any or all thereof and maintain such possession on such premises or move the same or any part thereof to such other place or places as the Agent shall choose, without being liable to the Borrower on account of any loss, damage or depreciation that may occur as a result thereof, so long as the Agent shall act reasonably and in good faith; (vi) require the Borrower to and the Borrower shall, without charge to the Agent or any Lender, assemble the Inventory and Equipment and maintain or deliver it into the possession of the Agent or any agent or representative of the Agent at such place or places as the Agent may designate and as are reasonably convenient to both the Agent and the Borrower; 96 (vii) at the expense of the Borrower, cause any of the Inventory and Equipment to be placed in a public or field warehouse, and the Agent shall not be liable to the Borrower on account of any loss, damage or depreciation that may occur as a result thereof, so long as the Agent shall act reasonably and in good faith; (viii) without notice, demand or other process, and without payment of any rent or any other charge, enter any of the Borrower's premises and, without breach of the peace, until the Agent, on behalf of the Lenders, completes the enforcement of its rights in the Collateral, take possession of such premises or place custodians in exclusive control thereof, remain on such premises and use the same and any of the Borrower's Equipment, for the purpose of (A) completing any work in process, preparing any Inventory for disposition and disposing thereof, and (B) collecting any Receivable, and the Agent for the benefit of the Lenders is hereby granted a license or sublicense and all other rights as may be necessary, appropriate or desirable to use the Proprietary Rights in connection with the foregoing, and the rights of the Borrower under all licenses, sublicenses and franchise agreements shall inure to the Agent for the benefit of the Lenders (PROVIDED, HOWEVER, that any use of any federally registered trademarks as to any goods shall be subject to the control as to the quality of such goods of the owner of such trademarks and the goodwill of the business symbolized thereby); (ix) exercise any and all of its rights under any and all of the Security Documents; (x) apply any Collateral consisting of cash to the payment of the Secured Obligations in any order in which the Agent, on behalf of the Lenders, may elect or use such cash in connection with the exercise of any of its other rights hereunder or under any of the Security Documents; (xi) establish or cause to be established one or more Lockboxes or other arrangement for the deposit of proceeds of Receivables, and, in such case, the Borrower shall cause to be forwarded to the Agent at the Agent's Office, on a daily basis, copies of all checks and other items of payment and deposit slips related thereto deposited in such Lockboxes, together with collection reports in form and substance satisfactory to the Agent; and (xii) exercise all of the rights and remedies of a secured party under the Uniform Commercial Code and under any other Applicable Law, including, without limitation, the right, without notice except as specified below and with or without taking possession thereof, to sell the Collateral or any part thereof in one or more parcels at public or private sale, at any location chosen by the Agent, for cash, on credit or for future delivery, and at such price or prices and upon such other terms as the Agent may deem commercially reasonable. The Borrower agrees that, to the extent notice of sale shall be required by law, at least 10 days' notice to the Borrower of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification, but notice given in any other reasonable manner or at any other 97 reasonable time shall constitute reasonable notification. The Agent shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. The Agent may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. SECTION 11.3 APPLICATION OF PROCEEDS. All proceeds from each sale of, or other realization upon, all or any part of the Collateral following an Event of Default shall be applied or paid over as follows: (a) FIRST: to the payment of all costs and expenses incurred in connection with such sale or other realization, including reasonable attorneys' fees, (b) SECOND: to the payment of the Secured Obligations (with the Borrower remaining liable for any deficiency) as the Agent may elect, (c) THIRD: the balance (if any) of such proceeds shall be paid to the Borrower, subject to any duty imposed by law, or otherwise to whomsoever shall be entitled thereto. THE BORROWER SHALL REMAIN LIABLE AND WILL PAY, ON DEMAND, ANY DEFICIENCY REMAINING IN RESPECT OF THE SECURED OBLIGATIONS, TOGETHER WITH INTEREST THEREON AT A RATE PER ANNUM EQUAL TO THE HIGHEST RATE THEN PAYABLE HEREUNDER ON SUCH SECURED OBLIGATIONS, WHICH INTEREST SHALL CONSTITUTE PART OF THE SECURED OBLIGATIONS. SECTION 11.4 POWER OF ATTORNEY. In addition to the authorizations granted to the Agent under SECTION 7.13 or under any other provision of this Agreement or of any other Loan Document, during the continuance of an Event of Default, the Borrower hereby irrevocably designates, makes, constitutes and appoints the Agent (and all Persons designated by the Agent from time to time) as the Borrower's true and lawful attorney, and agent in fact, and the Agent, or any agent of the Agent, may, without notice to the Borrower, and at such time or times as the Agent or any such agent in its sole discretion may determine, in the name of the Borrower, the Agent or the Lenders, (a) demand payment of the Receivables, (b) enforce payment of the Receivables by legal proceedings or otherwise, (c) exercise all of the Borrower's rights and remedies with respect to the collection of Receivables, (d) settle, adjust, compromise, extend or renew any or all of the Receivables, (e) settle, adjust or compromise any legal proceedings brought to collect the Receivables, (f) discharge and release the Receivables or any of them, 98 (g) prepare, file and sign the name of the Borrower on any proof of claim in bankruptcy or any similar document against any Account Debtor, (h) prepare, file and sign the name of the Borrower on any notice of Lien, assignment or satisfaction of Lien, or similar document in connection with any of the Collateral, (i) endorse the name of the Borrower upon any chattel paper, document, instrument, notice, freight bill, bill of lading or similar document or agreement relating to the Receivables, the Inventory or any other Collateral, (j) use the stationery of the Borrower and sign the name of the Borrower to verifications of the Receivables and on any notice to the Account Debtors, (k) open the Borrower's mail, (l) notify the post office authorities to change the address for delivery of the Borrower's mail to an address designated by the Agent, and (m) use the information recorded on or contained in any data processing equipment and computer hardware and software relating to the Receivables, Inventory or other Collateral to which the Borrower has access. SECTION 11.5 MISCELLANEOUS PROVISIONS CONCERNING REMEDIES. (a) RIGHTS CUMULATIVE. The rights and remedies of the Agent and the Lenders under this Agreement, the Notes and each of the Loan Documents shall be cumulative and not exclusive of any rights or remedies which it or they would otherwise have. In exercising such rights and remedies the Agent and the Lenders may be selective and no failure or delay by the Agent or any Lender in exercising any right shall operate as a waiver of it, nor shall any single or partial exercise of any power or right preclude its other or further exercise or the exercise of any other power or right. (b) WAIVER OF MARSHALING. The Borrower hereby waives any right to require any marshaling of assets and any similar right. (c) LIMITATION OF LIABILITY. Nothing contained in this ARTICLE 11 or elsewhere in this Agreement or in any of the Loan Documents shall be construed as requiring or obligating the Agent, any Lender or any agent or designee of the Agent or any Lender to make any demand, or to make any inquiry as to the nature or sufficiency of any payment received by it, or to present or file any claim or notice or take any action, with respect to any Receivable or any other Collateral or the monies due or to become due thereunder or in connection therewith, or to take any steps necessary to preserve any rights against prior parties, and the Agent, the Lenders and their agents or designees shall have no liability to the Borrower for actions taken pursuant to this ARTICLE 11, any other provision of this Agreement or any of the Loan Documents so long as the Agent or such Lender shall act in good faith and in a commercially reasonable manner. 99 (d) APPOINTMENT OF RECEIVER. In any action under this ARTICLE 11, the Agent shall be entitled during the continuance of an Event of Default, to the fullest extent permitted by Applicable Law, to the appointment of a receiver, without notice of any kind whatsoever, to take possession of all or any portion of the Collateral and to exercise such power as the court shall confer upon such receiver. 100 ARTICLE 12 ASSIGNMENTS SECTION 12.1 SUCCESSORS AND ASSIGNS; PARTICIPATIONS. (a) This Agreement shall be binding upon and inure to the benefit of the Borrower, the Lenders, the Agent, all future holders of the Notes, and their respective successors and assigns, except that the Borrower may not assign or transfer any of its rights or obligations under this Agreement without the prior written consent of each Lender. (b) Subject to the prior consent of the Agent and, so long as no Default or Event of Default has occurred and is continuing, the Borrower (neither of such consents to be unreasonably withheld or delayed), each Lender may assign to one or more Eligible Assignees all or a portion of its interests, rights and obligations under this Agreement (including, without limitation, all or a portion of the Loans at the time owing to it and the Notes held by it); PROVIDED, HOWEVER, that (i) each such assignment shall be of a constant, and not a varying, percentage of all the assigning Lender's rights and obligations under this Agreement, (ii) the amount of the Commitment of the assigning Lender that is subject to each such assignment (determined as of the date the Assignment and Acceptance with respect to such assignment is delivered to the Agent) shall in no event be less than $5,000,000, (iii) in the case of a partial assignment, the amount of the Commitment that is retained by the assigning Lender (determined as of the date the Assignment and Acceptance with respect to such assignment is delivered to the Agent) shall in no event be less than $5,000,000, (iv) the parties to each such assignment shall execute and deliver to the Agent, for its acceptance and recording in the Register an Assignment and Acceptance, together with any Note or Notes subject to such assignment and a fee in the amount of $3,500, (v) such assignment shall not, without the consent of the Borrower, require the Borrower to file a registration statement with the Securities and Exchange Commission or apply to or qualify the Loans or the Notes under the blue sky laws of any state, and (vi) the representation contained in SECTION 12.2 hereof shall be true with respect to any such proposed assignee. Upon such execution, delivery, acceptance and recording, from and after the effective date specified in each Assignment and Acceptance, which effective date shall be at least five Business Days after the execution thereof, (A) the assignee thereunder shall be a party hereto and, to the extent provided in such Assignment and Acceptance, have the rights and obligations of a Lender hereunder, and (B) the Lender assignor thereunder shall, to the extent of such assignment, be released from its obligations under this Agreement. (c) By executing and delivering an Assignment and Acceptance, the Lender assignor thereunder and the assignee thereunder confirm to and agree with each other and the other parties hereto as follows: (i) other than the representation and warranty that it is the legal and beneficial owner of the interest being assigned thereby free and clear of any adverse claim, such Lender assignor makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with this Agreement or the execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement or any other instrument or document furnished pursuant hereto; (ii) such Lender assignor makes 101 no representation or warranty and assumes no responsibility with respect to the financial condition of the Borrower or the performance or observance by the Borrower of any of its obligations under this Agreement or any other instrument or document furnished pursuant hereto; (iii) such assignee confirms that it has received a copy of this Agreement, together with copies of the financial statements referred to in SECTION 5.1(n) and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such Assignment and Acceptance; (iv) such assignee will, independently and without reliance upon the Agent, such Lender assignor or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement; (v) such assignee confirms that it is an Eligible Assignee; (vi) such assignee appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers under this Agreement and the other Loan Documents as are delegated to the Agent by the terms hereof and thereof, together with such powers as are reasonably incidental thereto; and (vii) such assignee agrees that it will perform in accordance with their terms all of the obligations which by the terms of this Agreement are required to be performed by it as a Lender. (d) The Agent shall maintain a copy of each Assignment and Acceptance delivered to it and a register for the recordation of the names and addresses of the Lenders and the Commitment and Proportionate Share of, and principal amount of the Loans and owing to, each Lender from time to time (the REGISTER). The entries in the Register shall be conclusive, in the absence of manifest error, and the Borrower, the Agent and the Lenders may treat each person whose name is recorded in the Register as a Lender hereunder for all purposes of this Agreement. The Register shall be available for inspection by the Borrower or any Lender at any reasonable time and from time to time upon reasonable prior notice. (e) Upon its receipt of an Assignment and Acceptance executed by an assigning Lender and an Eligible Assignee together with any Note or Notes subject to such assignment, the Agent shall, if such Assignment and Acceptance has been completed and is in the form of EXHIBIT C, (i) accept such Assignment and Acceptance, (ii) record the information contained therein in the Register, (iii) give prompt notice thereof to the Lenders and the Borrower, and (iv) promptly deliver a copy of such Acceptance and Assignment to the Borrower. Within five Business Days after receipt of notice, the Borrower shall execute and deliver to the Agent in exchange for the surrendered Note or Notes a new Note or Notes to the order of such Eligible Assignee in amounts equal to the Commitment assumed by such Eligible Assignee pursuant to such Assignment and Acceptance and a new Note or Notes to the order of the assigning Lender in an amount equal to the Commitment retained by it hereunder. Such new Note or Notes shall be in an aggregate principal amount equal to the aggregate principal amount of such surrendered Note or Notes, shall be dated the effective date of such Assignment and Acceptance and shall otherwise be in substantially the form of the assigned Notes. Each surrendered Note or Notes shall be cancelled and returned to the Borrower. (f) Each Lender may sell participations to one or more banks or other entities in all or a portion of its rights and obligations under this Agreement (including, without limitation, all or a portion of its Commitment hereunder and the Loans owing to it and the Notes held by it); 102 PROVIDED, HOWEVER, that (i) each such participation shall be in an amount not less than $5,000,000, (ii) such Lender's obligations under this Agreement (including, without limitation, its Commitment hereunder) shall remain unchanged, (iii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations, (iv) such Lender shall remain the holder of the Notes held by it for all purposes of this Agreement, (v) the Borrower, the Agent and the other Lenders shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement; PROVIDED, that such Lender may agree with any participant that such Lender will not, without such participant's consent, agree to or approve any waivers or amendments which would reduce the principal of or the interest rate on any Loans, extend the term or increase the amount of the commitments of such participant, reduce the amount of any fees to which such participant is entitled, extend any scheduled payment date for principal or release Collateral securing the Loans (other than Collateral disposed of pursuant to SECTION 7.7 hereof or otherwise in accordance with the terms of this Agreement or the Security Documents), and (vi) any such disposition shall not, without the consent of the Borrower, require any Borrower to file a registration statement with the Securities and Exchange Commission to apply to qualify the Loans or the Notes under the blue sky law of any state. The Lender selling a participation to any bank or other entity that is not an Affiliate of such Lender shall give prompt notice thereof to the Borrower. (g) Any Lender may, in connection with any assignment, proposed assignment, participation or proposed participation pursuant to this SECTION 12.1, disclose to the assignee, participant, proposed assignee or proposed participant, any information relating to the Borrower furnished to such Lender by or on behalf of the Borrower, PROVIDED that, prior to any such disclosure, each such assignee, proposed assignee, participant or proposed participant shall agree with the Borrower or such Lender (which in the case of an agreement with only such Lender, the Borrower shall be recognized as a third party beneficiary thereof) to preserve the confidentiality of any confidential information relating to the Borrower received from such Lender. SECTION 12.2 REPRESENTATION OF LENDERS. Each Lender hereby represents that it will make each Loan hereunder as a commercial loan for its own account in the ordinary course of its business; PROVIDED, HOWEVER, that subject to SECTION 12.1 hereof, the disposition of the Notes or other evidence of the Secured Obligations held by any Lender shall at all times be within its exclusive control. 103 ARTICLE 13 AGENT SECTION 13.1 APPOINTMENT OF AGENT. Each of the Lenders hereby irrevocably designates and appoints NationsBank, N.A. as the Agent of such Lender under this Agreement and the other Loan Documents, and each Lender irrevocably authorizes the Agent, as the Agent for such Lender, to take such action on its behalf under the provisions of this Agreement and the other Loan Documents and to exercise such powers and perform such duties as are expressly delegated to the Agent by the terms of this Agreement and such other Loan Documents, together with such other powers as are reasonably incidental thereto. Without limiting the generality of the foregoing, each Lender expressly authorizes the Agent to determine on behalf of such Lender (i) any reduction or increase of advance rates applicable to the Borrowing Base, so long as such advance rates do not at any time exceed the rates set forth in the definition "BORROWING BASE", (ii) the creation or elimination of any reserves against the Revolving Credit Facility or the Borrowing Base, and (iii) whether specific Inventory or Receivables shall be deemed to constitute Eligible Inventory or Eligible Receivables. Such authorization may be withdrawn by the Required Lenders by giving the Agent written notice of such withdrawal signed by the Required Lenders; PROVIDED, HOWEVER, that unless otherwise agreed by the Agent, such withdrawal of authorization shall not become effective until the 30th Business Day after receipt of such notice by the Agent. Thereafter, the Required Lenders shall jointly instruct the Agent in writing regarding such matters with such frequency as the Required Lenders shall jointly determine. Notwithstanding any provision to the contrary elsewhere in this Agreement or the other Loan Documents, the Agent shall not have any duties or responsibilities, except those expressly set forth herein and therein, or any fiduciary relationship with any Lender, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement or the other Loan Documents or otherwise exist against the Agent. SECTION 13.2 DELEGATION OF DUTIES. The Agent may execute any of its duties under this Agreement and the other Loan Documents by or through agents or attorneys-in-fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. The Agent shall not be responsible for the negligence or misconduct of any agents or attorneys-in-fact selected by it with reasonable care. SECTION 13.3 EXCULPATORY PROVISIONS. Neither the Agent nor any of its trustees, officers, directors, employees, agents, attorneys-in-fact or Affiliates shall be (i) liable to any Lender (or any Lender's participants) for any action lawfully taken or omitted to be taken by it or such Person under or in connection with this Agreement or the other Loan Documents (except for its or such Person's own gross negligence or willful misconduct), or (ii) responsible in any manner to any Lender (or any Lender's participants) for any recitals, statements, representations or warranties made by the Borrower or any officer thereof contained in this Agreement or the other Loan Documents or in any certificate, report, statement or other document referred to or provided for in, or received by the Agent under or in connection with, this Agreement or the other Loan Documents or for the existence, value, validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement or the other Loan Documents or any Collateral or 104 Lien or other interest therein or for any failure of the Borrower to perform its obligations hereunder or thereunder. The Agent shall not be under any obligation to any Lender to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, this Agreement, or to inspect the properties, books or records of the Borrower. SECTION 13.4 RELIANCE BY AGENT. The Agent shall be entitled to rely, and shall be fully protected in relying, upon any Note, writing, resolution, notice, consent, certificate, affidavit, letter, cablegram, telegram, telecopy, telex or teletype message, statement, order or other document or conversation believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons and upon advice and statements of legal counsel (including, without limitation, counsel to the Borrower), independent accountants and other experts selected by the Agent. The Agent may deem and treat the payee of any Note as the owner thereof for all purposes unless such Note shall have been transferred in accordance with SECTION 12.1. The Agent shall be fully justified in failing or refusing to take any action under this Agreement and the other Loan Documents unless it shall first receive such advice or concurrence of the Required Lenders as it deems appropriate and shall be indemnified to its satisfaction by the Lenders against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. The Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement and the Notes in accordance with a request of the Required Lenders, and such request and any action taken or failure to act pursuant thereto shall be binding upon all the Lenders and all future holders of the Notes. SECTION 13.5 NOTICE OF DEFAULT. The Agent shall not be deemed to have knowledge or notice of the occurrence of any Default or Event of Default hereunder unless the Agent has received notice from a Lender or the Borrower referring to this Agreement, describing such Default or Event of Default and stating that such notice is a "notice of default". In the event that the Agent receives such a notice, the Agent shall promptly give notice thereof to the Lenders. The Agent shall take such action with respect to such Default or Event of Default as shall be reasonably directed by the Required Lenders; PROVIDED that unless and until the Agent shall have received such directions, the Agent may (but shall not be obligated to) continue making Revolving Credit Loans to the Borrower on behalf of the Lenders in reliance on the provisions of SECTION 3.7 and take such other action, or refrain from taking such action, with respect to such Default or Event of Default as it shall deem advisable in the best interests of the Lenders. SECTION 13.6 NON-RELIANCE ON AGENT AND OTHER LENDERS. Each Lender expressly acknowledges that neither the Agent nor any of its officers, directors, counsel, employees, agents, attorneys-in-fact or Affiliates has made any representations or warranties to it and that no act by the Agent hereafter taken, including any review of the affairs of the Borrower, shall be deemed to constitute any representation or warranty by the Agent to any Lender. Each Lender represents to the Agent that it has, independently and without reliance upon the Agent or any other Lender, and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, operations, property, financial (and other) condition and creditworthiness of the Borrower and made its own decision to make its 105 Loans hereunder and enter into this Agreement. Each Lender also represents that it will, independently and without reliance upon the Agent or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Agreement and the other Loan Documents, and to make such investigation as it deems necessary to inform itself as to the business, operations, property, financial (and other) condition and creditworthiness of the Borrower. Except for notices, reports and other documents expressly required to be furnished to the Lenders by the Agent hereunder or under the other Loan Documents, the Agent shall not have any duty or responsibility to provide any Lender with any credit or other information concerning the business, operations, property, financial (and other) condition or creditworthiness of the Borrower which may come into the possession of the Agent or any of its officers, directors, employees, agents, attorneys-in-fact or Affiliates. SECTION 13.7 INDEMNIFICATION. The Lenders agree to indemnify the Agent in its capacity as such (to the extent not reimbursed by the Borrower and without limiting the obligation of the Borrower to do so), ratably according to their respective Commitment Percentages, from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind whatsoever which may at any time (including, without limitation, at any time following the payment of the Notes) be imposed on, incurred by or asserted against the Agent in any way relating to or arising out of this Agreement or the other Loan Documents, or any documents contemplated by or referred to herein or therein or the transactions contemplated hereby or thereby or any action taken or omitted by the Agent under or in connection with any of the foregoing; PROVIDED that no Lender shall be liable for the payment of any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting solely from the Agent's gross negligence or willful misconduct or resulting solely from transactions or occurrences that occur at a time after such Lender has assigned all of its interests, rights and obligations under this Agreement pursuant to SECTION 12.1 or, in the case of a Lender to which an assignment is made hereunder pursuant to SECTION 12.1, at a time before such assignment. The agreements in this subsection shall survive the payment of the Notes, the Secured Obligations and all other amounts payable hereunder and the termination of this Agreement. SECTION 13.8 AGENT IN ITS INDIVIDUAL CAPACITY. The institution at the time acting as the Agent and its Affiliates may make loans to, accept deposits from and generally engage in any kind of business with the Borrower and the other Loan Parties and their respective Subsidiaries as if it were not the Agent hereunder. With respect to its Commitment, the Loans made or renewed by it and any Note issued to it and any Letter of Credit issued by it, such institution shall have and may exercise the same rights and powers under this Agreement and the other Loan Documents and shall be subject to the same obligations and liabilities as and to the extent set forth herein and in the other Loan Documents for any other Lender. The terms "Lenders" and "Required Lenders" or any other term shall, unless the context clearly otherwise indicates, include such institution in its individual capacity as a Lender or one of the Required Lenders. 106 SECTION 13.9 SUCCESSOR AGENT. The Agent may resign as Agent upon ten days' notice to the Lenders. If the Agent shall resign as Agent under this Agreement, then the Required Lenders shall appoint from among the Lenders a successor agent for the Lenders subject (so long as no Default or Event of Default has occurred and is continuing) to approval by the Borrower (which approval shall not be unreasonably withheld), whereupon such successor agent shall succeed to the rights, powers and duties of the Agent, and the term "Agent" shall mean such successor agent effective upon its appointment, and the former Agent's rights, powers and duties as Agent shall be terminated, without any other or further act or deed on the part of such former Agent or any of the parties to this Agreement or any holders of the Notes. After any retiring Agent's resignation hereunder as Agent, the provisions of SECTION 13.7 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent under this Agreement. SECTION 13.10 NOTICES FROM AGENT TO LENDERS. The Agent shall promptly, upon receipt thereof, forward to each Lender copies of any written notices, reports or other information supplied to it by the Borrower (but which the Borrower is not required to supply directly to the Lenders). 107 ARTICLE 14 MISCELLANEOUS SECTION 14.1 NOTICES. (a) METHOD OF COMMUNICATION. Except as specifically provided in this Agreement or in any of the Loan Documents, all notices and the communications hereunder and thereunder shall be in writing or by telephone, subsequently confirmed in writing. Notices in writing shall be delivered personally or sent by certified or registered mail, postage pre-paid, or by overnight courier, telex or facsimile transmission and shall be deemed received in the case of personal delivery, when delivered, in the case of mailing, when receipted for, in the case of overnight delivery, on the next Business Day after delivery to the courier, and in the case of telex and facsimile transmission, upon transmittal, PROVIDED that in the case of notices to the Agent under ARTICLE 2, notice shall be deemed to have been given only when such notice is actually received by the Agent. A telephonic notice to the Agent, as understood by the Agent, will be deemed to be the controlling and proper notice in the event of a discrepancy with or failure to receive a confirming written notice. (b) ADDRESSES FOR NOTICES. Notices to any party shall be sent to it at the following addresses, or any other address of which all the other parties are notified in writing by such first party: If to the Borrower: Burke Industries, Inc. 2250 South Tenth Street San Jose, California 95112-4197 Attn: David Worthington Facsimile No.: (408) 291-8497 with copies to: J.F. Lehman & Company 450 Park Avenue, 6th Floor New York, New York 10022 Attn: Keith Oster Facsimile No.:(212) 634 1155 Gibson, Dunn & Crutcher LLP 200 Park Avenue New York, New York 10166 Attn: Joerg Esdorn, Esq. Facsimile No.:(212) 351-4035 108 If to the Agent: NationsBank, N.A. 600 Peachtree Street 13 Plaza Atlanta, Georgia 30308 Attn: Craig Reese Facsimile No.: 404-607-6437 If to a Lender: At the address of such Lender set forth on the signature pages hereof. (c) AGENT'S OFFICE. The Agent hereby designates its office located at 600 Peachtree Street, Atlanta, Georgia 30308, or any subsequent office which shall have been specified for such purpose by written notice to the Borrower, as the office to which payments due are to be made and at which Loans will be disbursed. SECTION 14.2 EXPENSES. The Borrower agrees to pay or reimburse on demand all costs and expenses incurred by the Agent (or, as to SUBSECTIONS (d) AND (h) below, any Lender) including, without limitation, the reasonable fees and disbursements of counsel, in connection with the following: (a) the negotiation, preparation, execution, delivery, administration, enforcement and termination of this Agreement and each of the other Loan Documents, whenever the same shall be executed and delivered, including, without limitation (i) the out-of-pocket costs and expenses incurred in connection with the administration and interpretation of this Agreement and the other Loan Documents; (ii) the costs and expenses of appraisals of the Collateral in connection with the Effective Date and during the existence of an Event of Default; (iii) the costs and expenses of lien and title searches and title insurance; (iv) the costs and expenses of environmental reports with respect to the Real Estate in connection with the Effective Date and during the existence of an Event of Default; (v) taxes, fees and other charges for recording the Mortgages, filing the Financing Statements and continuations and the costs and expenses of taking other actions to perfect, protect, and continue the Security Interests; (b) the preparation, execution and delivery of any waiver, amendment, supplement or consent by the Agent and the Lenders relating to this Agreement or any of the Loan Documents; (c) sums paid or incurred in accordance with SECTION 14.11(b) to pay any amount or take any action required of the Borrower under the Loan Documents that the Borrower fails to pay or take; 109 (d) inspections and verifications of the Collateral, including, without limitation, standard per diem fees charged by the Agent or the Lenders, travel, lodging, and meals for inspections of the Collateral and the Borrower's operations and books and records by the Agent's agents once each year and whenever an Event of Default exists; (e) forwarding loan proceeds, collecting checks and other items of payment, and establishing and maintaining each Controlled Disbursement Account, Agency Account and Lockbox; (f) preserving and protecting the Collateral; (g) consulting, after the occurrence of a Default, with one or more Persons, including appraisers, accountants and lawyers, concerning the value of any Collateral for the Secured Obligations or related to the nature, scope or value of any right or remedy of the Agent or any Lender hereunder or under any of the Loan Documents, including any review of factual matters in connection therewith, which expenses shall include the fees and disbursements of such Persons; and (h) obtaining (or seeking to obtain) payment of the Secured Obligations, enforcing the Security Interests, selling or otherwise realize upon the Collateral, and otherwise enforcing the provisions of the Loan Documents, or prosecuting or defending any claim in any way arising out of, related to or connected with, this Agreement or any of the Loan Documents, which expenses shall include the reasonable fees and disbursements of counsel and of experts and other consultants retained by the Agent or any Lender. The foregoing shall not be construed to limit any other provisions of the Loan Documents regarding costs and expenses to be paid by the Borrower. The Borrower hereby authorizes the Agent and the Lenders to debit the Borrower's Loan Account (by increasing the principal amount of the Revolving Credit Loan) in the amount of any such costs and expenses owed by the Borrower when due. SECTION 14.3 STAMP AND OTHER TAXES. The Borrower will pay any and all stamp, registration, recordation and similar taxes, fees or charges and shall indemnify the Agent and the Lenders against any and all liabilities with respect to or resulting from any delay in the payment or omission to pay any such taxes, fees or charges, which may be payable or determined to be payable in connection with the execution, delivery, performance or enforcement of this Agreement and any of the Loan Documents or the perfection of any rights or security interest thereunder, including, without limitation, the Security Interest. SECTION 14.4 SETOFF. In addition to any rights now or hereafter granted under Applicable Law and not by way of limitation of any such rights, during the continuance of any Event of Default, each Lender, and each Affiliate of each Lender are hereby authorized by the Borrower at any time or from time to time, without notice to the Borrower or to any other Person, any such notice being hereby expressly waived, to set off and to appropriate and to apply any and all deposits (general or special, including, but not limited to, indebtedness evidenced by certificates of deposit, whether matured or unmatured) and any other indebtedness at any time 110 held or owing by any Lender or any Affiliate of any Lender to or for the credit or the account of the Borrower against and on account of the Secured Obligations irrespective or whether or not (a) the Agent or such Lender shall have made any demand under this Agreement or any of the Loan Documents, or (b) the Agent or such Lender shall have declared any or all of the Secured Obligations to be due and payable as permitted by SECTION 11.2 and although such Secured Obligations shall be contingent or unmatured. SECTION 14.5 CONSENT TO ADVERTISING AND PUBLICITY With the prior written consent of the Borrower, which consent shall not be unreasonably withheld, the Agent, on behalf of the Lenders, may issue and disseminate to the public information describing the credit accommodation entered into pursuant to this Agreement, including the name and address of the Borrower, the amount, interest rate, maturity, collateral for and a general description of the credit facilities provided hereunder and of the Borrower's business. SECTION 14.6 REVERSAL OF PAYMENTS The Agent and each Lender shall have the continuing and exclusive right to apply, reverse and re-apply any and all payments to any portion of the Secured Obligations in a manner consistent with the terms of this Agreement. To the extent the Borrower makes a payment or payments to the Agent, for the account of the Lenders, or any Lender receives any payment or proceeds of the Collateral for the Borrower's benefit, which payment(s) or proceeds or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside and/or required to be repaid to a trustee, receiver or any other party under any bankruptcy law, state or federal law, common law or equitable cause, then, to the extent of such payment or proceeds received, the Secured Obligations or part thereof intended to be satisfied shall be revived and continued in full force and effect, as if such payment or proceeds had not been received by the Agent or such Lender. SECTION 14.7 ACCOUNTING MATTERS. All financial and accounting calculations, measurements and computations made for any purpose relating to this Agreement, including, without limitation, all computations utilized by the Borrower to determine whether it is in compliance with any covenant contained herein, shall, unless this Agreement otherwise provides or unless Required Lenders shall otherwise consent in writing (in response to a request by the Borrower), be performed in accordance with GAAP. SECTION 14.8 AMENDMENTS. (a) Except as set forth in SUBSECTION (b) below, any term, covenant, agreement or condition of this Agreement or any of the other Loan Documents may be amended or waived, and any departure therefrom may be consented to by the Required Lenders, if, but only if, such amendment, waiver or consent is in writing signed by the Required Lenders and, in the case of an amendment (other than an amendment described in SECTION 14.9(d)), by the Borrower, PROVIDED that no such amendment, unless consented to by the Agent, shall alter or affect the rights or responsibilities of the Agent, and in any such event, the failure to observe, perform or discharge any such term, covenant, agreement or condition (whether such amendment is executed or such 111 waiver or consent is given before or after such failure) shall not be construed as a breach of such term, covenant, agreement or condition or as a Default or an Event of Default. Unless otherwise specified in such waiver or consent, a waiver or consent given hereunder shall be effective only in the specific instance and for the specific purpose for which given. In the event that any such waiver or amendment is requested by the Borrower, the Agent and the Lenders may require and charge a fee in connection therewith and consideration thereof in such amount as shall be determined by the Agent and the Required Lenders in their discretion. (b) Without the prior unanimous written consent of the Lenders, (i) no amendment, consent or waiver shall (A) affect the amount or extend the time of the obligation of any Lender to make Loans or (B) extend the originally scheduled time or times of payment of the principal of any Loan or (C) alter the time or times of payment of interest on any Loan or of any fees payable for the account of the Lenders or (D) alter the amount of the principal of any Loan or the rate of interest thereon or (E) alter the amount of any commitment fee or other fee payable hereunder for the account of the Lenders or (F) permit any subordination of the principal of or interest on any Loan or (G) permit the subordination of the Security Interests in any Collateral in excess of $500,000 in the aggregate, (ii) no Collateral having an aggregate value greater than $500,000 in the aggregate shall be released by the Agent in any 12-month period other than as specifically permitted in this Agreement or the Security Documents nor shall any Collateral be released at a time when the Agent is entitled to exercise remedies hereunder upon default, nor shall the Borrower or the Guarantor be released from its liability for the Secured Obligations, (iii) except to the extent expressly provided in SECTION 13.1, the definition "Borrowing Base" shall not be amended, (iv) none of the provisions of this SECTION 14.9, the definitions "Lenders" or "Required Lenders", or the provisions of ARTICLE 11 shall be amended, and (v) neither the Agent nor any Lender shall consent to any amendment to or waiver of the amortization, deferral or subordination provisions of any other instrument or agreement evidencing or relating to obligations of the Borrower that are expressly subordinate to any of the Secured Obligations if such amendment or waiver would be adverse to the Lenders in their capacities as Lenders hereunder; PROVIDED, HOWEVER, that anything herein to the contrary notwithstanding, the Required Lenders shall have the right to waive any Default or Event of Default and the consequences hereunder of such Default or Event of Default provided only that such Default or Event of Default does not arise under SECTION 11.1(g) OR (h) or out of a breach of or failure to perform or observe any term, covenant or condition of this Agreement or any other Loan Document (other than the provisions of ARTICLE 11 of this Agreement) the amendment of which requires the unanimous consent of the Lenders. The Required Lenders shall have the right, with respect to any Default or Event of 112 Default that may be waived by them, to enter into an agreement with the Borrower or any other Loan Party providing for the forbearance from the exercise of any remedies provided hereunder or under the other Loan Documents without thereby waiving any such Default or Event of Default. (c) The making of Loans hereunder by the Lenders during the existence of a Default or Event of Default shall not be deemed to constitute a waiver of such Default or Event of Default. (d) Notwithstanding any provision of this Agreement or the other Loan Documents to the contrary, no consent, written or otherwise, of the Borrower shall be necessary or required in connection with any amendment to ARTICLE 13 or SECTION 3.8, and any amendment to such provisions may be effected solely by and among the Agent and the Lenders, PROVIDED that no such amendment shall impose any obligation on (or impair any rights of) the Borrower. SECTION 14.9 ASSIGNMENT. All the provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, except that the Borrower may not assign or transfer any of its rights under this Agreement. SECTION 14.10 PERFORMANCE OF BORROWER'S DUTIES. (a) The Borrower's obligations under this Agreement and each of the Loan Documents shall be performed by the Borrower at its sole cost and expense. (b) If the Borrower shall fail to do any act or thing which it has covenanted to do under this Agreement or any of the Loan Documents, the Agent, on behalf of the Lenders, may (but shall not be obligated to), upon notice to the Borrower, do the same or cause it to be done either in the name of the Agent or the Lenders or in the name and on behalf of the Borrower, and the Borrower hereby irrevocably authorizes the Agent so to act. SECTION 14.11 INDEMNIFICATION. The Borrower agrees to reimburse the Agent and the Lenders for all costs and expenses, including reasonable counsel fees and disbursements, incurred, and to indemnify and hold the Agent and the Lenders harmless from and against all losses suffered by, the Agent or any Lender in connection with (a) the exercise by the Agent or any Lender of any right or remedy granted to it under this Agreement or any of the Loan Documents, (b) any claim, and the prosecution or defense thereof, arising out of or in any way connected with this Agreement or any of the Loan Documents (other than any such claim arising out of disputes among the Lenders and the Agent or asserted by the Borrower in respect of which the Borrower prevails by a final judgment not subject to appeal (or in respect of which an appeal is not timely filed)), and (c) the collection or enforcement of the Secured Obligations or any of them, other than such costs, expenses and liabilities arising out of the Agent's or any Lender's gross negligence or willful misconduct. SECTION 14.12 ALL POWERS COUPLED WITH INTEREST. All powers of attorney and other authorizations granted to the Agent and the Lenders and any Persons designated by the Agent or the Lenders pursuant to any provisions of this Agreement or any of the Loan 113 Documents shall be deemed coupled with an interest and shall be irrevocable so long as any of the Secured Obligations remain unpaid or unsatisfied. SECTION 14.13 SURVIVAL. Notwithstanding any termination of this Agreement, (a) until all Secured Obligations have been irrevocably paid in full or otherwise satisfied, the Agent, for the benefit of the Lenders, shall retain its Security Interest and shall retain all rights under this Agreement and each of the Security Documents with respect to such Collateral as fully as though this Agreement had not been terminated, (b) the indemnities to which the Agent and the Lenders are entitled under the provisions of this ARTICLE 14 and any other provision of this Agreement and the Loan Documents shall continue in full force and effect and shall protect the Agent and the Lenders against events arising after such termination as well as before, and (c) in connection with the termination of this Agreement and the release and termination of the Security Interests, the Agent, on behalf of itself as agent and the Lenders, may require such assurances and indemnities as it shall reasonably deem necessary or appropriate to protect the Agent and the Lenders against loss on account of such release and termination, including, without limitation, with respect to credits previously applied to the Secured Obligations that may subsequently be reversed or revoked. SECTION 14.14 TITLES AND CAPTIONS. Titles and captions of Articles, Sections and subsections in this Agreement are for convenience only, and neither limit nor amplify the provisions of this Agreement. SECTION 14.15 SEVERABILITY OF PROVISIONS. Any provision of this Agreement or any Loan Document which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective only to the extent of such prohibition or unenforceability without invalidating the remainder of such provision or the remaining provisions hereof or thereof or affecting the validity or enforceability of such provision in any other jurisdiction. SECTION 14.16 GOVERNING LAW; JURISDICTION; CONSENT TO SERVICE OF PROCESS; WAIVER OF JURY TRIAL. (a) This Agreement shall be construed in accordance with and governed by the law of the State of New York. (b) The Borrower hereby irrevocably and unconditionally submits, for itself and its property, to the nonexclusive jurisdiction of the Supreme Court of the State of New York sitting in New York County and of the United States District Court of the Southern District of New York, and any appellate court from any thereof, in any action or proceeding arising out of or relating to this Agreement or the other Loan Documents, or for recognition or enforcement of any judgment, and each of the parties hereto hereby irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and determined in such New York State or, to the extent permitted by law, in such Federal court. Each of the parties hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. 114 Nothing in this Agreement shall affect any right that the Agent, or any Lender may otherwise have to bring any action or proceeding relating to this Agreement or the other Loan Documents against the Borrower or its properties in the courts of any jurisdiction. (c) The Borrower hereby irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection which it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Agreement or the other Loan Documents in any court referred to in SECTION 14.17(b). Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court. (d) Each party to this Agreement irrevocably consents to service of process in the manner provided for notices in SECTION 14.1. Nothing in this Agreement will affect the right of any party to this Agreement to serve process in any other manner permitted by law. (e) The Borrower, the Agent and each Lender hereby knowingly, intentionally and voluntarily waive trial by jury in any action or proceeding of any kind or nature in any court in which an action may be commenced by or against the Borrower, the Agent or such Lender arising out of this Agreement, the Collateral or any assignment thereof or by reason of any other cause or dispute whatsoever between the Borrower and the Agent or any Lender of any kind or nature. The Borrower, the Agent and the Lenders hereby agree that the Federal Court of the Northern District of Georgia or, at the option of the Agent or any Lender, any court in which the Agent or such Lender shall initiate legal or equitable proceedings and which has subject matter jurisdiction over the matter in controversy, shall have nonexclusive jurisdiction to hear and determine any claims or disputes between the Borrower and the Agent or such Lender, pertaining directly or indirectly to this Agreement or the Loan Documents or to any matter arising therefrom. The Borrower expressly submits and consents in advance to such jurisdiction in any action or proceeding commenced in such courts, hereby waiving personal service of the summons and complaint, or other process or papers issued therein and agreeing that service of such summons and complaint or other process or papers may be made by registered or certified mail addressed to the borrower at the address of the borrower set forth in SECTION 4.1. Should the Borrower fail to appear or answer any summons, complaint, process or papers so served within 30 days after the mailing thereof, it shall be deemed in default and an order and/or judgment may be entered against it as demanded or prayed for in such summons, complaint, process or papers. The nonexclusive choice of forum set forth in this section shall not be deemed to preclude the enforcement of any judgment obtained in such forum or the taking of any action under this Agreement to enforce same in any appropriate jurisdiction. SECTION 14.17 COUNTERPARTS. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and shall be binding upon all parties, their successors and assigns, and all of which taken together shall constitute one and the same agreement. SECTION 14.18 REPRODUCTION OF DOCUMENTS. This Agreement, each of the Loan Documents and all documents relating thereto, including, without limitation, (a) consents, 115 waivers and modifications that may hereafter be executed, (b) documents received by the Agent or any Lender, and (c) financial statements, certificates and other information previously or hereafter furnished to the Agent or any Lender, may be reproduced by the Agent or such Lender by any photographic, photostatic, microfilm, microcard, miniature photographic or other similar process and such Person may destroy any original document so produced. Each party hereto stipulates that, to the extent permitted by Applicable Law, any such reproduction shall be as admissible in evidence as the original itself in any judicial or administrative proceeding (whether or not the original shall be in existence and whether or not such reproduction was made by the Agent or such Lender in the regular course of business), and any enlargement, facsimile or further reproduction of such reproduction shall likewise be admissible in evidence. SECTION 14.19 PRO-RATA PARTICIPATION. (a) Each Lender agrees that if, as a result of the exercise of a right of setoff, banker's lien or counterclaim or other similar right or the receipt of a secured claim it receives any payment in respect of the Secured Obligations, it shall promptly notify the Agent thereof (and the Agent shall promptly notify the other Lenders). If, as a result of such payment, such Lender receives a greater percentage of the Secured Obligations owed to it under this Agreement than the percentage received by any other Lender, such Lender shall purchase a participation (which it shall be deemed to have purchased simultaneously upon the receipt of such payment) in the Secured Obligations then held by such other Lenders so that all such recoveries of principal and interest with respect to all Secured Obligations owed to each Lender shall be pro rata on the basis of its respective amount of the Secured Obligations owed to all Lenders, PROVIDED that if all or part of such proportionately greater payment received by such purchasing Lender is thereafter recovered by or on behalf of the Borrower from such Lender, such purchase shall be rescinded and the purchase price paid for such participation shall be returned to such Lender to the extent of such recovery, but without interest. (b) Each Lender which receives such a secured claim shall, to the extent practicable, exercise its rights in respect of such secured claim in a manner consistent with the rights of the Lenders entitled under this SECTION 14.20 to share in the benefits of any recovery on such secured claim. (c) The Borrower expressly consents to the foregoing arrangements and agrees that any holder of a participation in any Secured Obligation so purchased or otherwise acquired of which the Borrower has received notice may exercise any and all rights of banker's lien, set-off or counterclaim with respect to any and all monies owing by the Borrower to such holder as fully as if such holder were a holder of such Secured Obligation in the amount of the participation held by such holder. SECTION 14.20 CONFIDENTIALITY. The Agent and each Lender agrees (for itself and its Affiliates, directors, officers, employees and representatives) to use reasonable precautions to keep confidential, in accordance with their customary procedures for handling confidential information of this nature and in accordance with safe and sound banking practices, any non-public information supplied to it by the Borrower or any other Loan Party pursuant to this 116 Agreement which is identified by the Borrower or such Loan Party as being confidential at the time the same is delivered to the Agent or such Lender, PROVIDED that nothing herein shall limit the disclosure of such information (a) to the extent required by statute, rule, regulation or judicial process, (b) to counsel for the Agent or any Lender, (c) to bank examiners, auditors or accountants or other professional advisors involved in the administration of the transactions contemplated hereby and by the other Loan Documents, (d) to the Agent, or any Lender or to any Affiliate of the disclosing party, (e) in connection with any litigation or dispute to which any one or more of the Lenders is a party, (f) to any assignee or participant so long as such assignee or participant (or prospective assignee or participant) agree in writing with the relevant Lender to be bound, MUTATIS MUTANTS, by the provisions of this SECTION 14.21, or (g) to the extent such information has been received from any Person not bound by a duty on confidentiality; PROVIDED FURTHER, that unless specifically prohibited by Applicable Law, each Lender shall, prior to disclosure thereof, notify the Borrower of any request for disclosure of any such non-public information (i) by any governmental agency of representative thereof (other than any such request in connection with an examination of the financial condition of such Lender by such governmental agency) or (ii) pursuant to legal process; and, PROVIDED FINALLY that in no event shall the Agent or any Lender be obligated or required to return any materials furnished by the Borrower or any other Loan Party. The obligations of the Agent and each Lender under this SECTION 14.21 shall supersede and replace the obligations of such Person under any commitment letter, proposal letter, confidentiality agreement or other letter or agreement in respect of the transactions contemplated by this Agreement and signed by such Person and delivered to the Borrower prior to the Agreement Date. 117 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their duly authorized officers in several counterparts all as of the day and year first written above. BORROWER: BURKE INDUSTRIES, INC. [CORPORATE SEAL] Attest: By: /s/ DONALD GLICKMAN -------------------------------- Name: Donald Glickman ------------------------- By: /s/ LOUIS N. MINTZ Title: Assistant Vice President --------------------------- ------------------------ Name: Louis N. Mintz --------------------- Title: Assistant Secretary -------------------- 118 AGENT: NATIONSBANK, N.A. By: /s/ ANDREW HETTINGER -------------------------------- Name: Andrew Hettinger ------------------------- Title: Vice President ------------------------ Address: 600 Peachtree Street 13 Plaza Atlanta, Georgia 30308 Attn: Craig Reese Facsimile No.: 404-607-6437 LENDERS: NATIONSBANK, N.A. By: /s/ ANDREW HETTINGER -------------------------------- Name: Andrew Hettinger ------------------------- Title: Vice President ------------------------ Address: 600 Peachtree Street 13 Plaza Atlanta, Georgia 30308 Attn: Craig Reese Facsimile No.: 404-607-6437 119 EX-10.2 5 EXH 10.2 REVOLVING NOTES FROM CO. EXHIBIT 10.2 [EXECUTION COPY] REVOLVING CREDIT NOTE $15,000,000 New York, New York August 20, 1997 FOR VALUE RECEIVED, the undersigned, BURKE INDUSTRIES, INC., a California corporation (successor by merger to JFL Merger Co., a California corporation, the "Borrower"), hereby unconditionally promises to pay to the order of NationsBank N.A., a national banking association, (the "Lender") at the offices of NationsBank, N.A. a national banking association as agent for the Lenders (together with its successor agents the "Agent") located at 600 Peachtree Street, N.E., Atlanta, Georgia, 30308, or at such other place within the United States as shall be designated from time to time by the Agent, on the Termination Date, the principal amount of Fifteen Million 00/100 Dollars ($15,000,000), or such lesser principal amount as may then constitute the aggregate unpaid balance of all Revolving Credit Loans made by the Lender to the Borrower pursuant to the Loan Agreement (as hereinafter defined), in lawful money of the United States of America in federal or other immediately available funds. The Borrower also unconditionally promises to pay interest on the unpaid principal amount of this Note outstanding from time to time for each day from the date of disbursement until such principal amount is paid in full at the rates per annum and on the dates specified in the Loan Agreement applicable from time to time in accordance with the provisions thereof. Nothing contained in this Note or in the Loan Agreement shall be deemed to establish or require the payment of a rate of interest in excess of the maximum rate permitted by any Applicable Law. In the event that any rate of interest required to be paid hereunder exceeds the maximum rate permitted by Applicable Law, the provisions of the Loan Agreement relating to the payment of interest under such circumstances shall control. This Note is one of the Revolving Credit Notes referred to in that certain Loan and Security Agreement dated as of a date on or about the date hereof (as amended, modified, supplemented or restated from time to time, the "Loan Agreement"; terms defined therein being used in this Note as therein defined) between the Borrower, the financial institutions party thereto from time to time (the "Lenders") and the Agent, is subject to, and entitled to, all provisions and benefits of the Loan Documents, is secured by the Collateral and other property as provided in the Loan Documents, is subject to optional and mandatory prepayment in whole or in part and is subject to acceleration prior to maturity upon the occurrence of one or more Events of Default, all as provided in the Loan Documents. Presentment for payment, demand, protest and notice of demand, notice of dishonor, notice of non-payment and all other notices are hereby waived by the Borrower, except to the extent expressly provided in the Loan Agreement. No failure to exercise, and no delay in exercising, any rights hereunder on the part of the holder hereof shall operate as a waiver of such rights. The Borrower hereby agrees to pay on demand all costs and expenses incurred in collecting the Secured Obligations hereunder or in enforcing or attempting to enforce any of the Lender's rights hereunder, including, but not limited to, reasonable attorneys' fees and expenses if collected by or through an attorney, whether or not suit is filed, all as provided in the Loan Agreement. THE PROVISIONS OF SECTION 14.5 OF THE LOAN AGREEMENT ARE HEREBY EXPRESSLY INCORPORATED BY REFERENCE HEREIN. THIS REVOLVING CREDIT NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE SUBSTANTIVE LAWS OF THE STATE OF NEW YORK, WITHOUT REFERENCE TO THE CHOICE OF LAW RULES OF THE STATE OF NEW YORK, BUT WITH REFERENCE TO SECTION 5-1401 OF THE NEW YORK GENERAL OBLIGATIONS LAW, WHICH SHALL APPLY TO THIS NOTE. IN WITNESS WHEREOF, the undersigned has executed this Note as of the day and year first above written. BURKE INDUSTRIES, INC. By: /s/ DONALD GLICKMAN ------------------- Name: Donald Glickman ------------------------- Title: Assistant Vice President ------------------------ (CORPORATE SEAL) Attest: By: /s/ LOUIS N. MINTZ ------------------ Name: Louis N. Mintz -------------- 2 EX-10.3 6 EXH 10.3 SUBSIDIARY GUARANTY EXHIBIT 10.3 [EXECUTION COPY] GUARANTY (Subsidiary) Dated as of August 20, 1997 Each of the undersigned corporations (each a "Guarantor" and, collectively the "Guarantors"), hereby agrees in favor of NationsBank, N.A., as Agent under the Loan Agreement (as hereinafter defined), as follows: Section 1. CROSS REFERENCES AND DEFINITIONS. (a) Reference is made to the Loan and Security Agreement, dated as of August 20, 1997 (the same as it may be amended, modified or supplemented from time to time being referred to as the "Loan Agreement"), between Burke Industries, Inc., a California corporation (successor by merger to JFL Merger Co., the "Borrower"), the "Lenders" parties thereto from time to time, and the Agent. (b) For the purposes of this Guaranty: "AGENT" and "Lender" each have the meaning ascribed to such terms in the Loan Agreement and "Lender" also means and includes each subsequent holder of a Note. "OBLIGOR" means any obligor, maker, endorser. acceptor, surety or guarantor (other than the Guarantor), from time to time, of any Secured Obligation. (c) Unless otherwise defined in this Guaranty, terms used herein which are defined in the Loan Agreement shall have the same meaning herein as therein ascribed to them. Section 2. GUARANTY. (a) GUARANTY. In consideration of the execution and delivery by the Lenders of the Loan Agreement and the making of Loans and issuing of Letters of Credit to the Borrower by the Lenders thereunder, the Guarantor, as primary obligor and not as surety merely, hereby guarantees absolutely and unconditionally to the Agent and the Lenders the due and punctual payment, when and as due (whether upon demand, at maturity, by reason of acceleration or otherwise), and performance of all Secured Obligations, whether now existing or hereafter arising (hereinafter referred to as the "Guaranteed Obligations"), and agrees to pay any and all expenses (including, but not limited to, reasonable legal fees and disbursements) which may be incurred by the, Agent or any Lender in enforcing its rights under this Guaranty. The liability of each Guarantor under this Guaranty is primary, unlimited and unconditional, and shall be enforceable before, concurrently or after any claim or demand is made or suit is filed against the Borrower or any other Obligor and before, concurrently or after any proceeding by the Agent against any Collateral or other security for the Guaranteed Obligations and shall be effective regardless of the solvency or insolvency of the Borrower or any other Obligor at any time, the extension or modification of any of the Guarantedd Obligations by operation of law or the subsequent reorganization, merger or consolidation of the Borrower or any change in its composition, nature, ownership, personnel or location, and this Guaranty shall be a continuing guaranty of any and all notes given in extension or renewal of the Guaranteed Oligations. Each Guarantor acknowledges, agrees and confirins that this is a guaranty of payment and not of collection only and that demand for payment may be made hereunder on any number of occasions in the amount of all or any portion of the Guaranteed Obligations then due and no single demand shall exhaust the rights of the Agent or the Lenders hereunder. (b) PAYMENT BY GUARANTORS. If the Borrower shall fail to pay, when due and payable, any Guaranteed Obligation, the Guarantors will, without demand or notice, immediately pay the same to the Agent for the account of the Lenders. If any Guaranteed Obligation would be subject to acceleration, but such acceleration is enjoined or stayed, the Guarantors will to the extent permitted by Applicable Law, purchase such Guaranteed Obligation for a price equal to the outstanding principal amount thereof, plus such accrued interest and other amounts as would have been payable had such Guaranteed Obligation been paid or prepaid at the time of such purchase. All payments by the Guarantors under this Guaranty shall be made without any setoff, counterclaim or deduction whatsoever, and in the same currency and funds as are required to be paid by the Borrower. (c) WAIVER. Each Guarantor waives without any requirement of any notice to or further assent by such Guarantor, to the fullest extent permitted by Applicable Law, (i) diligence, presentment, demand, protest and notice of any kind whatsoever, (ii) any requirement that the Agent or any Lender exhaust any right or take any action against any Obligor or other Person or any of the Collateral or other security for the Guaranteed Obligations, (iii) the benefit of all principles or provisions of Applicable Law which are or might be in conflict ,with the terms of this Guaranty, (iv) notice of acceptance hereof, (v) notice of Default or Event of Default, (vi) notice of any and all favorable and unfavorable information, financial or other, about the Borrower, any Obligor or other Person, heretofore, now or hereafter learned or acquired by the Agent or any Lender, (vii) all other notice to which such Guarantor or Obligor might otherwise: be entitled, (viii) all defenses, set-offs and counterclaims of any kind whatsoever (but not the right to bring an independent action), (ix) notice of the existence or creation of any Guaranteed Obligations, (x) notice of any alteration, amendment, increase, extension or exchange of any of the Guaranteed Obligations, (xi) notice of any amendments, modifications or supplements to the Loan Agreement or any Loan Document, (xii) notice of any release of Collateral or other security for the Guaranteed Obligations or any compromise or settlement with respect thereto, (xiii) all diligence in collection or protection of or realization upon the Collateral or any of the Guaranteed Obligatons, and (xiv) the right to require the Agent to proceed against any Obligor. (d) CONSENTS. Each Guarantor consents without the requirement of any notice to or further assent by such Guarantor, to the fullest extent permitted by Applicable Law, that (i) the time of payment of any Guaranteed Obligation may be extended, (ii) any provision of the Loan Agreement or any Loan Document may be amended, waived or modified, (iii) any Obligor 2 may be released from its obligations or other obligors or guarantors substituted therefor or added, (iv) any Collateral or other property now or hereafter securing the Guaranteed Obligations may be released, exchanged, substituted, compromised or subordinated in whole or in part or any security may be added, and (v) the Agent may proceed against any Guarantor or any Obligor without proceeding against any other Obligor. (e) GUARANTOR BOUND. The Guarantors will remain bound under this Guaranty notwithstanding any changes, extensions, exchanges, substitutions. releases, compromises, subordinations, amendments, waivers or modifications or any other circumstances, whether or not referred to in CLAUSES (C) OR (D) above, which might otherwise constitute a legal or equitable discharge of a guaranty. (f) ABSOLUTE OBLIGATION. The obligations of the Guarantors hereunder are irrespective of and shall not be dependent upon or affected by (i) the validity, legality or enforceability of the Loan Agreement, the Note(s) or any Loan Document, (ii) the existence, value or condition of any of the Collateral or other security for the Guaranteed Obligations, (iii) the validity, perfection or priority of the Security Interest in any of the Collateral or other security, (iv) any action or failure to take action by the Agent or any Lender under, or with respect to, the Loan Agreement, the Note(s), any Loan Document, any Guaranteed Obligation, any Obligor or any of the Collateral or other security, (v) any other dealings among the Agent, the Lenders, the Borrower or any Obligor, or (vi) any present or future law or order of any government agency thereof purporting to reduce, amend or otherwise affect any obligations of the Borrower or the Guarantors. (g) RECOVERY OF PAYMENTS. In the event that any or all of the amounts guaranteed by the Guarantors are or were paid by the Borrower or any other Obligor or are or were paid or reduced by application of the proceeds of any Collateral, and all or any part of such payment is recovered from the Agent or any Lender under any applicable bankruptcy or insolvency law or otherwise, the liability of the Guarantors under this Guaranty shall continue and remain in full force and effect to the extent permitted by Applicable Law. (h) WAIVER OF REIMBURSEMENT, SUBROGATION. Each Guarantor hereby waives, irrevocably and to the fullest extent permitted by Applicable Law, any and all rights of subrogation, indemnification, reimbursement, contribution or similar rights which such Guarantor may have against the Borrower or any Obligor or any Collateral, other security or otherwise until all Secured Obligations have been paid in full. The provisions of this SUBSECTION (H) shall survive the termination of this Guaranty. (i) BINDING NATURE OF CERTAIN ADJUDICATIONS. Upon written notice of the institution by the Agent or any Lender of any action or proceedings, legal or otherwise, for the adjudication of any controversy with the Borrower, the Guarantors will be conclusively bound by the adjudication in any such action or proceedings and by a judgment. award or decree entered therein. Each Guarantor waives the right to assert in any action or proceeding brought by the Agent or any Lender, upon the Loan Agreement, the Note(s) or any Loan Document, any offsets 3 or counterclaims which such Guarantor may have with respect thereto (other than (subject to Section 2(g) payment of the Secured Obligations. (j) VALIDITY AND ENFORCEABILITY OF GUARANTY. The Guarantors will take all action required so that the guaranty contained herein will at all times be a binding obligation of the Guarantors enforceable in accordance with its terms. Section 3. REPRESENTATIONS AND WARRANTIES. Each Guarantor represents and warrants to the Agent and the Lenders as follows: (a) ORGANIZATION, POWER, QUALIFICATION. Such Guarantor is a corporation, duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation, has the power and authority to own its properties and to carry on its business as now being and hereafter proposed to be conducted and is duly qualified and authorized to do business in each jurisdiction in which the character of its properties or the nature of its business requires such qualification or authorization. (b) AUTHORIZATION OF GUARANTY. Such Guarantor has the right and power and has taken all necessary action to authorize it to guarantee the Guaranteed Obligations hereunder and to execute, deliver and perform this Guaranty in accordance with its terms. This Guaranty has been duly executed and delivered by the duly authorized officers of such Guarantor and is a legal, valid and binding obligation of such Guarantor enforceable in accordance with its terms. (c) COMPLIANCE OF GUARANTY WITH LAWS, ETC. The execution, delivery and performance of this Guaranty in accordance with its terms and the guaranty of the Guaranteed Obligations hereunder do not and will not, by the passage of time, the giving of notice or otherwise, (i) require any Government Approval or violate any Applicable Law relating to the Guarantor, (ii) conflict with, result in a breach of or constitute a default under (a) the certificate of incorporation or by-laws of such Guarantor, (b) any indenture, agreement or other instrument to which such Guarantor is a party or by which it or any of its properties may be bound or (c) any Governmental Approval, or (iii) result in or require the creation or imposition of any Lien upon or with respect to any property now owned or hereafter acquired by such Guarantor. (d) FINANCIAL INTEREST. The Guarantor is a Subsidiary of the Borrower and is engaged in a related and mutually interdependent business with the Borrower and will derive indirect financial and business advantages and benefits from the Loans and other financial ACCOMMODATIONS that the Lenders may make to the Borrower. Section 4. LITIGATION. THE GUARANTORS, AND THE AGENT AND THE LENDERS HEREBY KNOWINGLY, INTENTIONALLY AND VOLUNTARILY WAIVE TRIAL BY JURY IN ANY ACTION OR PROCEEDING OF ANY KIND OR NATURE IN ANY COURT IN WHICH AN ACTION MAY BE COMMENCED BY OR AGAINST ANY GUARANTOR ARISING OUT OF THIS GUARANTY, OR BY REASON OF ANY OTHER CAUSE OR DISPUTE WHATSOEVER BETWEEN A GUARANTOR AND THE AGENT OR ANY LENDER OF ANY KIND OR NATURE. 4 Section 5. TITLES AND CAPTIONS. Titles and captions of Sections and subsections in this Guaranty are for convenience only, and neither limit nor amplify the provisions of this Guaranty. Section 6. SEVERABILITY OF PROVISIONS. Any provision of this Guaranty which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective only to the extent of such prohibition or unenforceability without invalidating the remainder of such provision or the remaining provisions hereof or affecting the validity or enforceability of such provision in any other jurisdiction. Section 7. GOVERNING LAW. This Guaranty shall be construed in accordance with and governed by the law of the State of New York. (b) Each Guarantor hereby irrevocably and unconditionally submits, for itself and its property, to the nonexclusive jurisdiction of the Supreme Court of the State of New York sitting in New York County and of the United States District Court of the Southern District of New York, and any appellate court from any thereof, in any action or proceeding arising out of or relating to this Guaranty or the other Loan Documents, or for recognition or enforcement of any judgment, and each of the parties hereto hereby irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and determined in such New York State or, to the extent permitted by law, in such Federal court. Each of the parties hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Nothing in this Guaranty shall affect any right that the Agent, or any Lender may otherwise have to bring any action or proceeding relating to this Guaranty or the other Loan Documents against such Guarantor or its properties in the courts of any jurisdiction. (c) Each Guarantor hereby irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection which it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Guaranty or the other Loan Documents in any court referred to in Section 7(b). Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court. (d) Each party to this Agreement irrevocably consents to service of process in the manner provided for notices in Section 10. Nothing in this Guaranty will affect the right of any party to this Guaranty to serve process in any other manner permitted by law. Section 8. COUNTERPARTS. This Guaranty may be executed in any number of counterparts, each of which shall be deemed to be an original and shall be binding upon all parties, their successors and assigns. Section 9. MISCELLANEOUS. This Guaranty and the other agreements contemplated by this Guaranty supersede all prior negotiations, agreements and understandings, and constitute the entire agreement between the parties with respect to the subject matter thereof. All the provisions of this Guaranty shall be binding upon each Guarantor and its successors and assigns, 5 and each Lender may assign or transfer any of its rights under this Guaranty in connection with the transfer of its interests under the Loan Agreement in accordance with the terms thereof. Any term, covenant, agreement or condition of this Guaranty may be amended or waived, and any departure therefrom may be consented to, if, but only if, such amendment, waiver or consent is in writing and is signed by the Agent and the Required Lenders and, in the case of any amendment, also by the Guarantors. Unless otherwise specified in such waiver or consent, a waiver or consent given hereunder shall be effective only in the instance and for the specific purpose for which given and no waiver of any condition, or of the breach of any term, provision, warranty, representation, agreement or covenant contained in this Guaranty, whether by conduct or otherwise, in any one or more instances shall be deemed or construed as a further or continuing waiver of any such condition or breach or a waiver of any other condition or of the breach of any other term, provision, warranty, representation, agreement or covenant contained in this Guaranty. The failure of the Agnet or any Lender at any time or times to require performance of any provisions of this Guaranty shall in no manner affect the right to enforce the same. Whenever the contexr so requires, the singular number shal include the plural and the plural shall include the singular, and the gender of any pronoun shall include the other genders. Section 10. NOTICES. All notices and other communications provided for hereunder shall be in writing and given in accordance with the provisions of SECTION 14.1 of the Loan Agreement and such provisions are hereby incorporated herein by this reference as if fully set forth herein. The address of each Guarantor for such purposes shall be as set forth on the signature page hereof, or such other address notice of which is given in accordance with the provisions hereof and the address of the Lenders shall be as provided from time to time pursuant to SECTION 14.1 of the Loan Agreement. Each Guarantor agrees that if any notification of intended disposition of Collateral or other security for the Guaranteed Obligations or of any other act by the Agent or any Lender is required by law and a specific time period is not stated therein, such notification given in accordance with the provisions of this SECTION 10, at least ten (10) days prior to such disposition or act shall be deemed reasonable and properly given. Section 11. LIMITATION ON GUARANTEED OBLIGATIONS. The obligations of each Guarantor hereunder shall be li mited to an aggregate amount that is equal to the largest amount that would not render the obligations of such Guarantor hereunder subject to avoidance under Section 548 of the United States Bankruptcy Code (Title 11 of the United States Code) or any comparable provision of Applicable Law. 6 IN WITNESS WHEREOF, the Guarantors have caused this Guaranty to be executed by its duly authorized officer(s) as of the day and year first written above. BURKE FLOORING PRODUCTS, INC. [Corporate Seal] By: /s/ DONALD GLICKMAN ------------------- Name: Doanld Glickman Title: Vice President Attest: /s/ LOUIS N. MINITZ Address: 2250 South Tenth St. ------------------- San Jose, Calif. 90112 Name: Louis N. Mintz Title: Assistant Secretary BURKE CUSTOM PROCESSING, INC. [Corporate Seal] By: /s/ DONALD GLICKMAN -------------------- Name: Donald Glickman Title: Vice President Attest: /s/ LOUIS N. MINTZ Address: 2250 South Tenth St. ------------------ San Jose, Calif. 90112 Name: Louis N. Mintz Title: Assistant Secretary BURKE RUBBER COMPANY, INC. [Corporate Seal] By: /s/ DONALD GLICKMAN ------------------- Name: Donald Glickman Title: Vice President Attest: /s/ LOUIS N. MINTZ Address: 2250 South Tenth St. ------------------ San Jose, Caliif. 90112 Name: Louis N. Mintz Title: Assistant Secretary 7 EX-10.4 7 EXH 10.4 SUBSIDIARY SECURITY AGMT EXHIBIT 10.4 [EXECUTION COPY] SECURITY AGREEMENT (Subsidiary) THIS SECURITY AGREEMENT, dated as of August 20,1997, (this "Agreement") is made by each of the undersigned corporations (each a "Grantor" and, collectively, the "Grantors"), in favor of NationsBank, N.A., a national banking association (the "Agent"), in its capacity as agent for the financial institutions (the "Lenders") parties from time to time to the Loan and Security Agreement dated as of August 20, 1997 (the same as it may be amended, modified, supplemented, extended or refinanced from time to time. the "Loan Agreement") between Burke Industries, Inc., a California corporation (successor by merger to JFL Merger Co., the "Borrower"), the Lenders and the Agent. Unless otherwise defined herein, terms defined in the Loan Agreement are used in this Agreement as therein defined. PRELIMINARY STATEMENT. As a condition precedent to the Lenders making loans and other financial accommodations to the Borrower under the terms of the Loan Agreement, the obligations of the Borrower under which have been guaranteed by each Grantor pursuant to a Guaranty, dated as of even date herewith, (the principal, interest, fees. expenses and other indebtedness, obligations and liabilities under said Guaranty and this Agreement and all other indebtedness, obligations and liabilities of such Grantor to the Lenders, whether direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising, being hereinafter referred to collectively as the "Secured Obligations"), the Agent and the Lenders have required that Grantor shall have granted the security interest contemplated by this Agreement. NOW, THEREFORE, in consideration of the premises and in order to induce the Lenders to make loans and other financial accommodations to the Borrower, each Grantor hereby agrees as follows: SECTION 1. GRANT OF SECURITY. As security for payment and performance of the Secured Obligations, such Grantor hereby conveys, mortgages, pledges, assigns, transfers, sets over, grants and delivers to the Agent on behalf of the Lenders a continuing security interest in all of such Grantor's right, title and interest in and to the following property, wherever located, whether now owned or existing or hereafter acquired or arising (hereinafter referred to as the "Collateral"): (a) all machinery, apparatus, equipment, fittings, fixtures and other tangible personal property (other than Inventory, as hereinafter defined) of every kind and description, and all parts, accessories and special tools and all increases and accessions thereto (hereinafter referred to collectively as the "Equipment"); (b) all inventory of every kind and description, including, but not limited to, (i) all finished goods and all raw materials, work in process, and materials used or consumed in the manufacture or production of finished goods, (ii) all goods in which such Grantor has an interest in mass or a joint or other interest of any kind, and (iii) all goods which are returned to or repossessed by such Grantor, and all accessions and products of all of the foregoing (hereinafter referred to collectively as the "Inventory"); (c) all rights to the payment of money or other forms of consideration (including such rights under contracts whether or not at the time earned by performance), including, without limitation, accounts, contract rights, chattel paper, instruments, documents, letters of credit,, tax refunds, general intangibles, insurance proceeds and other obligations of every kind and description arising out of or in connection with the sale or lease of goods or the rendering of services or otherwise (hereinafter "Receivables") and all rights in and to all security agreements. leases and other contracts securing or otherwise relating to any such Receivables (hereinafter "Related Contracts"); and (d) all products and proceeds of any and all of the foregoing and to the extent not otherwise included, all payments under insurance (whether or not the Agent on behalf of the Lenders is the loss payee thereof), or any indemnity, warranty or guaranty, payable by reason of loss or damage to or otherwise with respect to any of the foregoing. Notwithstanding anything herein to the contrary, the Collateral shall not include (i) any agreement with a third party existing on the date hereof that prohibits the grant of a Lien on (but not merely the assignment of or of any interest in) such agreement or any of such Grantor's rights thereunder without the consent of such party or under which a consent to such grant is otherwise required, which consent has not been obtained, except to the extent rights under any such agreement are covered by Section 9-318 of the UCC, and (ii) any license permit or other Governmental Approval that, under the terms and conditions of such Governmental Approval or under Applicable Law, cannot be subjected to a Lien in favor of the Agent without the consent of the relevant party which consent has not been obtained; PROVIDED, HOWEVER, that the Collateral shall include all items excluded pursuant to clauses (i) or (ii) from and after the date on which the requisite consent is obtained. SECTION 2. GRANTOR REMAINS LIABLE. Anything contained herein to the contrary notwithstanding, (a) such Grantor shall remain liable under the contracts and agreements included in the Collateral to the extent set forth therein to perform all of its duties and obligations thereunder to the same extent as if this Agreement had not been executed, (b) the exercise by the Agent or any Lender of any of the rights hereunder shall not release such Grantor from any of its duties or obligations under the contracts and agreements included in the Collateral, and (c) the Agent and the Lenders shall not have any obligation or liability under the contracts and agreements included in the Collateral by reason of this Agreement, nor shall the Agent and the Lenders be obligated to perform any of the obligations or duties of such Grantor thereunder or to take any action to collect or enforce any claim for payment assigned hereunder. SECTION 3. REPRESENTATIONS AND WARRANTIES. Each Grantor represents and warrants as follows: (a) Such Grantor is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction indicated at the beginning of this Agreement, has the power and authority to own its properties and to carry on its business as now being and as hereafter proposed to be conducted and is duly qualified and authorized to do business in each 2 jurisdiction in which the character of its properties or the nature of its business requires such qualification or authorization. (b) Such Grantor has the right and power, and has taken all necessary action to authorize IT, to execute, deliver and perform this Agreement in accordance with its terms. This Agreement has been duly executed and delivered by the duly authorized officers of such Grantor and is a legal, valid and binding obligation of such Grantor, enforceable in accordance with its terms. (c) The execution, delivery and performance of this Agreement in accordance with its terms does not and will not. by the passage of time, the giving of notice or otherwise, (i) require any Government Approval or violate any Applicable Law relating to such Grantor, (ii) conflict with, result in a breach of or constitute a default under the articles of incorporation or by-laws of such Grantor, any indenture, agreement or other instrument to which such Grantor is a party or by which it or any of its property may be bound or any Governmental Approval relating to such Grantor, or (iii) result in or require the creation or imposition of any Lien upon or with respect to any property now owned or hereafter acquired by such Grantor other than the security interest contemplated by this Agreement. (d) There is no pending or threatened action or proceeding affecting such Grantor before any court, governmental agency or arbitrator, which may materially adversely affect the financial condition or operations of such Grantor. (e) All of the Equipment and Inventory are located at the address(es) set forth in PART I of EXHIBIT A hereto. Additional locations of the Equipment and Inventory during the last year are set forth in PART II of EXHIBIT A hereto. (f) The address of the chief executive office of such Grantor is set forth in PART III of EXHIBIT A hereto. The addresses of such chief executive offices have not been changed within the last five years. The address of the principal place of business of such Grantor in each state in which Collateral is located is set forth in PART IV of EXHIBIT A hereto. (g) The office(s) where each Grantor keeps its records concerning the Receivables and originals of chattel paper which evidence Receivables is (are) located at the address(es) set forth in PART IV of EXHIBIT A hereto and except as otherwise indicated in said PART IV of EXHIBIT A, such office(s) has (have) been located at such addressees) continuously for the past year. None of the Receivables is evidenced by a promissory note or other instrument, not in the possession of the Agent or any Lender. (h) If the business of such Grantor has been conducted under a different name or names during the last five years, such name(s) is (are) set forth in PART V of EXHIBIT A hereto. 3 (i) Each Grantor owns the Collateral free and clear of any lien, security interest, charge or encumbrance except for the security interest created by this Agreement and the Permitted Liens. Except as may be set forth on EXHIBIT B, no effective Financing Statement or other instrument similar in effect covering all or any part of the Collateral is on file in any recording office, except such as may have been filed in favor of the Agent on behalf of the Lenders relating to this Agreement or is related to a Permitted Lien. (j) The execution and delivery of this Agreement by such Grantor creates a valid security interest in the Collateral, which security interest (i) will be perfected as to all Collateral a security interest in which can be perfected by filing under the Uniform Commercial Code as in effect in any United States jurisdiction, upon the filing of the Financing Statements executed and delivered to the Agent on the Effective Date by such Grantor in accordance with this Agreement, (ii) has been perfected as to all Collateral identified by the Agent, a security interest in which may only be perfected by possession thereof by the secured party or its bailee, by delivery thereof to the Agent by such Grantor as of the Effective Date, accompanied by stock powers executed in blank, appropriate endorsements or appropriate instruments of assignment or transfer, and (iii) will be perfected as to all other Collateral, upon the Agent's request. Such perfected security interest is subject to no prior Lien other than Permitted Liens. (k) No authorization, approval or other action by, and no notice to or filing with, any governmental authority or regulatory body is required either (i) for the grant by such Grantor of the security interest granted hereby or. for the execution, delivery or performance of this Agreement by such Grantor or (ii) for the exercise by the Agent of its rights and remedies hereunder, except for filings in connection with the protection of Liens as contemplated hereby. SECTION 4. FURTHER ASSURANCES. (a) Each Grantor agrees that from time to time, at its expense, such Grantor shall promptly execute and deliver all further instruments and documents, and take all further action, that may be necessary or desirable, or that the Agent or any Lender may reasonably request, in order to perfect and protect any security interest granted or purported to be granted hereby or to enable the Agent or any Lender to exercise and enforce its rights and remedies hereunder with respect to any Collateral. Without limiting the generality of the foregoing, each Grantor shall: (i) mark conspicuously each chattel paper included in the Receivables and each Related Contract and, at the request of the Agent, each of its records pertaining to the Collateral, with a legend, in form and substance satisfactory to the Agent, indicating that such chattel paper, Related Contract or Collateral is subject to the security interest granted hereby; (ii) if any Receivable shall be evidenced by a promissory note or other instrument or chattel paper with a face value in excess of $100,000 deliver and pledge to the Agent on behalf of the Lenders such note, instrument or chattel paper duly endorsed and accompanied by duly executed instruments of transfer or assignment, all in form and substance satisfactory to the Agent; and (iii) execute and file such financing or continuation statements, or amendments thereto, and such other instruments or notices, as may be necessary or desirable, or as the Agent or any Lender may reasonably request, in order to perfect and preserve the security interests granted or purported to be granted hereby. 4 (b) Each Grantor hereby authorizes the Agent to file one or more financing or continuation statements, and amendments thereto, relative to all or any part of the Collateral without the signature of such Grantor where permitted by law and agrees that a photographic or other reproduction of this Agreement of this may be used and filed as a financing statement. (c) The Grantor shall furnish to the Agent from time to time statements and schedules further identifying and describing the Collateral and such other reports in connection with the Collateral as the Agent or the Lenders may reasonably request, all in reasonable detail. SECTION 5. AS TO EQUIPMENT AND INVENTORY. Each Grantor shall: (a) Except as permitted by the Loan Agreement, keep the Equipment and Inventory (other than Inventory sold in the ordinary course of business) at the places therefor specified 'in Section 3(e) or, upon 15 days' prior written notice to the Agent, at such other places in jurisdictions where all action required by Section 4 shall have been taken with respect to the Equipment and Inventory and notify the Agent in writing of any other proposed change in any facts set forth in. EXHIBIT B not less than 15 days in advance of such change. (b) Except as permitted by the Loan Agreement, cause the Equipment to be maintained and preserved in the same condition, repair and working order as when new, ordinary wear and tear excepted, and in accordance with any manufacturer's manual, and shall forthwith, or in the case of any loss or damage to any of the Equipment as quickly as practicable after the occurrence thereof and make or cause to be made all repairs, replacements, and other improvements in connection therewith which are necessary or desirable to such end. Such Grantor shall promptly furnish to the Agent a statement respecting any material loss or material damage to any of the Equipment. (c) Pay promptly when due all property and other taxes, assessments and governmental charges or levies imposed upon, and all claims (including claims for labor, materials and supplies) against, the Equipment and Inventory, except to the extent the validity thereof is being contested in good faith. SECTION 6. INSURANCE. (a) Each Grantor shall, at its own expense, maintain insurance with respect to the Equipment and Inventory in such amounts not to exceed those obtainable at commercially reasonable rates acceptable to the Agent in the exercise of its reasonable judgment, against such risks as is customarily maintained by similar businesses or as may be required by Applicable Law, and in such form and with such insurers acceptable to the Agent in the exercise of its reasonable judgment. Each policy for (i) liability insurance shall provide for all losses to be paid on behalf of the Agent for the account of the Lenders and such Grantor as their respective interests may appear and (ii) property damage insurance shall provide for all losses (except for losses of less than $250,000 per occurrence) to be paid directly to the Agent for the account of the Lenders. Each such policy shall in addition (i) name such Grantor and the Agent on behalf of the Lenders as insured parties thereunder (without any representation or warranty by or obligation upon the Agent or any Lender) as their interests may appear, (ii) contain the agreement by the insurer that any loss thereunder shall be payable to the Agent on behalf of the Lenders notwithstanding any action, inaction or breach of representation or warranty by such 5 Grantor, (iii) provide that there shall be no recourse against the Agent or any Lender for payment of premiums or other amounts with respect thereto, and (iv) provide that at least 10 days' prior written notice of cancellation or of lapse shall be given to the Agent by the insurer. Each Grantor shall, if so requested by the Agent, deliver to the Agent original or duplicate policies of such insurance and, as often as the Agent or any Lender may reasonably request, a report of a reputable insurance broker with respect to such insurance. Further, each Grantor shall, at the request of the Agent or any Lender, duly execute and deliver instruments of assignment of such insurance policies to comply with the requirements of Section 4 and cause the respective insurers to acknowledge notice of such assignment. (b) Reimbursement under any liability insurance maintained by the Grantor pursuant to this Section 6 may be paid directly to the Person who shall have incurred liability covered by such insurance. In case of any loss involving damage to Equipment or Inventory when subsection (c) of this Section 6 is not applicable, such Grantor shall make or cause to be made the necessary repairs to or replacements of such Equipment or Inventory, and any proceeds of insurance maintained by such Grantor pursuant to this Section 6 shall be paid to such Grantor as reimbursement for the costs of such repairs or replacements. (c) Upon (i) the occurrence and during the continuance of any Event of Default, or (ii) the actual or constructive total loss (in excess of $1,000,000 per occurrence) of any Equipment and Inventory, all insurance payments in respect of such Equipment or Inventory shall be paid to and applied by the Agent as specified in Section 13(b). SECTION 7. AS TO RECEIVABLES. (a) Each Grantor shall keep its chief place of business and chief executive office and the office(s) where it keeps its records concerning the Receivables, and all originals of all chattel paper which evidence Receivables, at the location(s) therefor specified in EXHIBIT A or, at such other location(s) upon prior written notice and evidence satisfactory to the Agent that all actions to maintain perfection and priority of the Receivables or as otherwise required by Section 4 have been taken. Each Grantor will hold and preserve such records and chattel paper and will permit representatives of the Agent and the Lenders at any time during normal business hours to inspect and make abstracts from such records and chattel paper. (b) Except as otherwise provided in this subsection (b), each Grantor shall continue to collect, at its own expense, all amounts due or to become due such Grantor under the Receivables. In connection with such collections, each Grantor may take (and, at the Agent's direction, while an Event of Default exists, shall take) such action as such Grantor or the Agent may deem necessary or advisable to enforce collection of the Receivables; PROVIDED, HOWEVER, that the Agent shall have the right at any time, upon the occurrence and during the continuation of an Event of Default, to notify the account debtors or obligors under any Receivables of the assignment of such Receivables to the Agent on behalf of the Lenders and to direct such account debtors or obligors to make payment of all amounts due or to become due to such Grantor thereunder directly to the Agent for the account of the Lenders and, upon such notification and at the expense of such Grantor, to enforce collection of any such Receivables, and to adjust, settle or compromise the amount or payment thereof, in the same manner and to the same extent as 6 such Grantor might have done. After receipt by the Grantor of the notice from the Agent referred to in the PROVISO to the preceding sentence, (i) all amounts and proceeds (including instruments) received by such Grantor in respect of the Receivables shall be received in trust for the benefit of the Agent hereunder, shall be segregated from other funds of the Grantor and shall be forthwith paid over to the Agent for the account of the Lenders in the same form as so received (with any necessary endorsement) to be held as cash collateral and either (a) released to such Grantor so long as no Event of Default shall have occurred and be continuing or (b) if any Event of Default shall have occurred and be continuing, applied as provided by Section 13(b), and (ii) without the consent of the Agent, such Grantor shall not adjust, settle or compromise the amount or payment of any Receivable, or release wholly or partly any account debtor or obligor thereof, or allow any credit or discount thereon. SECTION 8. TRANSFERS AND OTHER LIENS. Each Grantor shall not without the prior -written consent of the Agent or as permitted by the Loan Agreement: (a) Sell, assign (by operation of law or otherwise) or otherwise dispose of any of the Collateral except Inventory in the ordinary course of business and Equipment no longer used or deemed useful in the business. (b) Create or suffer to exist any lien, security interest or other charge or encumbrance Upon or with respect to any of the Collateral to secure indebtedness of any person or entity, except for the security interest created by this Agreement and liens, if any, contemplated by the Loan Agreement. SECTION 9. AGENT APPOINTED ATTORNEY-IN-FACT. Each Grantor hereby irrevocably appoints the Agent such Grantor's attorney-in-fact, with full authority in the place and stead of such Grantor and in the name of such Grantor, the Agent or otherwise, from time to time in the Agent's discretion, while an Event of Default Exists, to take any action and to execute any instrument which the Agent may deem necessary or advisable to accomplish the purposes of this Agreement (subject to the fights of the Grantor under Section 7), including, without limitation: (i) to obtain and adjust insurance required to be paid to the Agent for the account of the Lenders pursuant to Section 6, (ii) to ask demand, collect, sue for, recover, compound, receive and give acquittance and receipts for moneys due and to become due under or in respect of an of the Collateral, (iii) to receive, endorse, and collect any drafts or other instruments, documents and chattel paper, in connection with clause (i) or (11) above, and (iv) to file any claims or take any action or institute any proceedings which the Agent or any Lender may deem necessary or desirable for the collection of any of the Collateral or otherwise to enforce the fights of the Agent and the Lenders with respect to any of the Collateral. 7 SECTION 10. AGENT MAY PERFORM. If any Grantor fails to per-form any agreement contained herein, upon reasonable notice the Agent on behalf of the Lenders may itself perform., or cause performance of, such agreement, and the expenses of the Agent incurred in connection therewith shall be payable by such Grantor under Section 14(b). SECTION 11. THE AGENT'S DUTIES. The powers conferred on the Agent hereunder are solely to protect the Lenders' interest in the Collateral and shall not impose any duty upon it to exercise any such powers. except as otherwise provided under Applicable Law. Except for the safe custody of any Collateral in its possession and the accounting for moneys actually received by it hereunder, the Agent shall have no duty as to any Collateral or as to the taking of any necessary steps to preserve fights against prior parties or any other rights pertaining to any Collateral. SECTION 12. EVENTS OF DEFAULT. The occurrence of any one or more of the following shall constitute an Event of Default hereunder: (a) The occurrence of an Event of Default as defined in the Loan Agreement; (b) The failure of any Grantor to make any payment herewith, as and when the same shall become due and payable, any of the Secured Obligations; (c) The failure of any Grantor to perform any of its other agreements or obligations as specified in this Agreement, in the Guaranty or in any other agreement now or hereinafter existing between the Grantors, the Agent and the Lenders and such default shall continue for a period of thirty days after written notice thereof has been given to such Grantor by Agent; or (d) If at any time any representation, warranty, statement, certificate, schedule or report made by any Grantor to the Agent and the Lenders shall prove to have been false or misleading in any, material respect as of the time made or furnished. SECTION 13. REMEDIES. If any Event of Default shall have occurred and be continuing: (a) The Agent may, and at the direction of the Required Lenders in their sole and absolute discretion shall, exercise in respect of the Collateral, 'in addition to other rights and remedies provided for herein or otherwise available to it under Applicable Law or in equity or otherwise, all the rights and remedies of a Lender on default under the Uniform Commercial Code (the "Code") (whether or not the Code applies to the affected Collateral) and also may do any or all of the following: (i) Declare any or all of the Secured Obligations then existing to be immediately due and payable and they shall thereupon become forthwith due and payable, without notice of any kind to any Grantor and without any other presentment, demand, protest, or notice of any kind, all of which are hereby expressly waived. (ii) Terminate Lenders' obligations, if any, to make further loans or extensions of credit or other financial accommodations to the Borrower. 8 (iii) In the name of the Agent, of the Lenders or in the name of any Grantor or otherwise, demand, sue for, collect or receive any money or property at any time payable or receivable on account of or in exchange for, or make any compromise or settlement deemed desirable with respect to, any of the Collateral, but the Agent and the Lenders shall be under no obligation so to do, and the Agent and the Required Lenders may extend the time of payment, arrange for payment installments, or otherwise modify the terms of, or release, any of the Collateral without thereby incurring responsibility to. or discharging or otherwise affecting any liability of, the Grantors. (iv) Enter upon the premises, or wherever the Collateral may be. and take possession thereof, and demand and receive such possession from any person who has possession thereof and maintain such possession on such premises or move the same or any part thereof to such other place or places as the Agent shall choose, without being liable to such Grantor on account of any loss, damage or depreciation that may occur as a result thereof, so long as the Agent shall act reasonably and in good faith. (v) Require any Grantor to, and such Grantor hereby AGREES that it will at its expense and upon request of the Agent or any Lenders forthwith. assemble all or part of the Collateral as directed by the Agent or any Lenders and make it available to the Agent or any Lenders at a place to be designated by the Agent or any Lenders which is reasonably convenient to both parties. (vi) Without notice except as specified below and with or without taking the possession thereof, sell the Collateral or any part thereof in one or more parcels at public or private sale, at any location chosen by the Agent, for cash. on credit or for future delivery, and at such price or prices and upon such other terms as the Agent may deem commercially reasonable. Each Grantor agrees that, to the extent notice of sale shall be required by law, at least ten days' notice to such Grantor of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification, but notice given in any other reasonable manner or at any other reasonable time shall constitute reasonable notification. The Agent and the Lenders shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. The Agent may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. (vii) In any action hereunder, the Agent, on behalf of the Lenders, shall be entitled to the appointment of a receiver, to take possession of all or any portion of the Collateral and to exercise such power as the court shall confer upon the receiver. (viii) Apply, without notice, any cash or cash items constituting Collateral in the Agent's or any Lender's possession to payment of any of the Secured Obligations. The undersigned waives. to the extent permitted by Applicable Law, all rights it has to prior notice and hearing under the Constitution of the United States and the Uniform Commercial 9 Code and constitution of the State of New York, and under any other applicable statute or constitution. (b) All cash proceeds received by the Agent or any Lender in respect of any sale of, collection from, or other realization upon all or any part of the Collateral shall be applied (after payment of any amounts payable to the Agent and the Lenders pursuant to Section 14) in whole or in part by the Agent against, all or any part of the Secured Obligations in such order as the Agent shall elect. Any surplus of such cash or cash proceeds held by the Agent or any Lender and remaining after payment in full of all the Secured Obligations shall be paid over to the Grantor or to whomsoever may be lawfully entitled to receive such surplus. Each Grantor shall remain liable for any deficiency. SECTION 14. INDEMNITY AND EXPENSES. (a) Each Grantor agrees to indemnify the Agent and the Lenders from and against any and all claims, losses and liabilities growing out of or resulting from this Agreement (including, without limitation. enforcement of this Agreement), except claims, losses or liabilities resulting from the Agent's or any Lender's gross negligence or willful misconduct. (b) Each Grantor will upon demand pay to the Agent and the Lenders the amount of any and all reasonable expenses, including the reasonable fees and disbursements of its counsel and of any experts and agents, which the Agent or the Lenders may incur in connection with (i) subject to the limitations set forth in Section 14.2 of the Loan Agreement, the perfection of any security interest granted hereunder, (ii) the administration of this Agreement, (iii) the custody, presentation, use or operation of, or the sale of, collection from, or other realization upon. any of the Collateral, (iv) the exercise or enforcement of any of the rights of the Agent or the Lenders hereunder, or (v) the failure by the Grantor to perform or observe any of the provisions hereof SECTION 15. AMENDMENTS; ETC. No amendment or waiver of any provision of this Agreement, nor consent to any departure by any Grantor herefrom, shall in any event be effective unless the same shall be in writing and signed by the Agent and the Required Lenders. and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. SECTION 16. NOTICES. All notices and other communications provided for hereunder shall be in writing and given in accordance with the provisions of SECTION 14.1 of the Loan Agreement and such provisions are hereby incorporated herein by this reference as if fully set forth herein. The address of each Grantor for such purposes shall be as set forth on the signature page hereof, or such other address notice of which is given in accordance with the provisions hereof and the address of the Lenders shall be as provided from time to time pursuant to SECTION 14.1 of the Loan Agreement. Each Grantor agrees that if any notification of intended disposition of Collateral or other security for the Secured Obligations or of any other act by the Agent or any Lender is required by law and a specific time period is not stated therein, such notification given in accordance with the provisions of this SECTION 16, at least ten (10) days prior to such disposition or act shall be deemed reasonable and properly given. 10 SECTION 17. CONTINUING SECURITY INTEREST, TRANSFER OF OBLIGATIONS. This Agreement shall create a continuing security interest in the Collateral and shall (i) remain in full force and effect until payment in full of the Secured Obligations, (ii) be binding upon each Grantor, its successors and assigns, and (iii) inure to the benefit of the Agent and the Lenders and their successors, transferees and assigns. Without limiting the generality of the foregoing clause (iii), each Lender may assign or otherwise transfer any of its rights under this Agreement in connection with a transfer of its interests under the Loan Agreement in accordance with the terms thereof Upon the payment in full of the Secured Obligations, the security interest granted hereby shall terminate and all rights to the Collateral shall revert to the Grantors. Upon any such termination, the Agent and the Lenders will, at such Grantor's expense, execute and deliver to such Grantor such documents as such Grantor shall reasonably request to evidence such termination. SECTION 18. GOVERNING LAW; TERMS. (a) This Agreement shall be construed in accordance with and governed by the law of the State of New York. (b) Each Grantor hereby irrevocably and unconditionally submits, for itself and its property, to the nonexclusive jurisdiction of the Supreme Court of the State of New York sitting in New York County and of the United States District Court of the Southern District of New York, and any appellate court from any thereof, in any action or proceeding arising out of or relating to this Agreement or the other Loan Documents, or for recognition or enforcement of any judgment, arid each of the parties hereto hereby irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and deter-mined in such New York State or, to the extent permitted by law, in such Federal court. Each of the parties hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Nothing in this Agreement shall affect any right that the Agent, or any Lender may otherwise have to bring any action or proceeding relating to this Agreement or the other Loan Documents against such Grantor or its properties in the courts of any jurisdiction. (c) Each Grantor hereby irrevocably and unconditionally waives. to the fullest extent it may legally arid effectively do so, any objection which it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Agreement or the other Loan Documents in any court referred to in SECTION 18(B). Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court. (d) Each party to this Agreement irrevocably consents to service of process in the manner provided for notices in SECTION 16. Nothing in this Agreement will affect the right of any party to this Agreement to serve process in any other manner permitted by law. SECTION 19. LITIGATION. EACH GRANTOR, THE AGENT AND EACH LENDER HEREBY KNOWINGLY, INTENTIONALLY AND VOLUNTARILY WAIVE TRIAL BY JURY IN ANY ACTION OR PROCEEDING OF ANY KIND OR NATURE IN ANY COURT IN WHICH AN ACTION MAY BE COMMENCED BY OR AGAINST SUCH GRANTOR, 11 THE AGENT OR SUCH LENDER ARISING OUT OF THIS AGREEMENT, THE COLLATERAL OR ANY ASSIGNMENT THEREOF OR BY REASON OF ANY OTHER CAUSE OR DISPUTE WHATSOEVER BETWEEN ANY GRANTOR AND THE AGENT OR ANY LENDER. OF ANY KIND OR NATURE. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered by their respective duly authorized officer(s) as of the date first above written. BURKE FLOORING PRODUCTS, INC. By: /s/ DONALD GLICKMAN ------------------- Name: Donald Glickman Title: Vice President Address: 2250 South Tenth Street San Jose, California 95112 BURKE CUSTOM PROCESSING, INC. By: /s/ DONALD GLICKMAN ------------------- Name: Donald Glickman Title: Vice President Address: 2250 South Tenth Street San Jose, California 95112 BURKE RUBBER COMPANY, INC. By: /s/ DONALD GLICKMAN ------------------- Name: Donald Glickman Title: Vice President Address: 2250 South Tenth Street San Jose, California 95112 NATIONSBANK, N.A., as Agent By: /s/ ANDREW HETTINGER -------------------- Name: Andrew Hettinger Title: Vice President Address: 600 Peachtree St., 13th Plaza Atlanta, GA 30308 12 NATIONSBANK, N.A., as Lender By: /s/ ANDREW HETTINGER -------------------- Name: Andrew Hettinger Title: Vice President Address: 600 Peachtree St., 13th Plaza Atlanta, GA 30308 13 [EXECUTION COPY] EXHIBIT A SUBSIDIARY SECURITY AGREEMENT PART I -- PRESENT LOCATION OF EQUIPMENT AND INVENTORY None. PART II -- LOCATION OF EQUIPMENT AND INVENTORY DURING PAST YEAR None. PART III -- CHIEF EXECUTIVE OFFICE OF GRANTOR 2250 South Tenth Street San Jose, California 95112-4197 PART IV -- ADDRESS OF PRINCIPAL PLACE OF BUSINESS OF GRANTOR WHERE COLLATERAL IS LOCATED 2250 South Tenth Street San Jose, California 95112-4197 PART V -- NAMES USED DURING THE LAST FIVE YEARS Burke Industries, Inc. Burke Flooring Products, Inc. Burke Rubber Company Burke Industries Silicone Products Group Burke Industries Haskon Division Burke Custom Processing Burke Rubber Company Supervisors Club Burke Construction Company EXHIBIT B LIENS 1. Lien and financing statement granted by Burke Custom Processing, Inc. relating to Electronic; Security and Detection Devices and Equipment in favor of Ace Security. 2 EX-10.5 8 EXH 10.5 STOCK PLEDGE AGMT EXHIBIT 10.5 [EXECUTION COPY] PLEDGE AGREEMENT THIS PLEDGE AGREEMENT, dated as of August 20, 1997, made by BURKE INDUSTRIES, INC., a California corporation (the "Pledgor"), in favor of NationsBank, N.A., a national banking association with its principal office located in Atlanta, Georgia (the "Agent"), in its capacity as agent for the financial institutions (the "Lenders") party from time to time to the Loan and Security Agreement dated as of August 20, 1997 (the same as it may be amended, modified, supplemented, extended or refinanced from time to time, being the "Loan Agreement"), between the Pledgor, the Lender and the Agent. PRELIMINARY STATEMENT Pursuant to the Loan Agreement, the Lenders have made or have agreed to make certain financial accommodations to the Pledgor in the form of revolving credit loans under a $15,000,000 revolving credit facility, on the terms and conditions more particularly set forth in the Loan Agreement. Terms defined in the Loan Agreement, unless otherwise defined herein, are used herein as therein defined. The Pledgor's obligations under the Loan Agreement are secured by substantially all of the Pledgor's assets. The Pledgor is the owner of all of the issued and outstanding capital stock of the companies listed on ANNEX A attached hereto ("Pledged Shares"). The Lenders and the Agent have required as a condition to entering into the Loan Agreement and extending the credit and financial accommodations described therein that the Pledgor enter into this Pledge Agreement. STATEMENT OF AGREEMENT NOW, THEREFORE, in consideration of the premises and in order to induce the Lenders to make Loans to the Pledgor under the Loan Agreement, the Pledgor hereby agrees as follows: Section 1. PLEDGE. The Pledgor hereby mortgages, pledges and assigns to the Agent, for its benefit and the benefit of the Lenders, and grants to the Agent, for its benefit and the benefit of the Lenders, a security interest in the following (the "Pledged Collateral"): (a) the Pledged Shares and the certificates representing the Pledged Shares and all dividends, cash, instruments and other property from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of the Pledged Shares; (b) Any additional shares of any class of stock of any issuer of the Pledged Shares from time to time acquired by the Pledgor in any manner and the certificates representing such additional shares and all dividends, cash, instruments and other property from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such shares; and (c) all proceeds of the foregoing. Section 2. SECURITY FOR OBLIGATIONS. This Pledge Agreement secures the payment and performance of all of the Secured Obligations now or hereafter existing. Section 3. DELIVERY OF PLEDGED COLLATERAL. All certificates representing or evidencing the Pledged Collateral shall be delivered to and held by or on behalf of the Agent, for the benefit of the Lenders, pursuant hereto and shall be in suitable form for transfer by delivery, or shall be accompanied by duly executed instruments of transfer or assignment in blank, all in form and substance satisfactory to the Agent. The Agent shall have the right, at any time in its discretion and without notice to the Pledgor, when an Event of Default exists, to transfer to or to register in the name of the Agent or any of its nominees, for the benefit of the Lenders, any or all of the Pledged Collateral, subject only to the revocable rights specified in SECTION 6(A). The Agent shall have the right at any time when an Event of Default exists to exchange certificates or instruments representing or evidencing Pledged Collateral for certificates or instruments of smaller or larger denominations. The Pledgor acknowledges that all certificates or instruments deposited by the Pledgor or transferred to or registered in the name of the Agent in accordance with this SECTION 3 are deposited, transferred or registered to secure the payment and performance of the Secured Obligations. Section 4. REPRESENTATIONS AND WARRANTIES. The Pledgor represents and warrants as follows: (a) The execution, delivery and performance of this Pledge Agreement in accordance with its terms and the grant of the security interest hereunder are within the Pledgor's corporate power and have been duly authorized by all necessary corporate action on the part of the Pledgor. This Agreement has been duly executed and delivered by an authorized officer of the Pledgor and is a legal, valid and binding obligation of the Pledgor enforceable against the Pledgor in accordance with its terms. (b) The execution, delivery and performance of this Agreement in accordance with its terms and the grant of the security interest hereunder do not and will not, by the passage of time, the giving of notice or otherwise, (i) require any Governmental Approval or violate any Applicable Law relating to the Pledgor, the violation of which reasonably could be expected to have a Materially Adverse Effect, (ii) conflict with, result in a breach of or constitute a default under the Pledgor's articles of incorporation or bylaws, 2 (iii) conflict with, result in a breach of or constitute a default under any indenture, agreement or other instrument to which the Pledgor is a party or by which it or any of its properties may be bound or any Governmental Approval, if the effect thereof, singly or in the aggregate, reasonably could be expected to have a Materially Adverse Effect, or (iv) result in or require the creation or imposition of any Lien upon or with respect to any property now owned or hereafter acquired by the Pledgor, other than the security interest granted hereunder in favor of the Agent, for the benefit of itself as Agent and the Lenders. (c) No authorization, approval, or other action by, and no notice to or filing with, any governmental authority or regulatory body is required either (i) for the pledge by the Pledgor of the Pledged Collateral pursuant to this Agreement or for the execution, delivery or performance of this Agreement by the Pledgor, or (ii) for the exercise by the Agent of the voting or other rights provided for in this Agreement or the remedies in respect of the Pledged Collateral pursuant to this Agreement, other than the filing of financing statements for the purpose of giving public notice of the security interest granted hereby. (d) The Pledged Shares are not subject to any restriction prohibiting or limiting, in any material respect, the transfer thereof either by the Pledgor in connection herewith or by the Agent in connection with the exercise of its remedies hereunder, other than under applicable securities laws. (e) The Pledged Shares have been duly authorized and validly issued and are fully paid and non-assessable and represent 100% of the issued and outstanding shares of each of the Pledgor's Subsidiaries. (f) The Pledgor is the legal and beneficial owner of the Pledged Collateral free and clear of any lien, security interest, option or other charge or encumbrance, except for the security interest created by this Agreement. (g) The pledge of the Pledged Shares pursuant to this Pledge Agreement creates a valid security interest in the Pledged Collateral, securing the payment of the Secured Obligations, and all deliveries, filings or other actions necessary to perfect and protect such security interest in the Pledged Shares have been taken or will be taken simultaneously with the execution and delivery of this Agreement. (h) None of the Pledged Collateral is evidenced by any instrument not delivered to the Agent in accordance with the terms hereof. (i) The principal place of business and chief executive office of the Pledgor is located at 2250 South Tenth Street, San Jose, California 95112. 3 Section 5. FURTHER ASSURANCES. The Pledgor agrees that at any time, and from time to time, at the expense of the Pledgor, the Pledgor will promptly execute and deliver all further instruments and documents, and take all further action, that may be necessary or desirable, or that the Agent may request in order to perfect and protect any security interest granted or purported to be granted hereby or to enable the Agent to exercise and enforce its rights and remedies hereunder with respect to any Pledged Collateral. Section 6. VOTING RIGHTS, DIVIDENDS; ETC. (a) So long as no Event of Default shall have occurred and be continuing: (i) The Pledgor shall be entitled to exercise any and all voting and other consensual rights pertaining to the Pledged Collateral or any part thereof for any purpose not inconsistent with the terms of this Agreement or the Loan Agreement; PROVIDED, HOWEVER, that the Pledgor shall not exercise or shall refrain from exercising any such right if, in the Agent's reasonable judgment, such action would have a Materially Adverse Effect on the Agent's or any Lenders' rights in the Pledged Collateral. (ii) The Pledgor shall be entitled to receive and retain any and all dividends paid in respect of the Pledged Collateral; PROVIDED, HOWEVER, that any and all (A) dividends and interest paid or payable other than in cash in respect of, and instruments and other property received, receivable or otherwise distributed in respect of, or in exchange for, any Pledged Collateral, (B) dividends and other distributions paid or payable in cash in respect of any Pledged Collateral in connection with a partial or total liquidation or dissolution or in connection with a reduction of capital, capital surplus or paid-in-surplus, and (C) cash paid, payable or otherwise distributed in respect of principal of, or in redemption of, or in exchange for, any Pledged Collateral, shall be Pledged Collateral and shall be forthwith delivered to the Agent to hold, for the benefit of itself as Agent and the Lenders, as Pledged Collateral and shall, if received by the Pledgor, be received in trust for the Agent, be segregated from the other property or funds of the Pledgor and be forthwith delivered to the Agent, for the benefit of itself as Agent and the Lenders, as Pledged Collateral in the same form as so received (with any necessary endorsement). (iii) The Agent shall execute and deliver (or cause to be executed and delivered) to the Pledgor all such proxies and other instruments as the Pledgor 4 may reasonably request for the purpose of enabling the Pledgor to exercise the voting and other rights which it is entitled to exercise pursuant to CLAUSE (I) above and to receive the dividends or interest payments which it is authorized to receive and retain pursuant to CLAUSE (II) above. (b) Upon the occurrence and during the continuance of an Event of Default: (i) upon the Agent's election evidenced by a written notice to the Pledgor, all rights of the Pledgor to exercise the voting and other consensual rights which it would otherwise be entitled to exercise pursuant to SECTION 6(A)(I) and to receive the dividends and interest payments which it would otherwise be authorized to receive and retain pursuant to SECTION 6(A)(II) shall cease, and all such rights shall thereupon become vested in the Agent, for the benefit of itself as Agent and the Lenders, who shall thereupon have the sole right to exercise such voting and other consensual rights and to receive and hold as Pledged Collateral such dividends and interest payments; and (ii) all dividends and interest payments which are received by the Pledgor contrary to the provisions of CLAUSE (I) of this SECTION 6(B) shall be received in trust for the Agent, for the benefit of itself as Agent and the Lenders, shall be segregated from other funds of the Pledgor and shall be forthwith paid over to the Agent, for the benefit of itself as Agent and the Lenders, as Pledged Collateral in the same form as so received (with any necessary endorsement). Section 7. TRANSFERS AND OTHER LIENS. (a) The Pledgor agrees that it will not (i) sell or otherwise dispose of, or grant any option with respect to, any of the Pledged Collateral, or (ii) create or permit to exist any lien, security interest, or other charge or encumbrance upon or with respect to any of the Pledged Collateral, except for the security interest granted to the Agent under this Agreement and Permitted Liens. (b) The Pledgor agrees that it (i) will cause the issuers of the Pledged Shares not to issue any stock or other securities in addition to or in substitution for the Pledged Shares issued by such issuers, except to the Pledgor, and (ii) will pledge hereunder, immediately upon the Pledgor's acquisition (directly or indirectly) thereof, any and all additional shares of stock or other securities of each issuer of the Pledged Shares, subject to the limitations set forth herein. Section 8. AGENT APPOINTED ATTORNEY-IN-FACT. The Pledgor hereby appoints the Agent as the Pledgor's attorney-in-fact, with full authority in the place and stead of the Pledgor and in the name of the Pledgor or otherwise, from time to time in the Agent's discretion to take any action and to execute any instrument which the Agent may deem necessary or advisable to accomplish the purposes of this Pledge Agreement, including, without limitation, subject to the provisions of SECTION 6, to receive, endorse and collect all instruments made payable to the Pledgor representing any dividend, interest payment or other distribution that constitutes Pledged 5 Collateral or that are payable to the Agent pursuant to the terms hereof and to give full discharge for the same. Section 9. AGENT MAY PERFORM. If the Pledgor fails to perform any agreement contained herein, the Agent may itself perform, or cause performance of, such agreement, and the reasonable expenses of the Agent incurred in connection therewith shall be payable by the Pledgor under SECTION 13. Section 10. REASONABLE CARE. The Agent and the Lenders shall be deemed to have exercised reasonable care in the custody and preservation of the Pledged Collateral in the Agent's possession if the Pledged Collateral is accorded treatment substantially equal to that which the Agent accords its own property of the same type or, if the Agent appoints an agent to hold the Pledged Collateral on its behalf or on behalf of the Lenders, such agent agrees to be bound by a similar standard of care, it being understood that neither the Agent, any Lender nor any such agent shall have any responsibility for (i) ascertaining or taking action with respect to calls, conversions, exchanges, maturities, tenders or other matters relative to any Pledged Collateral, whether or not the Agent, any Lender or any such agent has or is deemed to have knowledge of such matters, or (ii) taking any necessary steps to preserve rights against any parties with respect to any Pledged Collateral. Section 11. EVENTS OF DEFAULT. The occurrence of any one or more of the following shall constitute an Event of Default hereunder: (a) the occurrence of any "Event of Default" under the Loan Agreement; or (b) if, at any time, any representation, warranty, certificate, schedule or report made or delivered by the Pledgor to the Agent and the Lenders hereunder shall prove to have been false or misleading in any material respect as of the time made or furnished. Section 12. REMEDIES UPON DEFAULT. If any Event of Default shall have occurred and be continuing: (a) The Agent may, and at the direction of the Lenders in their sole and absolute discretion shall, exercise in respect of the Pledged Collateral, in addition to other rights and remedies provided for herein or otherwise available to it, all the rights and remedies of a secured party upon default under the Uniform Commercial Code, and the Agent may also, and at the direction of the Lenders in their sole and absolute discretion shall, upon notice specified below, sell the Pledged Collateral or any part thereof in one or more parcels at public or private sale, at any exchange, broker's board or at any of the Agent's offices or elsewhere, for cash, on credit or for future delivery, and at such price or prices and upon such other terms as the Agent may deem commercially reasonable. The Pledgor agrees that, to the extent notice of sale shall be required by law, at least five days' written notice to the Pledgor of the time and place of any public sale or the time after which any private sale may be made shall constitute reasonable notification. The Agent shall not be obligated to make any sale of Pledged Collateral regardless of notice of sale having been given. The Agent may adjourn any public or private sale from time to time 6 by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. The Agent shall have the right to bid for and purchase any of the Pledged Collateral at any such public sale and shall not be deemed thereby to have retained the Pledged Collateral in satisfaction of the Secured Obligations. (b) Any cash held by the Agent as Pledged Collateral and all cash proceeds received by the Agent in respect of any sale of, or other realization upon all or any part of the Pledged Collateral may, in the discretion of the Agent, be held by the Agent as collateral for, and/or then or at any time thereafter applied (after payment of any amounts payable to the Agent pursuant to SECTION 13) in whole or in part by the Agent against, all or any part of the Secured Obligations in such order as the Agent shall elect. Any surplus of such cash proceeds held by the Agent and remaining after payment in full of all the Secured Obligations shall be paid over to the Pledgor or to whomsoever may be lawfully entitled to receive such surplus. The Pledgor shall remain liable for any deficiency. (c) The Pledgor acknowledges that compliance with applicable securities laws may very strictly limit the Agent's conduct in the disposition of all or any part of the Pledged Collateral in accordance with this SECTION 12, and may also limit the extent to which or the manner in which any subsequent transferee of any Pledged Collateral may dispose of the same. Pledgor acknowledges and agrees that the Agent shall be entitled to place all or any part of the Pledged Collateral for private placement by an investment banking firm, that any such investment banking firm may purchase all or any part of the Pledged Collateral for its own account and that the Agent shall be entitled to place all or any part of the Pledged Collateral privately with a purchaser or purchasers who will represent and agree that they are purchasing the Pledged Collateral for their own account for investment and not with a view to the distribution or sale thereof in violation of applicable securities laws, notwithstanding the existence of a public or private market upon which the quotations or sales prices may exceed substantially the price at which the Agent sells the Pledged Collateral. Section 13. EXPENSES. The Pledgor will upon demand pay to the Agent and each Lender the amount of any and all reasonable expenses, including the reasonable fees and expenses of its counsel actually incurred and of any experts and agents, which the Agent or such Lender may incur in connection with (a) the sale of, collection from, or other realization upon, any of the Pledged Collateral, (b) the exercise or enforcement of any of the rights of the Agent or any Lender hereunder, or (c) the failure by the Pledgor to perform or observe any of the provisions hereof. The Lenders shall to the extent reasonably practicable coordinate their activities in the administration of this Pledge Agreement through the Agent to avoid unnecessary duplication of costs and expenses that the Pledgor is required to pay under this SECTION 13, provided that neither the Lenders nor the Agent shall be under any obligation to coordinate such activities during the continuation of an Event of Default. 7 Section 14. SECURITY INTEREST ABSOLUTE. All rights of the Agent and security interests hereunder, and all obligations of the Pledgor hereunder, shall be absolute and unconditional irrespective of: (a) any lack of validity or enforceability of the Loan Agreement or any other agreement or instrument relating thereto; (b) any change in the time, manner or place of payment of, or in any other term of, all or any of the Secured Obligations, or any other amendment or waiver of or any consent to any departure from the Loan Agreement or the Notes or extension of the maturity date of any of the Notes; (c) any exchange, release or nonperfection of any other collateral for all or any of the Secured Obligations; or (d) any other circumstance which might otherwise constitute a defense available to, or a discharge of, the Pledgor in respect of the Secured Obligations or this Pledge Agreement or otherwise. Section 15. RELEASE OF SECURITY INTERESTS. Upon the payment and performance in full of the Secured Obligations and the termination of each of the Lenders' Commitments under the Loan Agreement, the Agent shall release its security interests hereunder in the Pledged Collateral, and the Pledgor shall be entitled to the return, upon its request and at its expense, of such of the Pledged Collateral as shall not have been sold or otherwise applied pursuant to the terms hereof and the Agent shall, at the Pledgor's request and expense, execute and deliver such other releases, confirmations and acknowledgments as may reasonably be requested to evidence such release. Section 16. AMENDMENTS, ETC. No amendment or waiver of any provision of this Agreement nor consent to any departure by the Pledgor herefrom shall in any event be effective unless the same shall be in writing and signed by the Agent, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. Section 17. LITIGATION. THE PLEDGOR, THE AGENT AND EACH LENDER HEREBY KNOWINGLY, INTENTIONALLY AND VOLUNTARILY WAIVE TRIAL BY JURY IN ANY ACTION OR PROCEEDING OF ANY KIND OR NATURE IN ANY COURT IN WHICH AN ACTION MAY BE COMMENCED BY OR AGAINST THE PLEDGOR, THE AGENT OR SUCH LENDER ARISING OUT OF THIS AGREEMENT OR BY REASON OF ANY OTHER CAUSE OR DISPUTE WHATSOEVER BETWEEN THE PLEDGOR AND THE AGENT OR ANY LENDER OF ANY KIND OR NATURE. Section 18. NOTICES. All notices and other communications provided for hereunder shall be in writing and given in accordance with the provisions of Section 14.1 of the Loan Agreement and such provisions are hereby incorporated herein by this reference as if fully set forth herein. 8 Section 19. CONTINUING SECURITY INTEREST This Agreement shall create a continuing security interest in the Pledged Collateral and shall (a) remain in full force and effect until the release thereof as provided in SECTION 15, (b) be binding upon the Pledgor, its successors and assigns, and (c) inure to the benefit of the Agent and the Lenders and their respective successors and assigns, provided that any assignment of the Agent's or any Lenders' rights hereunder that is made other than during the continuance of an Event of Default shall be made only in connection with an assignment of all or a portion of the Loans and the Commitments that is permitted under the Loan Agreement. Section 20. GOVERNING LAW; TERMS. (a) This Agreement shall be construed in accordance with and governed by the law of the State of New York. (b) The Pledgor hereby irrevocably and unconditionally submits, for itself and its property, to the nonexclusive jurisdiction of the Supreme Court of the State of New York sitting in New York County and of the United States District Court of the Southern District of New York, and any appellate court from any thereof, in any action or proceeding arising out of or relating to this Agreement or the other Loan Documents, or for recognition or enforcement of any judgment, and each of the parties hereto hereby irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and determined in such New York State or, to the extent permitted by law, in such Federal court. Each of the parties hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Nothing in this Agreement shall affect any right that the Agent, or any Lender may otherwise have to bring any action or proceeding relating to this Agreement or the other Loan Documents against the Pledgor or its properties in the courts of any jurisdiction. (c) The Pledgor hereby irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection which it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Agreement or the other Loan Documents in any court referred to in SECTION 20(B). Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court. (d) Each party to this Agreement irrevocably consents to service of process in the manner provided for notices in SECTION 18. Nothing in this Agreement will affect the right of any party to this Agreement to serve process in any other manner permitted by law. IN WITNESS WHEREOF, the Pledgor and the Agent have caused this Agreement to be duly executed and delivered under seal by their respective officers thereunto duly authorized as of the date first above written. 9 PLEDGOR: BURKE INDUSTRIES, INC. [CORPORATE SEAL] By: /s/ DONALD GLICKMAN ------------------- Name: Donald Glickman Attest: Title:Assistant Vice President By: /s/ LOUIS N. MINTZ ------------------ Name: Louis N. Mintz Title: Assistant Secretary Agent: NATIONSBANK, N.A. By: /s/ ANDREW HETTINGER -------------------- Name: Andrew Hettinger Title: Vice President 10 ANNEX A Pledged Shares COMPANY AUTHORIZED SHARES ISSUED SHARES CERTIFICATE NO. Burke Flooring 7500 100 1 Products, Inc. Burke Custom 7500 100 1 Processing, Inc. Burke Rubber 7500 100 1 Company, Inc. 11 IRREVOCABLE STOCK TRANSFER POWER FOR VALUE RECEIVED, BURKE INDUSTRIES INC., a California corporation, hereby sells, assigns, and transfers unto _____________________________100 shares of _____ par value, Common Stock in BURKE CUSTOM PROCESSING, INC., a California corporation (the "Company"), represented by Certificate No. ______ herewith, and hereby irrevocably constitutes and appoints _______________________________ attorney to transfer the said stock on the books of said Company, with full power of substitution in the premises. Dated: BURKE INDUSTRIES, INC. Attest: By: _____________________________ Name: Title: ________________________________ Name: Title: IRREVOCABLE STOCK TRANSFER POWER FOR VALUE RECEIVED, BURKE INDUSTRIES INC., a California corporation, hereby sells, assigns, and transfers unto _____________________________100 shares of _____ par value, Common Stock in BURKE FLOORING PRODUCTS, INC., a California corporation (the "Company"), represented by Certificate No. ______ herewith, and hereby irrevocably constitutes and appoints _______________________________ attorney to transfer the said stock on the books of said Company, with full power of substitution in the premises. Dated: BURKE INDUSTRIES, INC. Attest: By: ________________________________ Name: Title: __________________________________ Name: Title: IRREVOCABLE STOCK TRANSFER POWER FOR VALUE RECEIVED, BURKE INDUSTRIES INC., a California corporation, hereby sells, assigns, and transfers unto _____________________________100 shares of _____ par value, Common Stock in BURKE RUBBER COMPANY, INC., a California corporation (the "Company"), represented by Certificate No. ______ herewith, and hereby irrevocably constitutes and appoints _______________________________ attorney to transfer the said stock on the books of said Company, with full power of substitution in the premises. Dated: BURKE INDUSTRIES, INC. Attest: By: ______________________________ Name: Title: __________________________________ EX-10.6 9 EXH 10.6 INVESTMENT AGMT W/ PREFERRED HOLDERS EXHIBIT 10.6 INVESTMENT AGREEMENT BY AND AMONG BURKE INDUSTRIES, INC., MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY, MASSMUTUAL CORPORATE VALUE PARTNERS LIMITED, MASSMUTUAL HIGH YIELD PARTNERS LLC, PARIBAS NORTH AMERICA, INC. AND JACKSON NATIONAL LIFE INSURANCE COMPANY DATED AS OF AUGUST 20, 1997 TABLE OF CONTENTS ARTICLE I DEFINITIONS......................................................2 Section 1.01. Definitions.................................................2 ARTICLE II AUTHORIZATION, SALE AND PURCHASE OF THE. SECURITIES.......................................................6 Section 2.01. Authorization; Agreement to Sell and Purchase...............6 Section 2.02. Closing.....................................................6 ARTICLE III REPRESENTATIONS AND WARRANTIES...................................7 Section 3.01. Representations and Warranties of the Company...............7 Section 3.02. Representations and Warranties of Purchasers...............10 ARTICLE IV ADDITIONAL AGREEMENTS OF THE PARTIES............................10 Section 4.01. Taking of Necessary Action.................................10 Section 4.02. Conduct of Business; Line of Business......................11 Section 4.03. Inspection of Property.....................................11 Section 4.04. Use of Proceeds............................................12 Section 4.05. Transfer of Securities.....................................12 Section 4.06. Further Assurances.........................................13 Section 4.07. Allocation of Purchase Price...............................14 Section 4.08. Information Rights.........................................14 ARTICLE V CONDITIONS......................................................15 Section 5.01. Conditions of Purchase.....................................15 Section 5.02. Conditions of Sale.........................................16 ARTICLE VI TERM............................................................17 Section 6.01. Termination................................................17 Section 6.02. Effect of Termination......................................17 ARTICLE VII MISCELLANEOUS...................................................17 Section 7.01. Survival of Representations and Warranties.................17 Section 7.02. Notices....................................................18 i Section 7.03. Entire Agreement; Amendment................................19 Section 7.04. Counterparts...............................................20 Section 7.05. Governing Law..............................................20 Section 7.06. Public Announcements.......................................20 Section 7.07. Fees and Expenses..........................................20 Section 7.08. Successors and Assigns.....................................20 Section 7.09. Arbitration................................................21 Section 7.10. Specific Performance.......................................21 Section 7.11. Captions...................................................21 Section 7.12. Mutual Waiver of Jury Trial................................22 ii ANNEX AND EXHIBITS ANNEX I Number of Shares of Series A Preferred Stock and Warrants; Purchase Price EXHIBIT A Form of Amended and Restated Articles of Incorporation EXHIBIT B Form of Registration Rights Agreement EXHIBIT C Form of Shareholders Agreement EXHIBIT D Form of Warrant EXHIBIT E Matters to be Covered in Opinion of Company Counsel EXHIBIT F Form of Restated By-Laws iii INVESTMENT AGREEMENT INVESTMENT AGREEMENT, dated as of August 20, 1997 (this "AGREEMENT"), by and among BURKE INDUSTRIES, INC., a California corporation (the "COMPANY"), MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY ("MMLIC"), MASSMUTUAL CORPORATE VALUE PARTNERS LIMITED ("MMCVP"), MASSMUTUAL HIGH YIELD PARTNERS LLC ("MMHYP") and JACKSON NATIONAL LIFE INSURANCE COMPANY ("JACKSON NATIONAL" and, together with MMLIC, MMCVP and MMHYP, the "SERIES A PURCHASERS") and PARIBAS NORTH AMERICA, INC. ("PARIBAS," or the "SERIES B PURCHASER" and, together with the Series A Purchasers, the "PURCHASERS"). Capitalized terms not otherwise defined where used shall have the meanings ascribed thereto in Article I. WHEREAS, the Board of Directors of the Company has determined to effect a recapitalization of the Company pursuant to which, among other things, (i) J.F. Lehman Equity Investors I, L.P. ("JFLEI") will make a capital contribution in the amount of $20.0 million to JFL Merger Co. ("MERGERCO") and (ii) MergerCo will merge with and into the Company, with the Company surviving such merger (the "Merger"), pursuant to which, among other things, (A) each share of common stock, without par value, of the Company issued and outstanding immediately prior to the Merger, other than certain shares held by certain shareholders and members of management, will be converted into the right to receive approximately $9.16 per share in cash and (B) each outstanding and vested option and each outstanding warrant to purchase a share of Common Stock of the Company will be converted into the right to receive cash in the amount of approximately $9.16 per share less the exercise price for such option, (iii) as provided herein, substantially simultaneously with the consummation of the Merger, Burke will issue the Series A Preferred Stock, the Series B Preferred Stock and the Warrants in exchange for aggregate consideration of $18.0 million, (iv) the Company will issue $110.0 million in aggregate principal amount of 10% Senior Notes due 2007, and (v) the Company will enter into a credit agreement (the "CREDIT AGREEMENT") providing for revolving credit and letter of credit facilities of up to an aggregate principal amount of $15.0 million (all such transactions shall be collectively referred to herein as the "RECAPITALIZATION"); WHEREAS, as a part of and a condition to the Recapitalization, Purchasers have agreed, severally and not jointly, to purchase, and the Company has agreed to sell, subject to the terms and conditions of this Agreement, (i) shares of its Series A Preferred Stock to the Series A Purchasers, (ii) shares of its Series B Preferred Stock to the Series B Purchaser and (ii) Warrants to purchase its Common Stock; and WHEREAS, the Company and Purchasers desire to set forth certain agreements herein. NOW THEREFORE, in consideration of the premises and the representations, warranties and agreements herein contained and intending to be legally bound hereby, the parties hereby agree as follows: ARTICLE I DEFINITIONS SECTION 1.01. DEFINITIONS. As used in this Agreement, the following terms shall have the meanings set forth below: "AFFILIATE" shall mean, with respect to any Person, any other Person which directly or indirectly controls or is controlled by or is under common control with such Person. As used in this definition, "control" (including its correlative meanings, "controlled by" and "under common control with") shall mean possession, directly or indirectly, of power to (i) direct or cause the direction of management or policies (whether through ownership of securities or partnership or other ownership interests, by contract or otherwise) or (ii) vote 10% or more of the securities having ordinary voting power for the election of directors (or Persons performing similar duties) of such Person. For purposes hereof, "Affiliates" of the Company shall include all holders of Common Stock and securities exercisable for or convertible into Common Stock party to the Shareholders Agreement. "AMENDED AND RESTATED ARTICLES OF INCORPORATION" shall mean the Amended and Restated Articles of Incorporation, setting forth the rights, preferences, privileges and restrictions of the Series A Preferred Stock and the Series B Preferred Stock, which are attached hereto as EXHIBIT A. "ANCILLARY DOCUMENTS" shall mean the Amended and Restated Articles of Incorporation, the Registration Rights Agreement and the Warrants. "BUSINESS DAY" shall mean any day, other than a Saturday, Sunday or a day on which banking institutions in New York, New York are authorized or obligated by law or executive order to close. "CLOSING" and "CLOSING DATE" shall have the meanings set forth in Section 2.02(a). "COMMON STOCK" shall mean the Company's common stock, without par value. "COMPANY SUBSIDIARY" shall mean any Subsidiary of the Company. "CONTRACTUAL OBLIGATION" shall mean, as to any Person, any provision of any note, bond or security issued by such Person, or of any mortgage, indenture, deed of trust, lease, license, franchise, contract, agreement, instrument or undertaking to which such Person is a party or by which it or any of its property is subject. "DEBT OFFERING MEMORANDUM" shall mean the final, dated August 14, 1997, of the offering memorandum with respect to the offering by MergerCo and the issuance by the 2 Company of the Senior Notes, which final offering memorandum was delivered to Purchasers prior to the date of this Agreement. "ELIGIBLE TRANSFEREE" shall mean, in the case of the Series A Preferred Stock, any other Series A Purchaser, and, in the case of the Series B Preferred Stock, any other Purchaser and, in the case of either the Series A Preferred Stock or the Series B Preferred Stock, any partner of any Purchaser, any Person who controls or is under common control with any Purchaser, any successor to any Purchaser or any such other Person and any "qualified institutional buyer" as defined in Rule 144A promulgated under the Securities Act. "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as amended. "GAAP" shall mean generally accepted accounting principles in the United States of America in effect from time to time. "GOVERNMENTAL ENTITY" shall mean any nation or government, any state or other political subdivision thereof, any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government and any self-regulating organization, securities exchange or securities trading system. "INITIAL PERCENTAGE" shall mean 20% of the Common Stock on the Closing Date, calculated on a fully diluted basis after giving effect to (i) the conversion and exercise of all outstanding warrants, options and other securities of the Company convertible or exercisable for Common Stock (whether or not such securities are then currently exercisable) and (ii) the issuance and exercise of the Warrants. "INITIAL PURCHASERS" shall mean Massachusetts Mutual Life Insurance Company, MassMutual Corporate Value Partners Limited, MassMutual High Yield Partners LLC, Jackson National Life Insurance Company and Paribas North America, Inc. "JFLEI" shall mean J.F. Lehman Equity Investors I, L.P., a Delaware limited partnership and the sole shareholder of MergerCo. "LEHMAN" shall mean J.F. Lehman & Company, a Delaware corporation. "LEHMAN AGREEMENT" shall mean the management agreement to be entered by and among the Company and Lehman on the Closing Date. "LIEN" shall mean any mortgage, pledge, hypothecation, assignment, encumbrance, lien (statutory or other) or security agreement of any kind or nature whatsoever (including, without limitation, any conditional sale or other title retention agreement or any financing lease having substantially the same effect as any of the foregoing). 3 "MATERIAL ADVERSE EFFECT" shall mean a material adverse effect on (i) the assets, properties, business, financial condition, results of operations or prospects of the Company and the Company Subsidiaries taken as a whole, (ii) the ability of the Company or any Company Subsidiary to perform its obligations under this Agreement or the Ancillary Documents or (iii) the validity or enforceability of this Agreement or any of the Ancillary Documents or the rights or remedies of any Purchaser hereunder and thereunder. "MERGER" shall mean the merger of MergerCo with and into the Company on the Closing Date, with the Company as the surviving entity. "MERGER AGREEMENT" shall mean the Agreement and Plan of Merger, dated as of August 13, 1997, by and among JFLEI, MergerCo, the Company and all of the shareholders of the Company, pursuant to which, among other things, MergerCo has merged with and into the Company, with the Company as the surviving entity. "MERGERCO" shall mean JFL Merger Co., a California corporation and a wholly owned subsidiary of JFLEI. "PERMITS" shall have the meaning set forth in Section 3.01(h). "PERSON" shall mean an individual, corporation, limited liability company, unincorporated association, partnership, group (as defined in Section 13(d)(3) of the Exchange Act), trust, joint stock company, joint venture, business trust or unincorporated organization, any Governmental Entity or any other entity of whatever nature. "PREFERRED STOCK" shall mean the authorized preferred stock of the Company, without par value. "PRO RATA SHARE" with respect to each Purchaser, shall mean a fraction the numerator of which is the aggregate purchase price payable by such Purchaser pursuant to this Agreement and the denominator of which is $18.0 million. "RECAPITALIZATION" shall have the meaning set forth in the Recitals. "REGISTRATION RIGHTS AGREEMENT" shall mean the Warrantholders Registration Rights Agreement to be entered into by and among the Company and the Purchasers at the Closing, which shall be in the form attached hereto as EXHIBIT B. "RELATED DOCUMENTS" shall mean the collective reference to the Merger Agreement, the Debt Offering Memorandum, the Indenture with respect to the Senior Notes, the Senior Notes, the Credit Agreement and the Lehman Agreement. "REQUIREMENT OF LAW" shall mean, as to any Person, the certificate of incorporation and by-laws or other organizational documents of such Person, and any law, statute, order, treaty, rule, regulation or guideline, or judgment, decree, 4 determination or order of any arbitrator, court or other Governmental Entity, applicable to or binding upon such Person or any of its property. "SEC" shall mean the United States Securities and Exchange Commission. "SECURITIES" shall mean the collective reference to the Series A Preferred Stock, the Series B Preferred Stock and the Warrants. "SECURITIES ACT" shall mean the Securities Act of 1933, as amended. "SENIOR NOTES" shall mean the 10% Senior Notes Due 2007 of the Company to be offered pursuant to the Debt Offering Memorandum. "SERIES A PREFERRED STOCK" shall mean the Series A 11.5% Cumulative Redeemable Preferred Stock of the Company, without par value, stated liquidation value of $1,000 per share and having the designations, relative rights, preferences and limitations set forth in the Amended and Restated Articles of Incorporation. "SERIES B PREFERRED STOCK" shall mean the Series B 11.5% Cumulative Redeemable Preferred Stock of the Company without par value, stated liquidation value of $1,000 per share and having the designations, relative rights, preferences and limitations set forth in the Amended and Restated Articles of Incorporation. "SHAREHOLDERS AGREEMENT" shall mean the Shareholders Agreement dated as of the Closing Date, to be executed and delivered by the Company, JFLEI, the Purchasers in their capacity as holders of Warrant Shares upon exercise of the Warrants and by the other shareholders of the Company named therein, which shall be in the form of EXHIBIT C hereto. "SUBSIDIARY" shall mean, as to any Person, a corporation, partnership or other entity of which shares of stock or other ownership interests having ordinary voting power (other than stock or such other ownership interests having such power only by reason of the happening of a contingency) to elect a majority of the board of directors or other managers of such corporation, partnership or other entity are at the time owned, or the management of which is otherwise controlled, directly or indirectly through one or more intermediaries, or both, by such Person. "WARRANT" shall mean a warrant, in the form of EXHIBIT D, issued by the Company to acquire upon exercise one share of Common Stock (as adjusted from time to time pursuant to the terms thereof) and any warrant issued upon transfer, division or combination thereof or in substitution therefor. "WARRANT SHARES" shall mean shares of Common Stock issued upon exercise of Warrants. 5 ARTICLE II AUTHORIZATION, SALE AND PURCHASE OF THE SECURITIES SECTION 2.01. AUTHORIZATION; AGREEMENT TO SELL AND PURCHASE. (a) Upon and subject to the terms and conditions set forth in this Agreement, the Company has authorized the issuance and sale to Purchasers of (i) 18,000 shares of Series A Preferred Stock to the Series A Purchasers, (ii) 2,000 shares of Series B Preferred Stock to the Series B Purchaser and (iii) Warrants exercisable for a number of Warrant Shares equal to the Initial Percentage (which Warrant Shares shall be subject to adjustment from time to time pursuant to the terms of the Warrants). (b) Upon and subject to the terms and conditions of this Agreement, and in reliance upon the representations and warranties hereinafter set forth, the Company agrees to issue, sell and deliver to Purchasers at the Closing provided for in Section 2.02 hereof, and each Purchaser severally and not jointly agrees to purchase from the Company, the number of shares of Series A Preferred Stock or Series B Preferred Stock, as the case may be, set forth on ANNEX I hereto along with the Warrants as shall be exercisable for a number of Warrant Shares equal to the Purchaser's Pro Rata Share of the Initial Percentage (which Warrant Shares shall be subject to adjustment from time to time pursuant to the terms of the Warrants) (which such number of Warrants is set forth on ANNEX I hereto), for an aggregate purchase price with respect to each such Purchaser as is set forth on ANNEX I hereto. SECTION 2.02. CLOSING. (a) Subject to the satisfaction or waiver of the conditions set forth in this Agreement, the purchase and sale of the Securities pursuant to Section 2.01 (the "CLOSING") shall take place at the offices of Gibson, Dunn & Crutcher LLP, 200 Park Avenue, 48th Floor, New York, New York, on the first day on which the conditions in Sections 5.01 and 5.02 are satisfied or waived by Purchasers or the Company, as the case may be (the "CLOSING DATE"), or at such other time and place as may be mutually agreed upon by Purchasers and the Company. (b) At the Closing: (i) the Company shall deliver to each Purchaser, against payment of the purchase price therefor, (A) certificates for the Series A Preferred Stock or the Series B Preferred Stock as the case may be, to be sold in accordance with the provisions of Section 2.01, registered in the name of such Purchaser or its nominee and in such denominations as such Purchaser shall specify not less than three Business Days prior to the Closing Date and (B) certificates evidencing the Warrants to be sold in accordance with the provisions of Section 2.01, registered in the name of such Purchaser or its nominee; (ii) each Purchaser, in full payment for such Securities, against delivery of the stock certificates and Warrants referred to above shall deliver to the Company on the Closing Date immediately available funds, by wire transfer to such account as the Company shall specify at least three Business Days prior to the Closing Date, in the amount of the purchase price to be paid hereunder by such Purchaser pursuant to Section 2.01; and (iii) each party shall take or cause to be taken such other actions, 6 and shall execute and deliver such other instruments or documents, as shall be required under Article V hereof. ARTICLE III REPRESENTATIONS AND WARRANTIES SECTION 3.01. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. (a) ORGANIZATION AND GOOD STANDING OF THE COMPANY. Each of MergerCo and the Company is a corporation duly organized, validly existing and in good standing under the laws of the State of California and has all requisite corporate power and authority to own, operate and lease its properties and to carry on its businesses as they are now being conducted. Each of MergerCo and the Company is duly licensed or qualified as a foreign corporation for the transaction of business and is in good standing under the laws of each other jurisdiction in which its ownership or leasing of properties, or the conduct of its businesses requires such licensing or qualification and good standing, except where the failure to be so licensed or qualified and in good standing in any such jurisdiction would not have a Material Adverse Effect. Each of MergerCo and the Company has, prior to the date hereof, delivered to Purchasers a true and complete copy of their respective articles of incorporation and by-laws in each case as in effect on the date of this Agreement. (b) AUTHORIZATION; NO CONFLICTS. The Company has full corporate power and authority to enter into this Agreement and the Ancillary Documents and to consummate the transactions contemplated hereby and thereby. The execution, delivery and performance of this Agreement and each Ancillary Document and the consummation of the transactions contemplated hereby and thereby have been duly authorized by all necessary corporate action on the part of the Company. This Agreement has been, and on or prior to the Closing Date each Ancillary Document will be, duly and validly executed and delivered by the Company. This Agreement constitutes, and upon its execution and delivery on or prior to the Closing Date each Ancillary Document will constitute, a valid and legally binding obligation of the Company enforceable in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors generally and by general equitable principles. The execution, delivery and performance of this Agreement and the Ancillary Documents, the consummation of the transactions by the Company contemplated hereby and thereby and the compliance by the Company with the provisions hereof and thereof will not conflict with, violate or result in a breach of any provision of, require a consent, approval or notice under, or constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) under, or result in the termination of or accelerate the performance required by, or result in a right of termination or acceleration under, or result in the creation of any Lien upon any of the properties or assets of the Company under, (i) the articles of incorporation or by-laws of the Company, (ii) any Contractual Obligation of the Company or (iii) assuming that the filings, consents and approvals specified in Schedule 3.01(c) have been obtained, any Requirement of Law applicable to the Company. 7 (c) CONSENTS. No consent, approval, order or authorization of, registration, declaration or filing with, or notice to, any Governmental Entity is required in connection with the execution, delivery and performance of this Agreement and the Ancillary Documents by the Company, the consummation by the Company of the transactions contemplated hereby and thereby or the performance by the Company of its obligations hereunder and thereunder, except for (i) such filings as may be required under the blue sky laws of the various states and (ii) such consents, approvals, orders, authorizations, registrations, declarations, filings and notices as may be required in connection with the exercise of the rights set forth in the Registration Rights Agreement. (d) CAPITALIZATION. (i) Giving effect to the Recapitalization and immediately thereafter, (A) the authorized capital stock of the Company will consist of 20,000,000 shares of Common Stock and 50,000 shares of Preferred Stock, (B) 3,857,000 shares of Common Stock will be issued and outstanding, no shares of Common Stock will be held in treasury, 964,000 shares of Common Stock will be reserved for issuance upon exercise of outstanding warrants (including the Warrants issuable to the Purchasers) and 482,100 shares of Common Stock will be reserved for issuance upon exercise of outstanding stock options, (C) 30,000 shares of Preferred Stock will be designated Series A Preferred Stock, of which 16,000 will be issued and outstanding upon consummation of the Recapitalization and (D) 5,000 shares of Preferred Stock will be designated Series B Preferred Stock, of which 2,000 will be issued and outstanding upon consummation of the Recapitalization. (ii) All of the issued and outstanding shares of the Company's capital stock have been duly and validly authorized and issued and are fully paid and nonassessable. Upon delivery of and payment for the shares of Series A Preferred Stock or Series B Preferred Stock, as the case may be, on the Closing Date as provided herein, such shares of Series A Preferred Stock or Series B Preferred Stock, as the case may be, will be duly and validly authorized and issued, fully paid and nonassessable, and each Purchaser will acquire good title thereto, free and clear of all Liens (other than any Lien created by such Purchaser). The Warrant Shares have been reserved for issuance and, when issued upon exercise of the Warrants, will be duly and validly authorized and issued, fully paid and nonassessable and the owner of such Warrant Shares will acquire good title thereto, free and clear of all Liens (other than any Lien created by such Warrant owner). No class of capital stock of the Company and no holder of capital stock (or rights to acquire capital stock) of the Company is entitled to preemptive rights, other than as set forth in the Shareholders Agreement. There are no outstanding options, warrants, scrip, rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities or rights convertible into, shares of any capital stock of the Company, or contracts, commitments, understandings, or arrangements by which the Company is or may become bound to issue 8 additional shares of its capital stock or options, warrants or rights to purchase or acquire any shares of its capital stock. (e) DISCLOSURE. This Agreement, the certificates and disclosure statements delivered by or on behalf of the Company or the Company Subsidiaries, and all other written materials delivered by the Company to Purchasers prior to the date of this Agreement in connection with the transactions contemplated hereby (including, without limitation, the Merger Agreement and the Debt Offering Memorandum, taken as a whole and taking into account any written revisions or corrections to such written materials delivered to Purchasers prior to the date of this Agreement and including any statements, representations or warranties incorporated herein by reference pursuant to Section 3.01(g)), do not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements contained therein, as of the respective dates of such written materials, not misleading. There is no fact peculiar to the Company or any of its Subsidiaries which the Company has not disclosed to each Purchaser in writing which materially affects adversely or, so far as the Company can now reasonably foresee, will materially affect adversely the properties, business, or condition (financial or otherwise) of the Company and its Subsidiaries taken as a whole or the ability of the Company to perform this Agreement, the Related Documents or its obligations in respect of the shares of Preferred Stock and the Warrants. (f) OFFERING OF SECURITIES. Neither the Company nor any Person acting on its behalf has taken or will take any action (including without limitation any offering of any securities of the Company under circumstances which would require the integration of such offering with the offering of the Series A Preferred Stock, the Series B Preferred Stock or the Warrants under the Securities Act and the rules and regulations of the SEC thereunder) which might subject the offering, issuance or sale of any of the Series A Preferred Stock, the Series B Preferred Stock or Warrants to the registration requirements of the Securities Act. The offer, sale and issuance of the Series A Preferred Stock, the Series B Preferred Stock and Warrants by the Company under this Agreement will not violate the Securities Act, the Exchange Act or any applicable state securities or "blue sky" laws. (g) INCORPORATION BY REFERENCE OF REPRESENTATIONS AND WARRANTIES IN PURCHASE AGREEMENT. The representations and warranties made by MergerCo in respect of the Company and the Company Subsidiaries and their business, properties, capitalization, financial condition and operations in the Purchase Agreement dated as of August 14, 1997 related to the Senior Notes and in the Credit Agreement are incorporated herein as if made by the Company to the Purchasers and as if set forth fully herein. (h) OFFERING OF SHARES. Neither the Company nor any person acting on its behalf has offered the Series A Preferred Stock, the Series B Preferred Stock, the Warrants or any similar securities of the Company for sale to, solicited any offers to buy the Preferred Stock, the Warrants or any similar securities of the Company from or otherwise approached or negotiated with respect to the Company with any Person other than the Purchasers and not more than 35 other institutional investors. Neither the Company nor any Person acting on its behalf has taken or will take any action (including, without limitation, any offering of any securities of the 9 Company under circumstances which would require the integration of such offering with the offering of the Preferred Stock and the Warrants under the Securities Act and the rules and regulations of the Commission thereunder) which might subject the offering, issuance or sale of the Preferred Stock and the Warrants to the registration requirements of Section 5 of the Securities Act. SECTION 3.02. REPRESENTATIONS AND WARRANTIES OF PURCHASERS. Each Purchaser, severally and not jointly, represents and warrants to, and agrees with, the Company as follows: (a) SECURITIES ACT. Such Purchaser (i) is acquiring the Securities solely for the purpose of investment and not with a view to, or for resale in connection with, any distribution thereof in violation of the Securities Act; (ii) has had the opportunity to ask questions of the officers and directors of, and has had access to information concerning, the Company and the terms of the Securities and Warrant Shares; (iii) is an "accredited investor" as defined in Rule 501(a) under the Securities Act; (iv) has such knowledge, sophistication and experience in business and financial matters so as to be capable of evaluating the merits and risks of the investment in the Securities; (v) has so evaluated the merits and risks of such investment; (vi) is able to bear the economic risk of such investment; and (vii) is able to afford a complete loss of such investment. (b) BROKERS AND FINDERS. None of the Purchasers nor any of their officers, directors, employees or agents has utilized any broker, finder, placement agent or financial advisor or incurred any liability for any fees or commissions in respect thereof in connection with any of the transactions contemplated hereby or by the Ancillary Documents. Such Purchaser agrees to indemnify the Company and to hold it harmless from and against any and all claims, liabilities or obligations with respect to any fees or other amounts payable as a result of any act or statement made by such Purchaser or any of its Affiliates. (c) LEGAL INVESTMENT. Each of the Purchasers represents and warrants to the Company that its purchase of the Series A Preferred Stock and Warrants hereunder is a legal investment for such Purchaser and such investment is not a prohibited investment for such Purchaser under any insurance or other regulations applicable to such Purchaser or its business. ARTICLE IV ADDITIONAL AGREEMENTS OF THE PARTIES SECTION 4.01. TAKING OF NECESSARY ACTION. (a) Each of the parties hereto agrees to use all reasonable efforts promptly to take or cause to be taken all actions and promptly to do or cause to be done all things necessary, proper or advisable under applicable laws and regulations to consummate and make effective the transactions contemplated by this Agreement and the Ancillary Documents. Without limiting the 10 foregoing, the Company and Purchasers will, and the Company shall cause the Company Subsidiaries to, each use all reasonable efforts to make all filings and obtain all consents of Governmental Entities which may be necessary or, in the opinion of such Purchaser or the Company, as the case may be, advisable for the consummation of the transactions contemplated by this Agreement and the Ancillary Documents. (b) The Company shall provide to the Purchasers copies of all applications and filings in advance of filing with the applicable Governmental Entity and shall consult with the other parties regarding the contents thereof. SECTION 4.02. CONDUCT OF BUSINESS; LINE OF BUSINESS. (a) Except as required to (i) perform its obligations under this Agreement and the Ancillary Documents and (ii) effect the transactions described in the Debt Offering Memorandum, from the date hereof to the Closing Date, the Company shall, and shall cause each of the Company Subsidiaries to conduct its operations in accordance with its ordinary course of business and consistent with past practice and use its best efforts to preserve intact the business organizations of the Company and the Company Subsidiaries, to keep available the services of their respective officers and key employees and to preserve the good will of those having business relationships with the Company and Company Subsidiaries. (b) After the consummation of the Recapitalization, the Company will continue to engage principally in the business now conducted by it or a business or businesses similar thereto or reasonably compatible therewith. SECTION 4.03. INSPECTION OF PROPERTY. (a) The Company will keep, and will cause each Subsidiary to keep, proper books of record and account in which full and correct entries will be made of all dealings or transactions of or in relation to the business and affairs of the Company or such Subsidiary, in accordance with GAAP consistently maintained. For so long as any Purchaser or their respective Eligible Transferees owns any shares of Series A Preferred Stock, Warrants or Warrant Shares, the Company shall permit a representative of Purchaser or such Eligible Transferee to visit any of its properties and inspect its corporate books and financial records (but excluding any such books, records, agreements and files which are protected by attorney-client privilege or which the Company is prohibited from disclosing to Purchasers or such Eligible Transferees pursuant to any nondisclosure agreements to which the Company or any Company Subsidiary is a party; PROVIDED that, to the extent permitted under any such nondisclosure agreement, the Company shall disclose any information subject to such nondisclosure agreement upon execution and delivery by such Purchaser or Eligible Transferee of a confidentiality agreement for the benefit of the parties to such nondisclosure agreement and PROVIDED, FURTHER, that no such nondisclosure agreement shall be effective with respect to financial records to the Company), and will discuss its accounts, affairs and finances with a representative of Purchaser or such Eligible Transferee during reasonable business hours, at such times as Purchaser or such Eligible Transferee may reasonably request. In addition, the Company will provide from time to time such information 11 regarding results of operations, financial condition, business or prospects of the Company and the Company Subsidiaries as such Purchaser or Eligible Transferee may reasonably request. (b) No investigation by or on behalf of any Purchaser pursuant to this Section or otherwise shall affect any representation or warranty of the Company herein or the conditions to the obligations of the parties hereunder. SECTION 4.04. USE OF PROCEEDS. The proceeds of the sale of the Securities shall be used by the Company to effect the Recapitalization. SECTION 4.05. TRANSFER OF SECURITIES. (a) Each Purchaser acknowledges and agrees that as of the date hereof neither the Securities nor the Warrant Shares have been or will be registered under the Securities Act or the securities laws of any state and that they may be sold or otherwise disposed of only in one or more transactions registered under the Securities Act and, where applicable, such laws, or as to which an exemption from the registration requirements of the Securities Act and, where applicable, such laws, is available. Each Purchaser acknowledges that, except as provided in the Registration Rights Agreement with respect to the Warrant Shares, such Purchaser has no right to require the Company to register the Securities or Warrant Shares. Each Purchaser agrees not to sell, transfer, pledge or hypothecate any Securities or Warrant Shares except pursuant to (i) an effective registration statement for such Securities or Warrant Shares under the Securities Act or (ii) a transaction that is exempt from the registration requirements of the Securities Act; PROVIDED that the transferee of such Purchaser acknowledges and agrees to abide by the provisions of this Section 4.06 and, in the case of the transfer of any Warrants or Warrant Shares, the applicable provisions of the Shareholders Agreement. Except in the case of a transfer pursuant to Rule 144A under the Securities Act, the Holder may be required, upon reasonable request of the Company, to provide the Company with an opinion of counsel to such Purchaser (which opinion may be given by in-house counsel and otherwise to be in form and substance reasonably satisfactory to the Company) to the effect that such transfer is exempt from the registration requirements of the Securities Act. Notwithstanding the foregoing, the Securities and Warrant Shares may be transferred to any Eligible Transferee of such Purchaser without any registration or opinion, subject to the foregoing restrictions on future sale, transfer, pledge or hypothecation by such Eligible Transferee. The Company shall cooperate with Purchasers and their transferees in supplying such information as may be necessary for such Purchasers or transferees to complete and file any information reporting forms currently or hereafter required by the SEC as a condition to the availability of an exemption from the registration requirements of the Securities Act for the sale of restricted securities. (b) Each Purchaser further acknowledges and agrees that each certificate for the Securities and Warrant Shares shall bear the following legend: "THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, 12 AS AMENDED (THE "ACT"), OR APPLICABLE STATE SECURITIES LAWS, AND MAY BE OFFERED, SOLD, ASSIGNED, TRANSFERRED OR OTHERWISE DISPOSED OF ONLY IF REGISTERED PURSUANT TO THE PROVISIONS OF THE ACT AND SUCH LAWS, OR IF AN EXEMPTION FROM REGISTRATION IS AVAILABLE. THIS CERTIFICATE IS ISSUED PURSUANT TO AND SUBJECT TO THE PROVISIONS OF AN INVESTMENT AGREEMENT, DATED AUGUST 20, 1997 (AS AMENDED, SUPPLEMENTED OR OTHERWISE MODIFIED, THE "INVESTMENT AGREEMENT"), BETWEEN THE COMPANY AND THE PURCHASERS REFERRED TO THEREIN, A COPY OF WHICH IS ON FILE WITH THE COMPANY." In addition, each Purchaser further acknowledges that the Warrants and the Warrant Shares shall bear the following additional legend: "THE SECURITIES EVIDENCED BY THIS CERTIFICATE ARE ALSO SUBJECT TO A SHAREHOLDERS AGREEMENT DATED AS OF AUGUST 20, 1997 (THE "AGREEMENT"), WHICH CONTAINS PROVISIONS REGARDING (I) CERTAIN RESTRICTIONS ON THE TRANSFER OF SUCH SECURITIES, (II) CERTAIN RIGHTS OF FIRST OFFER, TAG-ALONG RIGHTS AND DRAG-ALONG RIGHTS APPLICABLE TO THIS SECURITY AND (III) CERTAIN OTHER MATTERS. A COPY OF SUCH AGREEMENT IS AVAILABLE FOR INSPECTION AT THE PRINCIPAL OFFICE OF THE COMPANY. ANY TRANSFER OF THE SECURITIES EVIDENCED BY THIS CERTIFICATE IN VIOLATION OF THE AGREEMENT IS NULL AND VOID." Any holder of Securities or Warrant Shares may request the Company to remove any legend described herein from the certificates evidencing such Securities or Warrant Shares by submitting to the Company such certificates, together with an opinion of counsel, if requested, reasonably satisfactory to the Company to the effect that such legend is no longer required under the Securities Act. SECTION 4.06. FURTHER ASSURANCES. Each party shall execute and deliver such additional instruments and other documents and shall take such further actions as may be necessary or appropriate to effectuate, carry out and comply with all of the terms of this Agreement and the transactions contemplated hereby, including, without limitation, making application as soon as practicable for all consents and approvals required in connection with the transactions contemplated hereby and diligently pursuing the receipt of such consents and approvals in good faith. 13 SECTION 4.07. ALLOCATION OF PURCHASE PRICE. The parties agree that for tax purposes, a reasonable allocation of the total purchase price is to allocate $1,955,555.56 to the purchase price of the Series B Preferred Stock, $15,644,444.44 to the purchase price of the Series A Preferred Stock, and $400,000 to the purchase price of the Warrant. The parties agree that all tax returns filed by the Company and Purchasers shall be prepared in a manner consistent with such allocation. SECTION 4.08. INFORMATION RIGHTS. (a) The Company covenants that during the period commencing on the Closing Date and for so long as an Initial Purchaser or its Eligible Transferee holds $1 million in stated liquidation value of Series A Preferred Stock or Series B Preferred Stock, the Company will deliver to such Initial Purchaser, at its address set forth in the records of the Company: (i) as soon as practicable and in any event within 45 days after the end of each quarterly period (other than the last quarterly period) in each fiscal year, consolidated statements of income, changes in shareholders' equity and cash flows of the Company and its subsidiaries for the period from the beginning of such quarterly period and from the beginning of the then current fiscal year to the end of such quarterly period, and a consolidated balance sheet of the Company and the Company Subsidiaries as of the end of such quarterly period, setting forth in each case in comparative form figures for the corresponding period or date in the preceding fiscal year; and (ii) as soon as practicable and in any event within 90 days after the end of each fiscal year, a consolidated balance sheet of the Company and the Company Subsidiaries as of the end of such fiscal year and the related consolidated statements of income, changes in shareholders' equity and cash flows for such fiscal year, setting forth in each case in comparative form the corresponding figures from the preceding fiscal year, together with the audit report of the independent public accountants of recognized standing selected by the Company. (c) In addition, the Company covenants that for such period as a Purchaser is entitled to receive the reports set forth in Section 4.08(a) above, the Company shall provide such holder with (i) monthly unaudited financial statements of the Company and the Company Subsidiaries not later than 30 days after the last day of each fiscal quarter and (ii) such other information relating to the Company's operations as such Purchaser may reasonably request from time to time. 14 ARTICLE V CONDITIONS SECTION 5.01. CONDITIONS OF PURCHASE. The respective obligations of each Purchaser to purchase the Securities to be purchased by it at the Closing is subject to the satisfaction or waiver of each of the following conditions on or prior to the Closing Date: (a) REPRESENTATIONS AND WARRANTIES; COVENANTS. The representations and warranties of the Company contained in or incorporated by reference in this Agreement and the Ancillary Documents shall be true and correct in all material respects on and as of the date of this Agreement or the date of such Ancillary Documents, as the case may be, and on and as of the Closing Date, with the same effect as though made on and as of such date, except to the extent any such representation and warranty is made as of a specified date, in which case such representation and warranty shall be true and correct in all material respects on and as of such specified date, and the Company shall have performed in all material respects all obligations, agreements, undertakings, covenants and conditions of this Agreement and the Ancillary Documents to be performed at or prior to the Closing Date. (b) NO INJUNCTION. There shall not be in effect any order, decree or injunction of a court or agency of competent jurisdiction which enjoins or prohibits consummation of the transactions contemplated hereby. (c) REGULATORY APPROVALS. All permits, consents, authorizations, orders and approvals of, and filings and registrations required under any Federal or state law, rule or regulation for or in connection with the execution and delivery of this Agreement and the Ancillary Documents and the consummation by the parties hereto of the transactions contemplated on such parties' part hereby and thereby shall have been obtained or made and all statutory waiting periods thereunder in respect thereof shall have expired. (d) ISSUANCE OF SENIOR NOTES; RECAPITALIZATION. Prior to or simultaneously with the issuance of the Securities, (i) the Recapitalization shall have been effected on terms and pursuant to such agreements as are reasonably satisfactory in all respects to Purchasers, the Senior Notes shall have been issued on terms and pursuant to such agreements and documents as shall be reasonably satisfactory to Purchasers in all respects and (ii) each of the Related Documents shall have been executed and delivered by each of the parties thereto and shall be reasonably satisfactory to Purchasers in all respects. (e) OPINION OF COUNSEL. Each Purchaser shall have received at the Closing from Gibson, Dunn & Crutcher LLP, counsel to the Company, a favorable written opinion dated as of the Closing Date which shall address each of the matters set forth in EXHIBIT E and which shall otherwise be in form and substance satisfactory to Purchasers. 15 (f) REGISTRATION RIGHTS AGREEMENT. The Registration Rights Agreement shall have been duly executed and delivered by the Company. (g) SHAREHOLDERS AGREEMENT. The Shareholders Agreement shall have been duly executed and delivered by the Company and each Shareholder party thereto. (h) AMENDED AND RESTATED ARTICLES OF INCORPORATION. The Articles of Incorporation of the Company shall have been amended and restated as set forth in EXHIBIT A hereto. (i) AMENDMENT OF BY-LAWS. The By-Laws of the Company shall have been amended and restated as set forth in EXHIBIT F hereto. SECTION 5.02. CONDITIONS OF SALE. The obligation of the Company to sell the Securities to be sold at the Closing is subject to satisfaction or waiver of each of the following conditions precedent: (a) REPRESENTATIONS AND WARRANTIES; COVENANTS. The representations and warranties of Purchasers contained in this Agreement shall be true and correct in all material respects on and as of the date of this Agreement and on and as of the Closing Date with the same effect as though made on and as of such date, except to the extent any such representation and warranty is made as of a specified date, in which case such representation and warranty shall be true and correct in all material respects on and as of such specified date, and Purchasers shall have performed in all material respects all obligations, agreements, undertakings, covenants and conditions required by them to be performed at or prior to the Closing. (b) NO INJUNCTION. There shall not be in effect any order, decree or injunction of a court or agency of competent jurisdiction which enjoins or prohibits consummation of the transactions contemplated hereby. (c) REGULATORY CONSENTS. All permits, consents, authorizations, orders and approvals of, and filings and registrations required under Federal or state law, rule or regulation for or in connection with the execution and delivery of this Agreement and the Ancillary Documents and the consummation by the parties hereto of the transactions contemplated on such parties' part hereby and thereby shall have been obtained or made and all statutory waiting periods thereunder in respect thereof shall have expired. (d) ISSUANCE OF SENIOR NOTES; RECAPITALIZATION. Prior to or simultaneously with the issuance of the Securities, each of the following shall have occurred: (i) the Senior Notes shall have been issued by the Company, (ii) the Credit Agreement shall have been executed and delivered by the parties thereto and (iii) the Recapitalization shall have been effected. (e) REGISTRATION RIGHTS AGREEMENT. The Registration Rights Agreement shall have been duly executed and delivered by Purchasers. 16 (f) SHAREHOLDERS AGREEMENT. The Shareholders Agreement shall have been duly executed and delivered by Purchasers in their capacity as holders of Warrant Shares upon exercise of the Warrants. ARTICLE VI TERM SECTION 6.01. TERMINATION. This Agreement may be terminated on or any time prior to the Closing: (a) by the mutual written consent of Purchasers and the Company; or (b) by either the Company or Purchasers if the Closing shall have not have occurred on or prior to August 31, 1997, unless the failure of such occurrence shall be due to the failure of the party seeking to terminate this Agreement to perform or observe its agreements set forth herein required to be performed or observed by such party on or before the Closing; or (c) by the Company or Purchasers pursuant to notice if any Governmental Entity of competent jurisdiction shall have denied any approval under any of the laws, rules or regulations necessary for the consummation of the transactions contemplated hereby by a final and unappealable order. SECTION 6.02. EFFECT OF TERMINATION. In the event of the termination of this Agreement as provided in Section 6.01, this Agreement shall forthwith become void, except for the obligations set forth in this Section and in 7.06 and 7.07 and there shall be no liability or obligation on the part of the parties hereto except as otherwise provided in this Agreement. The termination of this Agreement under Section 6.01(b) shall not relieve any party of any liability for breach of this Agreement prior to the date of termination. ARTICLE VII MISCELLANEOUS SECTION 7.01. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The representations and warranties made herein shall survive the execution and delivery of this Agreement and the issuance and delivery of the Series A Preferred Stock, the Series B Preferred Stock and the Warrants. 17 SECTION 7.02. NOTICES. All notices and other communications hereunder shall be in writing and shall be deemed to have been duly given, if delivered personally, by telecopier or sent by overnight courier as follows: (a) if to the Purchasers and their counsel: (i) if to MMLIC, MMCVP, and/or MMHYP, to: Massachusetts Mutual Life Insurance 1295 State Street Springfield, Massachusetts 01111 Attention: Richard E. Spencer Wallace G. Rodger Phone: (413) 744-6223 Fax: (413) 744-6127 AND, IF TO MMCVP, WITH A COPY TO: c/o Bank of America Trust and Banking Corporation (Cayman) Limited P.O. Box 1092 George Town Grand Cayman Cayman Islands, B.W.I. Attention: Michael Carney (ii) if to Jackson National, to: c/o PPM America, Inc. 225 West Wacker Drive, Suite 1200 Chicago, Illinois 60606 Attention: Private Placement Group Phone: (312) 634-2500 Fax: (312) 634-0054 (iii) if to Paribas, to: c/o Paribas Principal Partners 787 Seventh Avenue New York, New York 10019 Attention: Stephen Eisenstein Phone: (212) 841-2127 Fax: (212) 841-2502 18 IN EACH CASE, WITH A COURTESY COPY TO: Schwartz, Cooper, Greenberger & Krauss 180 North LaSalle Street, Suite 2700 Chicago, Illinois 60601 Attention: Brian O'Neil, Esq. Phone: (312) 845-5404 Fax: (312) 782-8416 (b) if to the Company, to: Burke Industries, Inc. 2250 South Tenth Street San Jose, California 95112 Attention: Rocco C. Genovese Phone: (408) 297-3500 Fax: (408) 995-5163 with a copy to: J.F. Lehman Equity Investors I, L.P. c/o J.F. Lehman & Company 450 Park Avenue, Sixth Floor New York, New York 10022 Attention: Mr. Donald Glickman Phone: (212) 634-1160 Fax: (212) 634-1155 AND WITH A COURTESY COPY TO: Gibson, Dunn & Crutcher LLP 333 South Grand Avenue Los Angeles, California 90071 Attention: Kenneth M. Doran, Esq. Phone: (213) 229-7000 Fax: (213) 229-7520 or to such other address or addresses as shall be designated in writing. All notices shall be effective when received. SECTION 7.03. ENTIRE AGREEMENT; AMENDMENT. This Agreement, the Ancillary Documents and the documents described herein and therein or attached or delivered pursuant hereto or thereto set forth the entire agreement between the parties hereto with respect to the transactions contemplated by this Agreement. Any provision of this Agreement may be amended or modified in whole or in part at any time by an 19 agreement in writing between the parties hereto executed in the same manner as this Agreement. No failure on the part of any party to exercise, and no delay in exercising, any right shall operate as a waiver thereof nor shall any single or partial exercise by any party of any right preclude any other or future exercise thereof or the exercise of any other right. No investigation by Purchasers of the Company or any Company Subsidiary prior to or after the date hereof shall stop or prevent Purchasers from exercising any right hereunder or be deemed to be a waiver of any such right. SECTION 7.04. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed to constitute an original, but all of which together shall constitute one and the same document. SECTION 7.05. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF CALIFORNIA APPLICABLE TO CONTRACTS MADE AND TO BE PERFORMED IN THAT STATE. SECTION 7.06. PUBLIC ANNOUNCEMENTS. Each of the parties hereto agrees to hold in strict confidence and not to disclose to others the status of any discussions or relations among the parties with respect to the subject matter of this Agreement until such time as the parties mutually agree to publicly disclose such information or are obligated by any legal or regulatory agency requirement to disclose such information; PROVIDED that a description of this transaction mutually satisfactory to the Company and the Purchasers may be included in the Debt Offering Memorandum. SECTION 7.07. FEES AND EXPENSES. The Company or an Affiliate of the Company shall be responsible for the costs and expenses incurred by the Purchasers, the Company and its Affiliates in connection with this Agreement and the Ancillary Documents and the transactions contemplated hereby, including the reasonable fees and expenses of their counsel, Schwartz, Cooper, Greenberger & Krauss, and their respective financial advisors and accountants. SECTION 7.08. SUCCESSORS AND ASSIGNS. Subject to applicable law, any Purchaser may assign its rights under this Agreement in whole or in part, but no such assignment shall relieve such Purchaser of its obligations hereunder. The Company may not assign any of its rights or delegate any of its duties under this Agreement without the prior written consent of Purchasers. Any purported assignment in violation of this Section shall be void. 20 SECTION 7.09. ARBITRATION. Any controversy, dispute or claim arising out of, in connection with or in relation to the interpretation, performance or breach of this Agreement shall be determined, at the request of any party, by arbitration in a city mutually agreeable to the parties to such controversy, dispute or claim, or, failing such agreement, in New York, New York, before and in accordance with the then-existing Rules for Commercial Arbitration of the American Arbitration Association, and any judgment or award rendered by the arbitrator will be final, binding and unappealable and judgment may be entered by any state or Federal court having jurisdiction thereof. The pre-trial discovery procedures of the Federal Rules of Civil Procedure shall apply to any arbitration under this Section 7.09. Any controversy concerning whether a dispute is an arbitrable dispute or as to the interpretation or enforceability of this Section 7.09 shall be determined by the arbitrator. The arbitrator shall be a retired or former United States District Judge or other person acceptable to each of the parties, provided such individual has substantial professional experience with regard to corporate or partnership legal matters. The parties intend that this agreement to arbitrate be valid, enforceable and irrevocable. SECTION 7.10. SPECIFIC PERFORMANCE. The Company acknowledges that the rights granted to Purchasers in this Agreement are of a special, unique and extraordinary character, and that any breach of this Agreement by the Company could not be compensated for by damages. Accordingly, if the Company breaches its obligations under this Agreement, Purchasers shall be entitled, in addition to any other remedies that they may have, to enforcement of this Agreement by a decree of specific performance requiring the Company to fulfill its obligations under this Agreement. SECTION 7.11. CAPTIONS. The captions contained in this Agreement are for reference purposes only and are not part of this Agreement. 21 SECTION 7.12. MUTUAL WAIVER OF JURY TRIAL. THE PARTIES HERETO WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, SUIT OR PROCEEDING BROUGHT TO ENFORCE OR DEFEND ANY RIGHTS OR REMEDIES UNDER THIS AGREEMENT. IN WITNESS WHEREOF, this Agreement has been executed by the parties hereto or by their respective duly authorized representatives, all as of the date first above written. BURKE INDUSTRIES, INC. By: /s/ KEITH OSTER --------------------------------------------------- Name: Keith Oster Title: Assistant Vice President 22 MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY By: /s/ RICHARD E. SPENCER II --------------------------------------------------- Name: Richard E. Spencer II Title: Managing Director MASSMUTUAL CORPORATE VALUE PARTNERS LIMITED By: Massachusetts Mutual Life Insurance Company Its: Investment Advisor By: /s/ RICHARD E. SPENCER II --------------------------------------------------- Name: Richard E. Spencer II Title: Managing Director MASSMUTUAL HIGH YIELD PARTNERS LLC By: HYP Management, Inc., as Manager By: /s/ ROGER W. CRANDALL --------------------------------------------------- Name: Roger W. Crandall Title: Vice President 23 JACKSON NATIONAL LIFE INSURANCE COMPANY By: PPM America, Inc. Its: Agent By: /s/ DEBBIE ACKERMAN --------------------------------------------------- Name: Debbie Ackerman Title: Managing Director PARIBAS NORTH AMERICA, INC. By: /s/ DONNA KIERNAN --------------------------------------------------- Name: Donna Kiernan Title: CFO 24 ANNEX I SERIES; NUMBER OF SHARES OF PREFERRED STOCK; NUMBER OF WARRANTS AND PURCHASE PRICE -----------------------------------------------
SERIES OF NUMBER NUMBER PURCHASE PURCHASER PREFERRED OF SHARES OF WARRANTS PRICE - ------------------------------------------------------------------------------------------------ Massachusetts Mutual Life Insurance Company A 3,808 203,939.56 $3,808,000 MassMutual Corporate Value Partners Limited A 1,904 101,969.78 $1,904,000 MassMutual High Yield Partners LLC A 2,288 122,535.11 $2,288,000 Jackson National Life Insurance Company A 8,000 428,444.44 $8,000,000 Paribas North America, Inc. B 2,000 107,111.11 $2,000,000 ---------- --------- ---------- ----------
A-1 EX-10.7 10 EXH 10.7 SHAREHOLDERS AGMT EXHIBIT 10.7 SHAREHOLDERS AGREEMENT SHAREHOLDERS AGREEMENT, dated as of August 20, 1997, among Burke Industries, Inc., a California corporation (the "Company"), J.F. Lehman Equity Investors I, L.P. ("JFLEI"), Massachusetts Mutual Life Insurance Company ("MMLIC"), MassMutual Corporate Value Partners Limited ("MMCVP") and MassMutual High Yield Partners LLC ("MMHYP" and, together with MMLIC and MMCVP, "MassMutual"), Jackson National Life Insurance Company ("Jackson National"), Paribas North America, Inc. ("Paribas" and, together with MassMutual and Jackson National, in their capacity as holders of the Warrants or the Warrant Shares (each, as defined below), the "Warrantholders"), and each of the persons whose names are listed on SCHEDULE A hereto (the "Continuing Shareholders"). JFLEI, the Warrantholders and the Continuing Shareholders are hereinafter sometimes referred to collectively as the "Shareholders" and individually as a "Shareholder." R E C I T A L S WHEREAS, as of the date hereof, the Shareholders, other than the Warrantholders, own all of the issued and outstanding shares of the Company's Common Stock, without par value (the "Common Stock"); WHEREAS, the Shareholders desire to enter into this Agreement setting forth rights and obligations with respect to all shares of Common Stock owned and hereafter acquired by them. A G R E E M E N T NOW, THEREFORE, in consideration of the foregoing recitals and the mutual covenants contained herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: 1. CORPORATE GOVERNANCE. (a) ARTICLES OF INCORPORATION; BY-LAWS. The Amended and Restated Articles of Incorporation and the Amended and Restated By-Laws of the Company, each as in effect on the date hereof, are attached hereto as EXHIBIT A and EXHIBIT B, respectively. (b) COMPOSITION AND ELECTION OF BOARD OF DIRECTORS. (i) The Board of Directors of the Company shall initially consist of nine (9) members (collectively, the "Directors" and, individually, a "Director") , who shall be Rocco C. Genovese, Reed C. Wolthausen, John F. Lehman, Donald Glickman, George Sawyer, Keith Oster, Dr. Oliver C. Boileau, Jr., Thomas G. Pownall and Bruce D. Gorchow. So long as, together with its Related Transferees, Jackson National holds in the aggregate Warrants and shares obtained upon exercise of the Warrants representing at least seventy-five percent (75%) of the Warrants initially issued to Jackson National, Jackson National shall have the right to designate one Director. So long as, together with its Related Transferees, MassMutual holds in the aggregate Warrants and shares obtained upon exercise of the Warrants representing at least seventy-five percent (75%) of the Warrants initially issued to MassMutual, MassMutual shall have the right to designate one Director (and, if MassMutual elects to exercise such right, the number of Directors of the Company shall be increased to ten (10)). Subject to the rights of the holder of the Series A Preferred Stock to elect Directors upon the occurrence of certain events, JFLEI shall be entitled to designate all Directors of the Company not designated by Jackson National and, if MassMutual elects to exercise its right to designate one Director, by MassMutual. (ii) Each Shareholder agrees to vote all shares of Common Stock now or hereafter owned by it, to cause each of its Related Transferees to vote all shares of Common Stock now or hereafter owned by it and otherwise to use its reasonable best efforts, to: (A) elect as Directors the persons designated by JFLEI, by Jackson National and, if MassMutual elects to exercise its right to designate one Director, by MassMutual, in accordance with Section 1(b)(i); (B) remove, with or without cause, (x) any Director designated by JFLEI in accordance with Section 1(b)(i), if requested by JFLEI, (y) any Director designated by Jackson National in accordance with Section 1(b)(i), if requested by Jackson National and (z) if MassMutual elects to exercise its right to designate one Director, any Director designated by MassMutual in accordance with Section 1(b)(i), if requested by MassMutual; and (C) cause any vacancy on the Board of Directors of the Company created by the death, resignation, incapacity or removal of (x) any Director designated by JFLEI in accordance with Section 1(b)(i), to be filled by a replacement Director designated by JFLEI, (y) any Director designated by Jackson National in accordance with Section 1(b)(i), to be filled by a replacement Director designated by Jackson National and (z) if MassMutual elects to exercise its right to designate one Director, any Director designated by MassMutual in accordance with Section 1(b)(i), to be filled by a replacement Director designated by MassMutual. (c) INFORMATION RIGHTS OF SHAREHOLDERS. (i) Until such time as the Company shall have become subject to the reporting requirements of Section 13 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the Company shall (A) provide each Shareholder with quarterly financial statements and reports of and any other regularly prepared monthly financial data related to the Company's and its subsidiaries' performance, (B) use reasonable efforts to deliver all other financial information distributed by the Company to any Shareholder (in its capacity as such) to each other Shareholder and (C) cause members of senior management of the Company to be available to each Shareholder from time to time to review the Company's performance. 2 (ii) (A) So long as, together with its Related Transferees, MassMutual holds in the aggregate Warrants and shares obtained upon exercise of the Warrants representing at least seventy-five percent (75%) of the Warrants initially issued to MassMutual, MassMutual shall have the right to designate two representatives (less the number of Directors MassMutual, in its capacity as a Warrantholder or in its capacity as a holder of the Series A 11.5% Cumulative Redeemable Preferred Stock of the Company, has designated or elected) to attend all meetings of the Board of Directors of the Company and all committees thereof as non-voting observers. (B) So long as, together with its Related Transferees, Jackson National holds in the aggregate Warrants and shares obtained upon exercise of the Warrants representing at least seventy-five percent (75%) of the Warrants initially issued to Jackson National, Jackson National shall have the right to designate two representatives (less the number of Directors Jackson National, in its capacity as a Warrantholder or in its capacity as a holder of the Series A 11.5% Cumulative Redeemable Preferred Stock of the Company, has designated or elected) to attend all meetings of the Board of Directors of the Company and all committees thereof as non-voting observers. (C) So long as, together with its Related Transferees, Paribas holds in the aggregate Warrants and shares obtained upon exercise of the Warrants representing at least seventy-five percent (75%) of the Warrants initially issued to Paribas, Paribas shall have the right to designate one representative to attend all meetings of the Board of Directors of the Company and all committees thereof as a non-voting observer. The Company shall deliver to MassMutual, Jackson National and Paribas, concurrently with the delivery to the directors of the Company, all notices of meetings of the Board of Directors of the Company or committees thereof, and copies of all written reports and other material given to the Board of Directors or committees thereof in connection with such meetings (whether or not their observers attend) or actions by consent in lieu thereof. Notwithstanding any provision of this Agreement to the contrary, the rights of MassMutual, Jackson National and Paribas pursuant to this Section 1(e)(ii) may not be assigned without the consent of the Company, other than to a Related Transferee. 2. RESTRICTIONS ON TRANSFER OF SECURITIES. (a) GENERAL. No Shareholder shall, directly or indirectly, transfer or otherwise dispose of any shares of Common Stock or Warrants owned by such Shareholder, or any interest therein, except pursuant to a Permitted Transfer described in Section 2(b), unless such transfer or disposition is made in accordance with the applicable provisions of Sections 3, 4 and 5 of this Agreement. Any attempt by a Shareholder to effect a transfer or disposition in violation of this Agreement shall be void and ineffective for all purposes. The words "transfer" and "dispose" mean the making of any sale, exchange, assignment, gift, security interest, pledge or other encumbrance, or any contract therefor, any voting trust or other agreement or arrangement with respect to the transfer or voting rights or any other beneficial interests, the creation of any other claim thereto or any other transfer or disposition whatsoever, whether voluntary or involuntary, 3 affecting the right, title, interest or possession in or to the Common Stock or Warrants; PROVIDED, HOWEVER, that in the case of MassMutual, Jackson National and Paribas, neither a pledge of the Warrants, the shares obtained upon exercise of the Warrants or any shares obtained pursuant to Section 3 in connection with a financing transaction nor foreclosure of such pledge shall constitute a transfer or disposition prohibited by this Section 2 if the person acquiring such Warrants or shares pursuant to such foreclosure executes an instrument acknowledging that it shall thereafter be bound by the terms of this Agreement. (b) PERMITTED TRANSFERS. None of the restrictions contained in this Agreement with respect to transfers of Common Stock or Warrants (other than those set forth in this Section 2(b) and Section 2(c)) shall apply: (i) to any transfer (including any gift) by any Shareholder who is an individual to: (A) such Shareholder's spouse or children (collectively, "relatives"); (B) a trust of which there are no beneficiaries other than one or more of such Shareholder and the relatives of such Shareholder; (C) a partnership of which there are no partners other than one or more of such Shareholder and the relatives of such Shareholder; (D) a corporation of which there are no Shareholders other than one or more of such Shareholder and the relatives of such Shareholder; (E) a legal representative or guardian of such Shareholder or a relative of such Shareholder if such Shareholder or relative becomes mentally incompetent; or (F) any Person by will or by the laws of descent; (ii) to any transfer by any Shareholder that is not an individual to any Affiliate thereof, as such term is defined in Rule 12b-2 of the Exchange Act, or (other than JFLEI or an Affiliate of JFLEI) to any Qualified Institutional Buyer, as such term is defined in Rule 144A of the Securities Act of 1933, as amended (the "Securities Act"); (iii) to any transfer by any Shareholder that is a partnership (other than JFLEI or an Affiliate of JFLEI) to the general and/or limited partners of such Partnership as of the date hereof; PROVIDED that such transfer is made PRO RATA according to the economic interests of such partners thereof as determined under the governing instructions of such partnership; (iv) to any transfer by a Selling Shareholder (as hereinafter defined) made in accordance with the applicable provisions of Section 3 and, unless such transfer 4 is to an Offeree Shareholder (as hereinafter defined), the applicable provisions of Section 4; (v) to any transfer by a Tag-Along Shareholder (as hereinafter defined) pursuant to the Tag-Along Right (as hereinafter defined); and (vi) to any transfer by a Drag-Along Shareholder (as hereinafter defined) made pursuant to the Drag-Along Right (as hereinafter defined); and (vii) to any transfer by a Shareholder for cash in a bona fide public offering (a "Registered Offering") pursuant to an effective registration statement under the Securities Act of 1933. Transfers made pursuant to this Section 2(b) are referred to herein as "Permitted Transfers" and transferees taking under a Permitted Transfer are referred to herein as "Permitted Transferees." Transferees taking under a Permitted Transfer described in Sections 2(b)(i) through (iii) are referred to herein as "Related Transferees." (c) REGISTRATION OF TRANSFER BY COMPANY. No transfer of Common Stock or Warrants by any Shareholder (other than transfers pursuant to a Registered Offering) shall be effective (and the Company shall not transfer on its books any such shares) unless (i) the certificates representing such Common Stock or Warrants issued to the Permitted Transferee shall bear any legends required by Section 10, (ii) the Permitted Transferee (if not already a party hereto) shall have executed and delivered to the Company, as a condition precedent to such transfer, an instrument or instruments in form and substance reasonably satisfactory to the Company confirming that the Permitted Transferee agrees to be bound by the terms of this Agreement to the same extent as its transferor. In addition, no transfer of Common Stock or Warrants shall be made by any Shareholder unless such transfer is effected in connection with a Registered Offering or is exempt from registration under the Securities Act and the Company, should it so request, has received a written legal opinion (which may be rendered by in-house legal counsel of any Shareholder that is not an individual) satisfactory to its counsel that the proposed transfer is exempt from such registration. (d) LEGEND. In the event that any shares of Common Stock or Warrants become free of the rights and restrictions imposed by this Agreement, the Shareholders holding such securities shall be entitled to receive, promptly upon presentment to the Company of the certificate or certificates evidencing the same, a new certificate or certificates not bearing the restrictive legend provided for in the second paragraph of Section 10. In the event that any shares of Common Stock or Warrants are (i) transferred in connection with a Registered Offering, or (ii) transferred pursuant to an exemption from registration under the Securities Act and the Company has received a written legal opinion (which may be rendered by in-house legal counsel of any Shareholder that is not an individual) satisfactory to its counsel (A) as to the availability of and the compliance with such exemption and (B) that such shares need not bear the restrictive legend set forth in the first paragraph of Section 9 hereof, the Company shall issue a new certificate or certificates representing such securities not bearing such legend. 5 3. RIGHT OF FIRST OFFER. (a) FIRST OFFER NOTICE. If a Shareholder (the "Selling Shareholder") desires to transfer any shares of Common Stock or Warrants other than (i) to a Related Transferee, (ii) as a Tag-Along Shareholder (as hereinafter defined) or (iii) as a Drag-Along Shareholder, such Selling Shareholder shall, prior to soliciting a BONA fide written offer from an independent third-party (the "Third-Party Offer"), deliver a written notice (the "First Offer Notice") offering to sell the Common Stock or Warrants proposed to be sold ("Offered Securities") to the remaining Shareholders (the "Offeree Shareholders") or to the Company. The First Offer Notice shall state (i) that the Selling Shareholder desires to sell the Offered Securities and (ii) the purchase price per share and other material terms on which and the material conditions subject to which the Offered Securities are offered. (b) EXERCISE OF RIGHT OF FIRST OFFER. (i) Upon receipt of the First Offer Notice, each Offeree Shareholder shall have the option (the "Shareholders' Right of First Offer"), which shall be exercisable by written notice (the "Notice of Election") delivered to the Selling Shareholder within ten (10) days after the date of the First Offer Notice (the "Shareholders' First Offer Option Period"), to purchase from the Selling Shareholder, at the price and upon the terms specified in the First Offer Notice, a number of shares of Common Stock and a number of Warrants up to the sum of (A) the number of shares of Common Stock and Warrants included in the Offered Securities multiplied by a fraction, the numerator of which is the number of shares of Common Stock and shares of Common Stock issuable upon exercise of Warrants ("Common Stock Equivalents") owned by such Offeree Shareholder and the denominator of which is the number of shares of Common Stock and Common Stock Equivalents held by all Offeree Shareholders and (B) the number of shares of Common Stock and Warrants that, under the formula in clause (A), all Offeree Shareholders could have elected to purchase but did not so elect, multiplied by a fraction, the numerator of which is the number of shares of Common Stock and Common Stock Equivalents owned by such Offeree Shareholder and the denominator of which is the total number of shares of Common Stock and Common Stock Equivalents owned by the Offeree Shareholders (including such Offeree Shareholder) that exercised the option provided herein. Each Offeree Shareholder who desires to exercise its option to purchase Offered Securities shall state in its Notice of Election the number of shares of Common Stock and Warrants that such Offeree Shareholder proposes to purchase determined in accordance with clause (b)(i)(A) plus an amount of additional shares and Warrants, if any, that such Offeree Shareholder would be willing to purchase from the Selling Shareholder in the event that one or more Offeree Shareholders (other than such Offeree Shareholder) elect not to exercise their Shareholders' Right of First Offer, in whole or in part. If any Offeree Shareholder shall fail to deliver the Notice of Election within the Shareholders' First Offer Option Period, such failure shall be deemed an election not to purchase any Offered Securities subject to the Shareholders' Right of First Offer and such Shareholders' Right of First Offer shall thereupon expire with respect to the Offered Securities only. 6 (ii) If the number of shares with respect to which the Shareholders' Right of First Offer has been exercised is less than the number of Offered Securities, the Company shall have the option (the "Company's Right of First Offer"), which shall be exercisable by written notice delivered to the Selling Shareholder within five (5) days after the expiration of the Shareholders' First Offer Option Period (the "Company's First Offer Option Period"), to purchase any or all of the Offered Securities not purchased by the Offeree Shareholders at the price and upon the terms specified in the First Offer Notice. If the Company shall fail to deliver a notice (the "Company Notice") of its election to exercise the Company's Right of First Offer within the Company First Offer Option Period, such failure shall be deemed an election not to purchase any Offered Securities subject to the Company's Right of First Offer and the Company's Right of First Offer shall thereupon expire with respect to the Offered Securities only. (iii) The Shareholders' Right of First Offer and the Company's Right of First Offer shall be exercisable only if the Offeree Shareholders and/or the Company, in the aggregate, elect to purchase all, and not less than all, of the Offered Securities. Each Notice of Election and Company Notice shall recite that such Notice of Election or Company Notice, as the case may be, constitutes a binding obligation of the Offeree Shareholder or the Company, as the case may be, submitting same to purchase, upon the same terms and subject to the same conditions as the Third-Party Offer, up to the number of shares set forth in the Notice of Election or the Company Notice, as the case may be. (iv) The closing of the purchase of the Offered Securities subscribed to by the Offeree Shareholders and the Company pursuant to this Section 3 shall be held at the principal office of the Company at 10:00 a.m., local time not later than the thirtieth (30th) day after the Company First Offer Option Period shall have expired. (c) SALE TO THIRD-PARTY PURCHASER. (i) If the First Offer Notice shall have been duly delivered, and the Offeree Shareholders and the Company together shall not have exercised the Shareholders' Right of First Offer and the Company's Right of First Offer to purchase all of the Offered Securities, the Selling Shareholder may solicit Third-Party Offers to purchase all (but not less than all) of the Offered Securities and, so long as any sale of the Offered Securities made pursuant to a Third-Party Offer that is (A) upon such terms, including price, and subject to such conditions as are, in the aggregate, no less favorable to the Selling Shareholder than those set forth in the First Offer Notice; PROVIDED, HOWEVER, that the price may be not less than 90% of the price set forth in the First Offer Notice (B) BONA FIDE,(C) consummated within one hundred eighty (180) days from the expiration date of the Company First Offer Option Period, (D) if applicable, subject to any Tag-Along Right and (E) in accordance with clause (ii) below, such transfer may be consummated without further restriction under this Section 3 and shall be a Permitted Transfer under this Agreement. (ii) All Offered Securities transferred by the Selling Shareholder in accordance with clause (i) above shall remain, and the third-party purchaser shall agree to take 7 and hold such Offered Securities, subject to all of the obligations and restrictions imposed upon the Selling Shareholder by this Agreement. No transfer of Offered Securities to which the preceding sentence applies shall be effective unless and until the third-party purchaser shall have executed and delivered to the Company an appropriate instrument to the foregoing effect. 4. TAG-ALONG RIGHTS. (a) THE RIGHT. If JFLEI and/or any of its Affiliates (collectively,the "JFLEI Group") proposes to transfer any shares of Common Stock owned by it on the date hereof to a Prospective Purchaser other than in a Permitted Transfer (a "Tag-Along Sale"), then each of the remaining Shareholders shall have the right to participate in any such sale of Common Stock by the JFLEI Group in accordance with the procedures set forth below; PROVIDED that such right may not be exercised with respect to any shares acquired by any such remaining Shareholder pursuant to the exercise of a Right of First Offer within One Hundred Eighty (180) days prior to the proposed date of consummation of the Tag-Along Sale; PROVIDED FURTHER, HOWEVER, that such participation shall be on the same terms and subject to the same conditions as those on which JFLEI proposes to transfer its shares; and PROVIDED STILL FURTHER, HOWEVER, that, in addition to receiving their ratable portion of any consideration paid in respect of the Common Stock or Warrants, the Shareholders shall be entitled to receive a ratable portion of any consideration to be paid other than in respect of the Common Stock or Warrants, to the extent that such consideration exceeds (i) the fair market value of any tangible property transferred by the JFLEI Group in exchange for such consideration or (ii) an amount that is customary and reasonable for any intangible property rights or transferred or granted in exchange for such consideration. (b) ELECTION TO PARTICIPATE. Shareholders shall have the right (the "Tag-Along Right") for thirty (30) days from receipt of the First Refusal Notice described in Section 3(a) (the "Tag-Along Option Period") to elect to participate in the Tag-Along Sale. Any remaining Shareholder electing to participate in the Tag-Along Sale (a "Tag-Along Shareholder") shall give JFLEI, all other Shareholders and Company written notice thereof (the "Election Notice") within the Tag-Along Option Period. The Election Notice shall specify the number of shares of Common Stock that such Tag-Along Shareholder desires to sell to the Prospective Purchaser, which amount shall be equal to or less than the total number of shares of Common Stock held by such Shareholder multiplied by a fraction, the numerator of which is the total number of shares of Common Stock proposed to be sold by the JFLEI Group and the denominator of which is the total number of shares of Common Stock then owned by the JFLEI Group. The failure of any remaining Shareholder to submit an Election Notice within the Tag-Along Option Period shall constitute an election by such remaining Shareholder not to participate in such Tag-Along Sale, PROVIDED such Tag-Along Sale is consummated within forty-five (45) days of the expiration of the Tag-Along Option Period. By delivering an Election Notice to JFLEI within the Tag-Along Option Period, a Tag-Along Shareholder shall have the right to sell to the Prospective Purchaser that number of shares of Common Stock specified in the Election Notice; PROVIDED, HOWEVER, that, to the extent the Prospective Purchaser is unwilling or unable to purchase all of the shares proposed to be sold by the JFLEI Group and the Tag-Along Shareholders, the number of shares to be sold by each of the JFLEI Group and each of the Tag-Along Shareholders shall be ratably reduced so that the number of shares to be sold by the JFLEI Group and each of the Tag-Along 8 Shareholders equals the number of shares that the Prospective Purchaser is willing or able to purchase. The only representations, warranties or indemnities that a Tag-Along Shareholder shall be required to give in connection with a Tag-Along Sale shall be as to due authority and execution, validity and marketability of title and the absence of liens or other encumbrances with respect to such Tag-Along Shareholder's shares of Common Stock. 5. DRAG-ALONG RIGHTS. (a) THE RIGHT. If one or more Shareholders holding, in the aggregate, a majority of the issued and outstanding Common Stock (the "Majority Shareholders") propose to sell all the Common Stock owned by such Majority Shareholders (whether owned by such Shareholders on the date hereof or hereafter acquired in a manner consistent with this Agreement) to a Prospective Purchaser, other than a Related Transferee, then such Majority Shareholders shall have the right (the "Drag-Along Right") to compel the remaining Shareholders (the "Drag-Along Shareholders") to sell all of the shares of Common Stock and Warrants owned by them to the Prospective Purchaser for such consideration per share (reduced by the exercise price of the Warrants, in the case of the Warrants), and on the same terms and subject to the same conditions, as the Majority Shareholders are able to obtain. The Majority Shareholders shall exercise the Drag-Along Right by giving written notice (the "Drag-Along Notice") to the Company and the Drag-Along Shareholders stating (i) that they propose to effect such transaction, (ii) the name and address of the Prospective Purchaser, (iii) the proposed purchase price per share and other terms and conditions of the proposed sale (including any consideration proposed to be paid other than in respect of the Common Stock or Warrants) and (iv) that all the Shareholders shall be obligated to sell their shares of Common Stock and Warrants upon the same terms and subject to the same conditions; PROVIDED, HOWEVER, that, in addition to receiving their ratable portion of any consideration paid in respect of the Common Stock or Warrants, the Shareholders shall be entitled to receive a ratable portion of any consideration paid other than in respect of the Common Stock or Warrants, to the extent that such consideration exceeds (i) the fair market value of any tangible property transferred by the Majority Shareholders in exchange for such consideration or (ii) an amount that is customary and reasonable for any intangible property or rights transferred or granted in exchange for such consideration. (b) PROCEDURE. Not later than twenty (20) days following the date of receipt of the Drag-Along Notice, each of the other Shareholders shall deliver to the Majority Shareholders certificates representing all shares of Common Stock held by a Drag-Along Shareholder, accompanied by duly executed stock powers, and all Warrants held by such Drag-Along Shareholder with duly executed assignments thereof. If any Drag-Along Shareholder fails to deliver such certificates and Warrants to the Majority Shareholders, the Company shall cause the books and records of the Company to show that the shares represented by such certificates and Warrants of such Drag-Along Shareholder are bound by the provisions of this Section 5 and are transferable only to the Prospective Purchaser or a Related Transferee of such Prospective Purchaser upon surrender for transfer by the holder thereof. Upon the consummation of the sale of the Common Stock of the Majority Shareholders and the Drag-Along Shareholders pursuant to this Section 5, the Majority Shareholders shall give notice thereof to the Drag-Along 9 Shareholders and shall remit to each of the Drag-Along Shareholders the total sales price received for the shares of Common Stock of such Drag-Along Shareholder sold pursuant hereto. Notwithstanding anything herein to the contrary, no Shareholder shall be obligated to receive as consideration for any Drag-Along Sale any property or securities the holding of which by such Shareholder would be prohibited by any law, rule or regulation of any governmental entity or insurance industry regulatory body. 6. SUBSCRIPTION OFFER WITH RESPECT TO PRIMARY ISSUANCES. (a) SUBSCRIPTION OFFER. The Company shall not issue (a "Primary Issuance") equity securities, or securities convertible into equity securities, of the Company to any person (a "Primary Purchaser") unless the Company has offered to issue to each of the other Shareholders, on a pro rata basis, an opportunity to purchase such securities on the same terms, including price, and subject to the same conditions as those applicable to the Primary Purchaser. Notwithstanding the foregoing, this Section 6 shall not apply to the issuance of options, warrants or rights to subscribe for shares of Common Stock to officers, directors, employees, consultants or agents of the Company pursuant to the termsof any stock option plan or arrangement approved by the Board of Directors, or the issuance of shares of its Common Stock upon the exercise of any such stock options, warrants or rights; PROVIDED, HOWEVER, that the aggregate number of shares of Common Stock that may be issued under such stock option plan or arrangement without application of this Section 6 to such issuance shall not exceed, in the aggregate, 482,000 shares (appropriately adjusted for stock splits, dividends and/or combinations). (b) PROCEDURE. Not less than ten (10) days prior to the date described in clause (i) of this paragraph, the Company shall make to each Shareholder an offer (the "Subscription Offer") to purchase any securities that are the subject of a Primary Issuance, which offer specify (i) the date on which the Company and the Primary Purchaser intend to consummate the Primary Issuance, (ii) the material rights, preferences, privileges and restrictions granted to or imposed upon the securities, including, if applicable, the certificate of determination or indenture governing such securities, (iii) the principal terms of and conditions applicable to the Primary Issuance, including, without limitation, the price at which such securities are being offered to the Primary Purchaser and (iv) the number of securities proposed to be issued to the Primary Purchaser pursuant to the Primary Issuance multiplied by a fraction, the numerator of which is the number of shares of Common Stock held by such Shareholder and the denominator of which is the total number of shares of Common Stock outstanding, on a fully diluted basis. Each Shareholder electing to participate in the Primary Issuance (a "Subscribing Shareholder") shall give the Primary Purchaser, the Company and each other Shareholder written notice (the "Subscription Notice") of such election not less than five (5) days after receipt of the Subscription Offer (the "Subscription Period"). The Subscription Notice shall specify the number of securities with respect to which such Shareholder desires to subscribe, which amount shall be equal to or less than the total number of securities set forth in the Subscription Offer. The failure of any Shareholder to submit a Subscription Notice within the Subscription Period shall constitute an election by such Shareholder not to accept such Subscription Offer, PROVIDED 10 that the Primary Issuance is consummated not later than the date described in clause (i) of this paragraph. 7. REGISTRATION RIGHTS. Each of the Shareholders shall have the rights, if any, with respect to registration of the shares of Common Stock held by them as are set forth in the Shareholders Registration Rights Agreement, the form of which is attached hereto as EXHIBIT C. 8. MERGER. The Company shall not enter into any merger or consolidation (a "Merger") unless the terms of such Merger provide that all shares of Common Stock shall be treated equally within the meaning on Section 1101 of the California General Corporation Law. 9. CERTAIN CLOSING CONDITIONS. At the closing of any transfer or disposition of Common Stock or Warrants pursuant to this Agreement, in addition to any other conditions specifically set out herein concerning such transfer or disposition, the transferor shall (i) deliver the certificates representing the Common Stock and the Warrants that are the subject of the transfer, duly endorsed for transfer and bearing any necessary tax stamps; (ii) by delivering such certificates and Warrants, be deemed to have represented and warranted that the transferor has valid and marketable title to the Common Stock represented by such certificates and the Warrants free of all encumbrances and (iii) deliver such certificates of authority, tax releases, consents to transfer and evidences of title as may reasonably be required by the transferee. The transferor shall be responsible for the payment of all transfer taxes unless otherwise specified. 10. LEGENDS. Each stock certificate representing shares of Common Stock and each Warrant certificate now held or hereafter acquired by any Shareholder shall bear the following legend: "THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR APPLICABLE STATE SECURITIES LAWS, AND MAY BE OFFERED, PLEDGED, SOLD, ASSIGNED, TRANSFERRED OR OTHERWISE DISPOSED OF ONLY IF REGISTERED PURSUANT TO THE PROVISIONS OF THE ACT AND SUCH LAWS, OR IF AN EXEMPTION FROM REGISTRATION IS AVAILABLE. THE SECURITIES EVIDENCED BY THIS CERTIFICATE ARE ALSO SUBJECT TO A SHAREHOLDERS AGREEMENT DATED AS OF AUGUST 20, 1997 (THE "AGREEMENT"), WHICH CONTAINS PROVISIONS REGARDING (I) CERTAIN RESTRICTIONS ON THE TRANSFER OF SUCH SECURITIES, (II) CERTAIN RIGHTS OF FIRST OFFER, TAG-ALONG RIGHTS AND DRAG-ALONG RIGHTS APPLICABLE TO THIS SECURITY AND (III) CERTAIN OTHER MATTERS. A COPY OF SUCH AGREEMENT IS AVAILABLE FOR INSPECTION AT THE PRINCIPAL OFFICE OF THE 11 COMPANY. ANY TRANSFER OF THE SECURITIES EVIDENCED BY THIS CERTIFICATE IN VIOLATION OF THE AGREEMENT IS NULL AND VOID." 11. TERMINATION. (a) TERMINATION AS TO SHAREHOLDER. This Agreement shall terminate with respect to any Shareholder at such time as the Shareholder ceases to hold any shares of Common Stock or Warrants; PROVIDED, HOWEVER, that the provisions of this Agreement shall continue in effect for the purpose of enforcing against such Shareholder all obligations and undertakings that shall have theretofore become operative; PROVIDED, FURTHER, HOWEVER, that the provisions of this Agreement shall be binding upon any transferee of any Shareholder, whether such transfer was pursuant to a Permitted Transfer (other than a Registered Offering)or otherwise. Notwithstanding the foregoing, the benefits of this Agreement shall inure only to a Permitted Transferee of a Shareholder. (b) TERMINATION AS TO SHARES. This Agreement shall terminate with respect to any particular shares of Common Stock or Warrants when such shares or Warrants shall have been sold in a Registered Offering or distributed to the public pursuant to Rule 144 under the Securities Act. (c) TERMINATION OF AGREEMENT. This Agreement shall terminate upon the earliest to occur of (i) the Agreement having been terminated as to all Shareholders and all transferees of all Shareholders pursuant to paragraph (a) hereof; (ii) the Agreement having been terminated as to all shares of Common Stock and Warrants pursuant to paragraph (b) hereof; (iii) the sale of shares of Common Stock at an aggregate offering price of at least $25,000,000 in a Registered Offering and (iv) the tenth anniversary of this Agreement. 12. MISCELLANEOUS PROVISIONS. (a) FURTHER ACTION. Each party hereto agrees to execute and deliver any instrument and take any action that may reasonably be requested by any other party for the purpose of effectuating the provisions of this Agreement. (b) INCORPORATION OF SCHEDULE AND EXHIBITS. The schedule and exhibits attached hereto are incorporated into this Agreement and shall be deemed a part hereof as if set forth herein in full. References herein to "this Agreement" and the words "herein," "hereof" and words of similar import refer to this Agreement (including its schedules and exhibits) as an entirety. In the event of any conflict between the provisions of this Agreement and any such schedule or exhibit, the provisions of this Agreement shall control. (c) ASSIGNMENT. Except as otherwise provided in this Section 12(c)or in Sections 2, 3, 4 and 5 hereof, no right under this Agreement shall be assignable and any attempted assignment, in violation of this provision shall be void. The Company shall have the right to assign its rights and obligations hereunder to any successor entity (including any entity acquiring substantially all of the assets of the Company), whereupon references herein tO the 12 Company shall be deemed to be to such successor. Except as expressly otherwise provided herein, this Agreement, and the rights and obligations of the parties hereunder, shall be binding upon and inure to the benefit of any and all transferees of the Common Stock or Warrants subject hereto, in each case with the same force and effect as if such transferees were named herein as parties hereto. (d) ENFORCEMENT. The parties recognize that irreparable damage will result in the event that this Agreement shall not be specifically performed. Should any dispute arise concerning the disposition of any Common Stock or Warrants hereunder, the parties hereto agree that an injunction may be issued restraining such disposition pending determination of such controversy and that no bond or other security may be required in connection therewith. Should any dispute arise concerning the right or obligation of the Shareholders or the Company to purchase or sell any of the Common Stock or Warrants subject hereto, such right or obligation shall be enforceable by a decree of specific performance. Such remedies shall, however, not be exclusive and shall be in addition to any other remedy which the parties may have. (e) NOTICES. Any notice or other communication required or which may be given hereunder shall be in writing by hand delivery, registered or certified first class mail, telecopier or air courier guaranteeing overnight delivery: (i) if to the Company, to: Burke Industries, Inc. 2250 South Tenth Street San Jose, California 95112 Attention: Rocco C. Genovese Fax: (408) 995-5163 (ii) if to JFLEI, to: C/O J.F. Lehman & Company 450 Park Avenue Sixth Floor New York, New York 10022 Attention: Donald Glickman Fax: (212) 634-1155 IN EITHER CASE, WITH A COURTESY COPY TO: Gibson, Dunn & Crutcher LLP 333 South Grand Avenue Los Angeles, California 90071 Attention: Kenneth M. Doran, Esq. Fax: (213) 229-7520 13 (iii) if to MMLIC, MMCVP or MMHYP, to: Massachusetts Mutual Life Insurance 1295 State Street Springfield, Massachusetts 01111 Attention: Richard E. Spencer Wallace G. Rodger Fax: (413) 744-6127 AND, IF TO MMCVP, WITH A COPY TO: c/o Bank of America Trust and Banking Corporation (Cayman) Limited P.O. Box 1092 George Town Grand Cayman Cayman Islands, B.W.I. Attention: Michael Carney (iv) if to Jackson National, to: c/o PPM America, Inc. 225 West Wacker Drive Suite 1200 Chicago, Illinois 60606 Attention: Private Placement Group Fax: (312) 634-0054 (v) if to Paribas, to: c/o Paribas Principal Partners 787 Seventh Avenue New York, New York 10019 Attention: Stephen Eisenstein Fax: (212) 841-2502 14 IN THE CASE OF ANY WARRANTHOLDER OR PREFERRED STOCKHOLDER, WITH A COURTESY COPY TO: Schwartz, Cooper, Greenberger & Krauss 180 North LaSalle Street Suite 2700 Chicago, Illinois 60601 Attention: Brian O'Neil, Esq. Fax: (312) 782-8416 (iv) if to any other Shareholder, to his or its address set forth on SCHEDULE A attached hereto, WITH A COURTESY COPY TO: Morrison & Foerster LLP 755 Page Mill Road Palo Alto, California 94304-1018 Attention: William D. Sherman, Esq. Fax: (415) 494-0792 or at such other address, notice of which is given in accordance with the provisions of this Section 11(e). All such notices shall be deemed to have been duly given when delivered by hand, if personally delivered; five (5) business days after being deposited in the mail, postage prepaid, if mailed; when receipt is acknowledged, if telecopied; and on the next business day, if timely delivered to an air courier guaranteeing overnight delivery. (g) APPLICABLE LAW. This Agreement shall be governed by, and construed and enforced in accordance with and subject to, the laws of California applicable to agreements made and to be performed entirely within such State, without giving effect to the conflicts-of-law principles thereof. (h) ENTIRE AGREEMENT; AMENDMENTS AND WAIVERS. This Agreement sets forth the entire understanding of the parties with respect to the subject matter hereof. The failure of any party to seek redress for the violation of or to insist upon the strict performance of any term of this Agreement shall not constitute a waiver of such term and such party shall be entitled to enforce such term without regard to such forbearance. This Agreement may be amended, each party hereto may take any action herein prohibited or omit to take action herein required to be performed by it, and any breach of or compliance with any covenant, agreement, warranty or representation may be waived, only by the written consent or written waiver of Shareholders holding (i) 66K% of all shares of Common Stock, on a fully diluted basis and (ii) 66K% of the shares of Common Stock, on a fully diluted basis, adversely affected by any such amendment, action, omission or waiver; provided, however, that any amendment, action, omission or waiver adversely affecting any rights of the Shareholders under Sections 3 or 6 shall require the written consent or written waiver of Shareholders holding 90% of the shares of Common Stock, on a fully diluted basis, adversely affected by any such amendment, action, omission or waiver; 15 PROVIDED that such Shareholder shall be given five (5) days advance notice of any such proposed amendment, action, omission or waiver; and PROVIDED, FURTHER, that such consent or waiver shall be effective only in the specific instance and for the specific purpose for which given. IN WITNESS WHEREOF, the undersigned have executed this Shareholders Agreement as of the date first set forth above. BURKE INDUSTRIES, INC. By: /s/ DONALD GLICKMAN ------------------------------- Name: Donald Glickman Title: Assistant Vice President J.F. LEHMAN EQUITY INVESTORS I, L.P., a Delaware limited partnership By: JFL INVESTORS L.L.C. Its: General Partner By: A Managing Member By: /s/ DONALD GLICKMAN ------------------- Name: Donald Glickman MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY By: /s/ RICHARD E. SPENCER II --------------------------------- Name: Richard E. Spencer II Title: Managing Director 16 MASSMUTUAL CORPORATE VALUE PARTNERS LIMITED By: Massachusetts Mutual Life Insurance Company Its: Investment Advisor By: /s/ RICHARD E. SPENCER II --------------------------------- Name: Richard E. Spencer II Title: Managing Director MASSMUTUAL HIGH YIELD PARTNERS LLC By: HYP Management, Inc., as Manager By: /s/ ROGER W. CRANDALL --------------------- Name: Roger W. Crandall Title: Vice President 17 JACKSON NATIONAL LIFE INSURANCE COMPANY By: PPM America, Inc. Its: Agent By: /s/ DEBBIE ACKERMAN ---------------------------- Name: Debbie Ackerman Title: Managing Director PARIBAS NORTH AMERICA, INC. By: /s/ DONNA KIERNAN --------------------------------- Name: Donna Kiernan Title: CFO 18 /s/ TIMOTHY E. HOWARD -------------------------------------- Timothy E. Howard /s/ DANIEL P. FLAMEN -------------------------------------- Daniel P. Flamen /s/ ROCCO C. GENOVESE -------------------------------------- Rocco C. Genovese /s/ REED C. WOLTHAUSEN ------------------------------------ Reed C. Wolthausen /s/ ROBERT F. PITMAN ------------------------------------ Robert F. Pitman /s/ DAVID E. WORTHINGTON ------------------------------------ David E. Worthington /s/ ANNE G. HOWE ------------------------------------ Anne G. Howe /s/ ROBERT G. ENGLE ------------------------------------ Robert G. Engle /s/ CRAIG A. CARNES ------------------------------------ Craig A. Carnes /s/ ROBERT P. HARRISON ------------------------------------ Robert P. Harrison /s/ HISHAM ALAMEDDINE ------------------------------------ Hisham Alameddine /s/ RONALD A. STIEBEN ------------------------------------ Ronald A. Stieben 19 SCHEDULE A ---------- 1 EX-10.9 11 EXH 10.9 WARRANTHOLDERS REGI RIGHTS AGMT EXHIBIT 10.9 WARRANTHOLDERS REGISTRATION RIGHTS AGREEMENT WARRANTHOLDERS REGISTRATION RIGHTS AGREEMENT, dated as of August 20, 1997 (this "Agreement"), by and among BURKE INDUSTRIES, INC., a California corporation ("Company"), MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY ("MMLIC"), MASSMUTUAL CORPORATE VALUE PARTNERS LIMITED ("MMCVP"), MASSMUTUAL HIGH YIELD PARTNERS LLC ("MMHYP"), PARIBAS NORTH AMERICA, INC. ("Paribas") and JACKSON NATIONAL LIFE INSURANCE COMPANY ("Jackson National," and together with MMLIC, MMCVP, MMHYP and Paribas, the "Holders"). WHEREAS, the Board of Directors of Burke has effected a recapitalization of Burke pursuant to which, among other things, JFL Merger Co., a wholly owned subsidiary of J.F. Lehman Equity Investors I, L.P. ("MergerCo") has merged with and into Burke, with Burke surviving such merger (the "Merger"), pursuant to which Burke assumed the liabilities and obligations of MergerCo; WHEREAS, substantially simultaneously with the Merger, MMLIC, MMCVP, MMHYP and Jackson National have purchased an aggregate of 16,000 shares of the Series A 11.5% Cumulative Redeemable Preferred Stock (the "Series A Preferred Stock") of the Company and Paribas has purchased 2,000 Shares of Series B 11.5% Cumulative Redeemable Preferred Stock ("Series B Preferred Stock" and, together with the Series A Preferred Stock, the "Preferred Stock") and warrants (the "Warrants") to purchase an aggregate of 964,000 shares of the common stock of the Company; and WHEREAS, to induce the Holders to purchase the Preferred Stock and Warrants, Burke agreed to provide the registration rights set forth in this Agreement. NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, the parties hereto agree as follows: 1. DEFINITIONS. Unless otherwise defined herein, the following terms shall have the following meanings below: "COMMON STOCK" shall mean the common stock of the Company, no par value, upon consummation of the Merger. "OTHER HOLDERS" shall mean Persons who are holders of record of equity securities of the Company who have valid contractual registration rights under the Shareholders Registration Rights Agreement entered into among certain shareholders of the Company and the Company. "PERSON" shall mean an individual, corporation, unincorporated association, partnership, group (as defined in Section 13(d)(3) of the Securities Exchange Act of 1934), trust, joint stock company, joint venture, business trust or unincorporated organization, any governmental entity or any other entity of whatever nature. "REGISTRABLE SHARES" shall mean any shares of Common Stock which may be (i) issued upon exercise of the Warrants or (ii) issued or distributed in respect of the Common Stock referred to in clause (i) above by way of stock dividend or stock split or other distribution, recapitalization or reclassification. As to any particular Registrable Share, such Registrable Share shall cease to be a Registrable Share when (i) it shall have been sold, transferred or otherwise disposed of or exchanged pursuant to a registration statement under the Securities Act or (ii) it shall have been distributed to the public pursuant to Rule 144 (or any successor provision) under the Securities Act. 2. INCIDENTAL REGISTRATIONS. (a) RIGHT TO INCLUDE REGISTRABLE SHARES. After the completion of the initial public offering by the Company of its Common Stock, each time the Company shall determine to file a registration statement under the Securities Act in connection with the proposed offer and sale for cash of Common Stock (other than debt securities which are convertible into Common Stock and other than registration statements on Form S-4 or S-8) either by it or by any holders of its outstanding equity securities, the Company shall give prompt written notice of its determination to each Holder and of such Holder's rights under this Section 2, at least 20 days prior to the anticipated filing date of such registration statement. Upon the written request of each Holder made within 15 days after the receipt of any such notice from the Company, (which request shall specify the Registrable Shares intended to be disposed of by such Holder), the Company shall use its best efforts to effect the registration under the Securities Act of all Registrable Shares which the Company has been so requested to register by the Holders thereof, to the extent required to permit the disposition of the Registrable Shares so to be registered; PROVIDED, HOWEVER, that (i) if, at any time after giving written notice of its intention to register any securities and prior to the effective date of the registration statement filed in connection with such registration, the Company shall determine for any reason not to proceed with the proposed registration of the securities to be sold by it, the Company may, at its election, give written notice of such determination to each Holder of Registrable Shares and thereupon shall be relieved of its obligation to register any Registrable Shares in connection with such registration (but not from its obligation to pay the Registration Expenses in connection therewith) and (ii) if such registration involves an underwritten offering, all Holders of Registrable Shares requesting to be included in the Company's registration must sell their Registrable Shares to the underwriters on the same terms and conditions as apply to the Company, with such differences, including any with respect to indemnification, as may be customary or appropriate in combined primary and secondary offerings (provided that no Holder shall be required to provide indemnification which is more expansive than the indemnification provided in Section 9(b) hereof and provided, further, that the representations and warranties provided by any Holder shall be limited to such matters as the authority of such Holder to sell its Registrable Shares, its title thereto and the absence of liens thereon). If a registration requested pursuant to this Section 2(a) involves an underwritten public offering, any Holder of Registrable Shares requesting to be included in such registration may elect in writing prior to the effective 2 date of the registration statement filed in connection with such registration, not to register such securities in connection with such registration. No registration effected under this Section 2 shall relieve the Company of its obligations to effect one registration upon request under Section 4 hereof. (b) PRIORITY IN INCIDENTAL REGISTRATIONS. If a registration pursuant to this Section 2 involves an underwritten offering and the managing underwriter in good faith advises the Company in writing that, in its opinion, the number of securities which the Company, the Holders and any other Persons intend to include in such registration exceeds the largest number of securities which can be sold in such offering without having an adverse effect on such offering (including the price at which such securities can be sold), then the Company shall include in such registration: (i) FIRST, 100% of the securities the Company proposes to sell for its own account; and (ii) SECOND, such number of Registrable Shares which the Holders have requested to be included in such registration and such number of securities which Other Holders have requested to be included in such registration which, in the opinion of such managing underwriter, can be sold without having the adverse effect referred to above, such number of Registrable Shares and securities of Other Holders to be included on a pro rata basis among all requesting Holders and Other Holders on the basis of the relative number of shares of Common Stock beneficially owned (as such term is used in Rule 13d-3 of the Exchange Act) by such Holders and Other Holders, PROVIDED that if the number of Registrable Shares requested to be included in such registration by the Holders pursuant to Section 2(a) hereof and permitted to be included in such registration by the Holders pursuant to this Section 2(b) exceeds the number which the Company has been advised can be sold in such offering without having the adverse effect referred to above, the number of such Registrable Shares to be included in such registration by the Holders shall be allocated pro rata among such Holders on the basis of the relative number of Registrable Shares each such Holder has requested to be included in such registration; and (iii) THIRD, to the extent that the number of securities which are to be included in such registration pursuant to clauses (i) and (ii), in the aggregate, is less than the number of securities which the Company has been advised can be sold in such offering without having the adverse effect referred to above, such number of other securities requested to be included in the offering for the account of any other Persons which, in the opinion of such managing underwriter, can be sold without having the adverse effect referred to above, such number to be allocated pro rata among all holders of such other securities on the basis of the relative number of such other securities each other person has requested to be included in such registration. 3. HOLDBACK AGREEMENTS. If any registration of Registrable Shares shall be effected in connection with an underwritten public offering, the Holders agree not to effect any public sale or distribution without the consent of the managing underwriter (except in connection with such public offering), of any equity securities of the Company, or of any security convertible into or exchangeable or exercisable for any equity security of the Company (in each case, other than as part of such underwritten public offering), during the 180-day period (or such lesser period as the managing underwriter may permit) beginning on the effective date of such registration, if, and to the extent, the managing underwriter of any such offering determines such action is necessary or desirable to effect such offering and if and to the extent that each director 3 and executive officer of the Company so agrees; PROVIDED, HOWEVER, that each Holder has received the written notice required by Section 2(a) hereof. 4. REGISTRATION ON DEMAND. (a) DEMAND BY HOLDERS. At any time on or after the later of (i) August 20, 2000 and (ii) the one hundred and eighty-first (181st) day after completion of the initial public offering by the Company of its Common Stock, upon the written request by Holders of at least 66 2/3% of all Registrable Shares, that the Company effect the registration under the Securities Act of all or part of the Registrable Shares of such requesting party, and specifying the amount and intended method of disposition thereof, the Company shall promptly give notice of such requested registration to all other Holders and, as expeditiously as possible, use its best efforts to effect the registration under the Securities Act of: (i) the Registrable Shares which the Company has been so requested to register; and (ii) all other Registrable Shares which the Company has been requested to register by any other Holder by written request received by the Company within 15 days after the giving of such written notice by the Company (which request shall specify the intended method of disposition of such Registrable Shares); PROVIDED, HOWEVER, that the Company shall not be required to effect such registration unless the Registrable Shares requested to be so registered have an aggregate proposed offering price of not less than $5,000,000; and PROVIDED, FURTHER, HOWEVER, that the Company shall not be required to effect more than one registration pursuant to this Section 4(a) unless (X) all of the Registrable Shares that the Holders initial requesting registration pursuant to this Section 4(a) requested to be registered are not included in such registration statement or (Y) the Company is eligible to file on Form S-3, in which case the Holders shall be entitled to request an unlimited number of registrations pursuant to this Section 4(a) except that the Company shall not be required to effect such registration pursuant to this clause (Y) unless the Registrable Shares requested to be so registered have an aggregate proposed offering price of not less than $5,000,000 and no other registration statement on Form S-3 has been filed by the Company and been declared effective within the previous twelve months. Promptly after the expiration of the 15-day period referred to in clause (ii) above, the Company shall notify all Holders to be included in the registration of the other Holders participating in such registration and the number of Registrable Shares requested to be included therein. The Holders initially requesting a registration pursuant to this Section 4(a) may, at any time prior to the effective date of the registration statement relating to such registration, revoke such request by providing a written notice to the Company revoking such request; PROVIDED, HOWEVER, that if such revocation occurs after the date of the filing of such registration statement, then the Registration Expenses incurred by the Company in connection with the revoked request shall be payable by the Holders participating in such demand registration. (b) EFFECTIVE REGISTRATION STATEMENT. A registration requested pursuant to this Section 4 shall not be deemed to have been effected unless it has become effective under the Securities Act and has remained effective for 180 days or such shorter period as all the Registrable Shares included in such registration have actually been sold thereunder. 4 (c) PRIORITY IN DEMAND REGISTRATIONS. If a demand registration pursuant to this Section 4 involves an underwritten offering and the managing underwriter in good faith advises the Company in writing that, in its opinion, the number of securities requested to be included in such registration (including securities of the Company which are not Registrable Shares) exceeds the largest number of securities which can be sold in such offering without having an adverse effect on such offering (including the price, acceptable to the Holders requesting such registration, at which such securities can be sold), then the Company will include in such registration (i) FIRST, 100% of the Registrable Shares requested to be registered pursuant to Section 4(a) (provided that if the number of Registrable Shares requested to be registered pursuant to Section 4(a) exceeds the number which the Company has been advised can be sold in such offering without having the adverse effect referred to above, the number of such Registrable Shares to be included in such registration by the Holders shall be allocated pro rata among such Holders on the basis of the relative number of Registrable Shares each Holder has requested to be included in such registration); and (ii) SECOND, to the extent that the number of Registrable Shares requested to be registered pursuant to Section 4(a) is less than the number of securities which the Company has been advised can be sold in such offering without having the adverse effect referred to above, such number of shares of equity securities that, FIRST, the Company and, SECOND, Other Holders may request to be included in such registration. 5. REGISTRATION PROCEDURES. (a) If and whenever the Company is required by the provisions of Sections 2 or 4 hereof to use its best efforts to effect or cause the registration of Registrable Shares, the Company shall as expeditiously as possible: (i) prepare and, in any event within 60 days after the end of the period within which a request for registration may be given to the Company, file with the Securities and Exchange Commission (the "SEC") a registration statement with respect to such Registrable Shares and use its best efforts to cause such registration statement to become effective; (ii) prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective for a period not in excess of 90 days and to comply with the provisions of the Securities Act, the Exchange Act, and the rules and regulations promulgated thereunder with respect to the disposition of all the securities covered by such registration statement during such period in accordance with the intended methods of disposition by the Holders thereof set forth in such registration statement; provided, that the Company shall notify each Holder of Registrable Shares covered by such registration statement of any stop order issued or threatened by the SEC, any other order suspending the use of any preliminary prospectus or of the suspension of the qualification of the registration statement for offering or sale in any jurisdiction, and take all reasonable actions required to prevent the entry of such stop order, other order or suspension or to remove it if entered; 5 (iii) furnish to each Holder and each underwriter, if applicable, of Registrable Shares covered by such registration statement such number of copies of the registration statement and of each amendment and supplement thereto (in each case including all exhibits), such number of copies of the prospectus included in such registration statement (including each preliminary prospectus and summary prospectus), in conformity with the requirements of the Securities Act, and such other documents as each Holder of Registrable Shares covered by such registration statement may reasonably request in order to facilitate the disposition of the Registrable Shares owned by such Holder; (iv) use its best efforts to register or qualify such Registrable Shares covered by such registration statement under the state securities or blue sky laws of such jurisdictions as each Holder of Registrable Shares covered by such registration statement and, if applicable, each underwriter, may reasonably request, and do any and all other acts and things which may be reasonably necessary to consummate the disposition in such jurisdictions of the Registrable Shares owned by such Holder; PROVIDED, HOWEVER, that in connection therewith, the Company shall not be required to (A) qualify as a foreign corporation to do business or to register as a broker or dealer in any such jurisdiction where it would not otherwise be required to qualify or register but for this clause (iv), (B) subject itself to taxation in any jurisdiction or (C) file a general consent to service of process in any such jurisdiction. (v) use its best efforts to cause such Registrable Shares covered by such registration statement to be registered with or approved by such other governmental agencies or authorities as may be necessary to enable the Holders thereof to consummate the disposition of such Registrable Shares; (vi) if at any time when a prospectus relating to the Registrable Shares is required to be delivered under the Securities Act any event shall have occurred as the result of which any such prospectus as then in effect would include an untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, immediately give written notice thereof to each Holder and the managing underwriter, if any, of such Registrable Shares and prepare and furnish to each such Holder a reasonable number of copies of an amended or supplemental prospectus as may be necessary so that, as thereafter delivered to the purchasers of such Registrable Shares, such prospectus shall not include an untrue statement of material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; (vii) use its best efforts to cause such Registrable Shares to be accepted for listing or quotation on any securities exchange or automated quotation system on which similar securities of the Company are then listed, and enter into customary agreements including a listing application and indemnification agreement in customary form, provided that the applicable listing requirements are satisfied, and provide a transfer agent and registrar for such Registrable Shares covered by such registration statement not later than the effective date of such registration statement; 6 (viii) enter into such customary agreements (including an underwriting agreement in customary form) and take such other actions as each Holder of Registrable Shares being sold or the underwriter, if any, reasonably requests in order to expedite or facilitate the disposition of such Registrable Shares, including customary indemnification and opinions; (ix) to the extent reasonably requested by the Holders of at least 51% of the Registrable Shares being sold, or the underwriters, if any, use its best efforts to obtain a "cold comfort" letter or letters from the Company's independent public accountants in customary form and covering matters of the type customarily covered by "cold comfort" letters; (x) make available, at the Company's expense, for inspection by representatives of any Holder of Registrable Shares covered by such registration statement, by any underwriter participating in any disposition to be effected pursuant to such registration statement and by any attorney, accountant or other agent retained by such Holders or any such underwriter (collectively, the "HOLDER REPRESENTATIVES"), all financial and other records, pertinent corporate documents and properties of the Company and its subsidiaries (excluding any such records and documents as are protected by attorney-client privilege or which the Company is prohibited from disclosing pursuant to the terms of any nondisclosure agreements to which the Company or any of its subsidiaries is a party; PROVIDED that, to the extent permitted under any such nondisclosure agreement, the Company shall disclose any information subject to such nondisclosure agreement upon execution and delivery by such Holder or Holder Representative of a confidentiality agreement for the benefit of the parties to such nondisclosure agreement); (xi) otherwise use its best efforts to comply with all applicable rules and regulations of the SEC, and make available to its security holders, as soon as reasonably practicable after the effective date of the registration statement, an earnings statement which shall satisfy the provisions of Section 11(a) of the Securities Act and the rules and regulations promulgated thereunder; and (xii) notify counsel for the Holders of Registrable Shares included in such registration statement and the managing underwriter, if any, immediately, and confirm the notice in writing, (A) when the registration statement, or any post-effective amendment to the registration statement, shall have become effective, or any supplement to the prospectus or any amendment prospectus shall have been filed and (B) of any request of the SEC to amend the registration statement or amend or supplement the prospectus or for additional information. (b) Each Holder of Registrable Shares hereby agrees that, upon receipt of any notice from the Company of the happening of any event of the type described in Section 5(a)(vi) hereof, such Holder shall forthwith discontinue disposition of such Registrable Shares covered by such registration statement or related prospectus until such Holder's receipt of the copies of the supplemental or amended prospectus contemplated by Section 5(a)(vi) hereof. In the event the Company shall give any such notice, the period mentioned in Section 5(a)(ii) hereof shall be extended by the number of days during the period from and including the date of the 7 giving of such notice pursuant to Section 5(a)(vi) hereof and including the date when such Holder shall have received the copies of the supplemental or amended prospectus contemplated by Section 5(a)(vi) hereof. If for any other reason the effectiveness of any registration statement filed pursuant to Section 4 hereof is suspended or interrupted prior to the expiration of the time period regarding the maintenance of the effectiveness of such Registration Statement required by Section 5(a)(ii) hereof so that Registrable Shares may not be sold pursuant thereto, the applicable time period shall be extended by the number of days equal to the number of days during the period beginning with the date of such suspension or interruption to and ending with the date when the sale of Registrable Shares pursuant to such registration statement may be recommenced. (c) Each Holder hereby agrees to provide the Company, upon receipt of its request, with such information about such Holder to enable the Company to comply with the requirements of the Securities Act and to execute such certificates as the Company may reasonably request in connection with such information and otherwise to satisfy any requirements of law. Each Holder further agrees to furnish to the Company in writing such information regarding the Holder and his, her or its proposed distribution of Registrable Shares as the Company may from time to time reasonably request. 6. UNDERWRITTEN REGISTRATIONS. Subject to the provisions of Sections 2, 3 and 4 hereof, any of the Registrable Shares covered by a registration statement may be sold in an underwritten offering at the discretion of the Holder thereof. In the case of an underwritten offering pursuant to Section 2 hereof, the managing underwriter or underwriters that will administer the offering shall be selected by the Company, PROVIDED that such managing underwriter or underwriters is reasonably satisfactory to the Holders of a majority of the Registrable Shares to be registered. In the case of any underwritten offering pursuant to Section 4 hereof, the managing underwriter or underwriters that will administer the offering shall be selected by the Holders of a majority of the Registrable Shares to be registered, PROVIDED that such underwriters are reasonably satisfactory to the Company. 7. SUSPENSION OF REGISTRATION REQUIREMENT. (a) Notwithstanding anything to the contrary set forth in this Agreement, the Company's obligation to use its best efforts to cause a registration statement and any filings with any state securities authorities to become effective or to amend or supplement any such registration statement or filings shall be suspended during such period as circumstances exist (including, without limitation, pending negotiations relating to, or the consummation of, any transaction) which (i) would require additional disclosure of material information by the Company in such registration statement or filing which the Company has a bona fide business purpose for not disclosing in such registration statement or (ii) render the Company unable to comply with SEC requirements (any such circumstances hereinafter referred to as a "Suspension Event"); PROVIDED that any suspension as a result of a Suspension Event shall occur on not more than one occasion during any 365-day period and shall continue only for so long as such event or its effect is continuing and in no event shall any such suspension continue for more than 120 days. To the extent that any such suspension occurs during a period in which a registration 8 statement has been filed pursuant hereto and remains effective, the time during which the Company shall be required to maintain the effectiveness of such registration statement shall be extended for the number of days during which such suspension continued. (b) Notwithstanding anything to the contrary set forth in this Agreement, the Company shall not be required to cause a registration statement requested pursuant to Section 4(a) to become effective during the period beginning 30 days prior to the Company's good faith estimate of the date of filing of, and ending 180 days after the effective date of, a Company-initiated registration, provided that the Company is actively employing in good faith all reasonable efforts to cause such registration statement to become effective. (c) The Company shall give the holders written notice immediately upon the occurrence of any Suspension Event instructing such holders to suspend sales of Registrable Shares as a result of such Suspension Event. The Holders agree that after receipt of such notice they will not effect any sales of Registrable Shares pursuant to any registration statement filed pursuant to this Agreement until such time as such Holders shall have received further notice from the Company that such sales may be recommenced, which notice shall be given by the Company not later than five days after the conclusion of any such Suspension Event. 8. EXPENSES. (a) The fees, costs and expenses of all registrations in accordance with Sections 2 and 4 hereof shall be borne by the Company, subject to the provisions of Section 8(b) hereof. (b) The fees, costs and expenses of registration to be borne as provided in Section 8(a) hereof shall include, without limitation, all expenses incident to the Company's performance of or compliance with this Agreement, including without limitation all SEC and stock exchange or NASD registration and filing fees and expenses, fees and expenses of compliance with securities or blue sky laws (including without limitation reasonable fees and disbursements of counsel for the underwriters, if any, or for the selling Holders in connection with blue sky qualifications of the Registrable Shares), rating agency fees, printing expenses (including expenses of printing certificates for Registrable Shares and prospectuses), the fees and expenses incurred in connection with the listing of the securities to be registered on each securities exchange or automated quotation system on which similar securities issued by the Company are then listed, and fees and disbursements of counsel for the Company and all independent certified public accountants (including the expenses of any annual audit, special audit and "cold comfort" letters required by or incident to such performance and compliance) (but in any event not including any underwriting discounts or commissions or transfer taxes, if any, attributable to the sale of Registrable Shares by such Holders) (collectively, "Registration Expenses"). 9. INDEMNIFICATION. 9 (a) INDEMNIFICATION BY THE COMPANY. In the event of any registration of any securities of the Company under the Securities Act pursuant to Sections 2 or 4 hereof, the Company shall, and it hereby does, indemnify and hold harmless, to the extent permitted by law, each of the Holders of any Registrable Shares covered by such registration statement, each affiliate of such Holder and their respective directors and officers (and the directors, officers, affiliates and controlling Persons thereof), each other Person who participates as an underwriter in the offering or sale of such securities and each other Person, if any, who controls such Holder or any such underwriter within the meaning of the Securities Act (collectively, the "Indemnified Parties"), against any and all losses, claims, damages or liabilities, joint or several, and expenses (including any amounts paid in any settlement effected with the Company's consent, which consent shall not be unreasonably withheld and including any expenses paid in connection with the enforcement of the indemnification rights contained herein) to which any Indemnified Party may become subject under the Securities Act, state securities or blue sky laws, common law, any other applicable law, foreign or domestic, or otherwise, insofar as such losses, claims, damages or liabilities (or actions or proceedings in respect thereof, whether or not such Indemnified Party is a party thereto) or expenses arise out of or are based upon (i) any untrue statement or alleged untrue statement of any material fact contained in any registration statement under which such securities were registered under the Securities Act, any preliminary, final or summary prospectus contained therein, or any amendment or supplement thereto, (ii) any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading or (iii) any violation by the Company of any federal, state or common law rule or regulation applicable to the Company and relating to action required of or inaction by the Company in connection with any such registration, and the Company shall reimburse such Indemnified Party for any legal or any other expenses reasonably incurred by it in connection with investigating or defending any such loss, claim, liability, action or proceeding; PROVIDED that the Company shall not be liable to any Indemnified Party in any such case to the extent that any such loss, claim, damage, liability (or action or proceeding in respect thereof) or expense arises out of or is based upon any untrue statement or alleged untrue statement or omission or alleged omission made in such registration statement or amendment or supplement thereto or in any such preliminary, final or summary prospectus in reliance upon and in conformity with written information with respect to such Holder furnished to the Company by such Holder specifically for use therein. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of such Holder or any Indemnified Party and shall survive the transfer of such securities by such Holder. (b) INDEMNIFICATION BY THE HOLDERS AND UNDERWRITERS. The Company may require, as a condition to including any Registrable Shares in any registration statement filed in accordance with Sections 2 or 4 hereof, that the Company shall have received an undertaking reasonably satisfactory to it from the Holders of such Registrable Shares or any underwriter to, severally and not jointly, indemnify and hold harmless (in the same manner and to the same extent as set forth in Section 9(a) hereof) the Company with respect to any statement or alleged statement in or omission or alleged omission from such registration statement, any preliminary, final or summary prospectus contained therein, or any amendment or supplement, if such statement or alleged statement or omission or alleged omission was made in reliance upon and in conformity with written information with respect to such Holder or such underwriter furnished to 10 the Company by such Holder or such underwriter specifically for use in such registration statement, preliminary, final or summary prospectus or amendment or supplement, or a document incorporated by reference into any of the foregoing; PROVIDED that no such Holder shall be liable for any indemnity claims in excess of the amount of net proceeds received by such Holder from the sale of Registrable Shares. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of the Company or any of the Holders, or any of their respective affiliates, directors, officers or controlling Persons, and shall survive the transfer of such securities by such Holder. (c) NOTICES OF CLAIMS, ETC. Promptly after receipt by an indemnified party hereunder of written notice of the commencement of any action or proceeding with respect to which a claim for indemnification may be made pursuant to this Section 9, such indemnified party shall, if a claim in respect thereof is to be made against an indemnifying party, give written notice to the latter of the commencement of such action; PROVIDED that the failure of the indemnified party to give notice as provided herein shall not relieve the indemnifying party of its obligations under this Section 9, except to the extent that the indemnifying party is actually materially prejudiced by such failure to give notice. In case any such action is brought against an indemnified party, the indemnifying party shall be entitled to participate in and to assume the defense thereof, with counsel satisfactory to such indemnified party, and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party shall not be liable to such indemnified party for any legal or other expenses subsequently incurred by the latter in connection with the defense thereof other than reasonable costs of investigation; PROVIDED that the indemnified party shall have the right to employ counsel to represent the indemnified party and its respective controlling persons, directors, officers, general or limited partners, employees or agents who may be subject to liability arising out of any claim in respect of which indemnity may be sought by the indemnified party against such indemnifying party under this Section 9 PROVIDED that the employment of such counsel shall be at the expense of the indemnified party, unless (i) the indemnifying party shall have agreed in writing to pay the expenses of such counsel, (ii) the indemnifying party shall not have promptly employed counsel reasonably satisfactory to the indemnified party to assume the defense of such action or counsel or (iii) any indemnified party shall have reasonably concluded that there may be defenses available to such indemnified party or its respective controlling persons, directors, officers, employees or agents which are in conflict with or in addition to those available to the indemnifying party, and in that event the reasonable fees and expenses of one firm of separate counsel for the indemnified party (in addition to the reasonable fees and expenses of one firm serving as local counsel) shall be paid by the indemnifying party. No indemnifying party shall consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of a release from all liability in respect to such claim or litigation. (d) CONTRIBUTION. If the indemnification provided for in this Section 9 shall for any reason be unavailable to any indemnified party under Section 9(a) or 9(b) hereof or is insufficient to hold it harmless in respect of any loss, claim, damage or liability, or any 11 action in respect thereof referred to therein, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of such loss, claim, damage or liability, or action in respect thereof, (i) in such proportion as shall be appropriate to reflect the relative benefits received by the indemnified party and indemnifying party or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) but also the relative fault of the indemnified party and indemnifying party with respect to the statements or omissions which resulted in such loss, claim, damage or liability, or action in respect thereof, as well as any other relevant equitable considerations. Notwithstanding any other provision of this Section 9(d), no Holder of Registrable Shares shall be required to contribute an amount greater than the dollar amount of the proceeds received by such Holder with respect to the sale of any such Registrable Shares. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. (e) OTHER INDEMNIFICATION. Indemnification and contribution similar to that specified in the preceding subdivisions of this Section 9 (with appropriate modifications) shall be given by the Company and each Holder of Registrable Shares with respect to any required registration or other qualification of securities under any federal or state law or regulation or governmental authority other than the Securities Act. (f) NON-EXCLUSIVITY. The obligations of the parties under this Section 9 shall be in addition to any liability which any party may otherwise have to any other party. 10. ASSIGNABILITY. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and permitted assigns. In addition, and whether or not any express assignment shall have been made, the provisions of this Agreement which are for the benefit of the parties hereto other than the Company shall also be for the benefit of and enforceable by any subsequent Holder of any Registrable Shares, subject to the provisions contained herein. The Company may not assign any of its rights or delegate any of its duties under this Agreement without the written consent of the Holders of 66 2/3% of the Registrable Shares; PROVIDED, HOWEVER, that it is understood and agreed by the parties hereto that MergerCo will be merged with and into Burke (the "Merger"), with Burke as the surviving corporation, pursuant to the Agreement and Plan of Merger, dated as of August 13, 1997, by and among MergerCo, Burke and the other parties thereto, and upon consummation of the Merger, this Agreement and the rights and obligations hereunder will be assumed by Burke and the definition of "Registrable Shares" contained herein will refer to the common stock of Burke issuable upon exercise of the Warrants (which such Warrants will become exercisable for shares of the common stock of Burke by operation of law upon consummation of the Merger). 11. NOTICES. Any and all notices, designations, consents, offers, acceptances or any other communications shall be given in writing by either (a) personal delivery to and receipted for by the addressee or by (b) telecopy or registered or certified mail which shall be addressed, in the case of the Company, to 2250 South Tenth Street, San Jose, California 95112, facsimile (408) 995-5163, attention of Chief Executive Officer, with a copy to J.F. Lehman Equity Investors I, L.P., 450 Park Avenue, New York, New York 10022, facsimile (212) 634-1155, attention of Mr. Donald Glickman, and in the case of Holders, to the address or 12 addresses thereof appearing on the books of the Company or of the transfer agent and registrar for the Registrable Shares. All such notices and communications shall be deemed to have been duly given and effective: when delivered by hand, if personally delivered; five business days after being deposited in the mail, postage prepaid, if mailed; and when receipt acknowledged, if telecopied. 12. ARBITRATION. Any controversy, dispute or claim arising out of, in connection with or in relation to the interpretation, performance or breach of this Agreement shall be determined, at the request of any party, by arbitration in a city mutually agreeable to the parties to such controversy, dispute or claim, or, failing such agreement, in New York, New York, before and in accordance with the then-existing Rules for Commercial Arbitration of the American Arbitration Association, and any judgment or award rendered by the arbitrator will be final, binding and unappealable and judgment may be entered by any state or Federal court having jurisdiction thereof. The pre-trial discovery procedures of the Federal Rules of Civil Procedure shall apply to any arbitration under this Section 12. Any controversy concerning whether a dispute is an arbitrable dispute or as to the interpretation or enforceability of this Section 12 shall be determined by the arbitrator. The arbitrator shall be a retired or former United States District Judge or other person acceptable to each of the parties, provided such individual has substantial professional experience with regard to corporate or partnership legal matters. The parties intend that this agreement to arbitrate be valid, enforceable and irrevocable. 13. SEVERABILITY. If any provision of this Agreement or any portion thereof is finally determined to be unlawful or unenforceable, such provision or portion thereof shall be deemed to be severed from this Agreement. Every other provision, and any portion of such an invalidated provision that is not invalidated by such a determination, shall remain in full force and effect. 14. AMENDMENTS, WAIVERS. This Agreement may not be amended, modified or supplemented and no waivers of or consents to departures from the provisions hereof may be given unless consented to in writing by the Company and the Holders of at least 66 2/3% of the Registrable Shares. 15. ATTORNEYS' FEES. In any action or proceeding brought to enforce any provision of this Agreement, or where any provision hereof is validly asserted as a defense, the successful party shall be entitled to recover reasonable attorneys' fees in addition to any other available remedy. 16. ENTIRE AGREEMENT. This Agreement contains the entire agreement among the parties hereto with respect to the transactions contemplated herein and understandings among the parties relating to the subject matter hereof. Any and all previous agreements and understandings between or among the parties hereto regarding the subject matter hereof are, whether written or oral, superseded by this Agreement. 13 17. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original and all of which, together, shall constitute one and the same instrument. 18. CAPTIONS. The captions contained in this Agreement are for reference purposes only and are not part of this Agreement. 19. LIMITATION OF LIABILITY OF SHAREHOLDERS AND OFFICERS OF COMPANY. ANY OBLIGATION OR LIABILITY WHATSOEVER OF THE COMPANY WHICH MAY ARISE AT ANY TIME UNDER THIS AGREEMENT OR ANY OBLIGATION OR LIABILITY WHICH MAY BE INCURRED BY IT PURSUANT TO ANY INSTRUMENT, TRANSACTION OR UNDERTAKING CONTEMPLATED HEREBY SHALL BE SATISFIED OUT OF THE COMPANY'S ASSETS ONLY. NO SUCH OBLIGATION OR LIABILITY SHALL BE PERSONALLY BINDING UPON, NOR SHALL RESORT FOR THE ENFORCEMENT THEREOF BE HAD TO, THE PROPERTY OF ANY OF THE COMPANY'S SHAREHOLDERS (SOLELY AS A RESULT OF THEIR STATUS AS SHAREHOLDERS), DIRECTORS, OFFICERS, EMPLOYEES OR AGENTS, REGARDLESS OF WHETHER SUCH OBLIGATION OR LIABILITY IS IN THE NATURE OF CONTRACT, TORT OR OTHERWISE. NOTWITHSTANDING THE FOREGOING, THIS SECTION 19 14 SHALL NOT IN ANY WAY AFFECT OR LIMIT ANY RIGHTS OR OBLIGATIONS OF THE COMPANY OR ANY HOLDER UNDER THIS AGREEMENT. 20. GOVERNING LAW. This Agreement is made pursuant to and shall be construed in accordance with the laws of the State of New York. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective authorized officers as of the date aforesaid. BURKE INDUSTRIES, INC. By: /s/ KEITH OSTER ------------------------------- Name: Keith Oster, Title: Assistant Vice President MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY By: /s/ RICHARD E. SPENCER ------------------------------- Name: Richard E. Spencer Title: Managing Director MASSMUTUAL CORPORATE VALUE PARTNERS LIMITED By: Massachusetts Mutual Life Insurance Company Its: Investment Advisor By: /s/ RICHARD E. SPENCER ------------------------------- Name: Richard E. Spencer Title: Managing Director 15 MASSMUTUAL HIGH YIELD PARTNERS LLC By: HYP Management, Inc. Its: Managing Member By: /s/ ROGER W. CRANDALL ------------------------- Name: Roger W. Crandall Title: Vice President PARIBAS NORTH AMERICA, INC. By: /s/ DONNA KIERNAN ------------------------------- Name: Donna Kiernan Title: CFO JACKSON NATIONAL LIFE INSURANCE COMPANY By: PPM America, Inc. Its: Agent By: /s/ DEBBIE ACKERMAN ------------------------------- Name: Debbie Ackerman Title: Managing Director 16 EX-10.10 12 EXH 10.10 WARRANT CERTIFICATES EXHIBIT 10.10 THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS AND MAY NOT BE TRANSFERRED, SOLD OR OTHERWISE DISPOSED OF EXCEPT WHILE SUCH A REGISTRATION IS IN EFFECT UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS OR PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT OR SUCH LAWS. THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE ALSO SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFERS SET FORTH IN A SHAREHOLDERS AGREEMENT, DATED AS OF AUGUST 20, 1997 (AS AMENDED, MODIFIED OR SUPPLEMENTED THROUGH THE DATE HEREOF, THE "SHAREHOLDERS AGREEMENT"), BY AND AMONG THE COMPANY AND THE SHAREHOLDERS NAMED THEREIN, A COPY OF WHICH IS AVAILABLE FOR INSPECTION AT THE OFFICES OF THE COMPANY. NO TRANSFER OF SUCH SECURITIES WILL BE MADE ON THE BOOKS OF THE COMPANY UNLESS ACCOMPANIED BY EVIDENCE OF COMPLIANCE WITH THE TERMS OF SUCH AGREEMENTS. EXERCISABLE AT ANY TIME SUBJECT TO THE PROVISIONS HEREOF NO. 1 BURKE INDUSTRIES, INC. WARRANT CERTIFICATE Warrant Certificate for Warrants to Purchase 428,444,44 Warrant Shares This Warrant Certificate certifies that, for value received, Jackson National Life Insurance Company (the "Holder") is the owner of the number of Warrants (as defined in Section 1.2(a) below) set forth above, each of which entitles the Holder to purchase from Burke Industries, Inc., a California corporation (the "Company") at any time from and after the date hereof and until the Expiration Date (as defined in Section 2.1 hereof) one Warrant Share (as defined below), at the purchase price stated in Section 2.3 hereof (the "Exercise Price"). The number of Warrant Shares purchasable upon exercise of the Warrants and the Exercise Price shall be subject to adjustment from time to time as herein provided. For purposes of this Warrant Certificate, "Warrant Shares" shall mean shares of the Company's Common Stock, no par value (the "Common Stock"); PROVIDED, HOWEVER, that if, in accordance with Section 6.3 hereof, the securities issuable upon exercise of the Warrants are issued by an entity other than the Company or there is a change in the class of securities so issuable, then the "Warrant Shares" shall mean the securities so issuable by such entity or the securities of the class of securities so issuable. The Warrants are subject to the following terms, conditions and provisions: SECTION 1. REGISTRATION; TRANSFERABILITY; EXCHANGE OF WARRANT CERTIFICATE. 1.1 REGISTRATION. The Company shall number and register the Warrants in a register (the "Warrant Register") maintained at the principal office of the Company (the "Office"). The Company shall be entitled to treat the Holder of the Warrants as the owner thereof for all purposes and shall not be bound to recognize any equitable or other claim to or interest in such Warrants on the part of any other person. 1.2 TRANSFER AND EXCHANGE. (a) Subject to compliance with any restrictions on transfer set forth in the Shareholders Agreement, dated as of August 20, 1997, by and among the Company, Holder, Massachusetts Mutual Life Insurance Company, MassMutual Corporate Value Partners Limited, MassMutual High Yield Partners LLC, Paribas North America, Inc. and the other shareholders named therein (the "Shareholders' Agreement") (Holder and Massachusetts Mutual Life Insurance Company, MassMutual Corporate Value Partners Limited, MassMutual High Yield Partners LLC and Paribas North America, Inc. shall sometimes be collectively referred to herein as the "Initial Warrantholders"), the warrants issued to the Initial Warrantholders (the "Warrants") shall be transferable only on the Warrant Register upon delivery thereof by the Holder or by his duly authorized attorney or representative or accompanied by proper evidence of succession, assignment or authority to transfer. Upon any such registration of transfer, a new Warrant Certificate, in substantially the form of this Warrant Certificate, evidencing the Warrants so transferred shall be issued to the transferee of such Warrants and a new Warrant Certificate, in substantially the form of this Warrant Certificate, evidencing the remaining Warrants, if any, not so transferred, shall be issued to the Holder. In all cases of transfer by an attorney, the original power of attorney, duly approved, or a copy thereof, duly certified, shall be deposited and shall remain with the Company. In case of transfers by executors, administrators, guardians or other legal representatives, duly authenticated evidence of their authority shall be produced, and may be required to be deposited and to remain with the Company in its discretion. No transfer of the Warrants or any interest therein other than in compliance with this Section 1.2 shall be made or recorded in the Warrant Register, and any such purported transfer shall be void and of no effect. (b) This Warrant Certificate is exchangeable, in whole or in part, upon the surrender hereof by the holder hereof at the Office for new Warrant Certificates, in substantially the form of this Warrant Certificate, evidencing in the aggregate the right to purchase the number of Warrant Shares that may then be purchased hereunder, each of such new Warrant Certificates to be dated the date of such exchange and to represent the right to purchase such number of Warrant Shares as shall be designated by the holder of such new Warrant Certificates at the time of such surrender. 2 SECTION 2. TERM OF WARRANTS; EXERCISE OF WARRANTS. 2.1 TERM OF WARRANT. Subject to the terms of this Warrant Certificate, the Holder shall have the right, which may be exercised by the registered Holder hereof from time to time on any Business Day before 5:00 P.M. (New York City time) during the period through and including February 20, 2008 (the "Expiration Date") to purchase from the Company an aggregate of 428,444.44 fully paid and nonassessable Warrant Shares or such other number of Warrant Shares which the Holder may at the time be entitled to purchase in accordance with this Warrant Certificate. At 5:00 P.M. (New York City time) on the Expiration Date, each Warrant not exercised prior thereto shall be and become void and of no value. 2.2 EXERCISE OF WARRANTS. Subject to the terms of this Warrant Certificate, the Warrants evidenced by this Warrant Certificate may be exercised in whole or in part, upon surrender to the Company, at its Office, of this Warrant Certificate, with a Purchase Form substantially in the form attached hereto duly completed and signed, and upon payment to the Company of the Exercise Price. Payment of the aggregate Exercise Price shall be in cash; PROVIDED, HOWEVER, that in lieu of payment in cash, the Holder may, at its option, pay all or a portion of the aggregate Exercise Price by tendering shares it holds of the Series A 11.5% Cumulative Redeemable Preferred Stock of the Company, which shares shall be valued at their stated liquidation value, plus any accrued but unpaid dividends thereon, to the date of exercise pursuant to this Section 2.2. Payment of the aggregate Exercise Price in cash shall be by wire transfer in immediately available funds to an account designated in writing by the Company to the Holder. Upon the surrender of this Warrant Certificate, with the Purchase Form duly executed, and payment of the Exercise Price as aforesaid, the Company shall (subject to compliance, if necessary, with applicable provisions of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended), promptly and, in any event within ten Business Days, issue and deliver to or upon the written order of the Holder and in such name or names as the Holder may designate a certificate or certificates for such number of Warrant Shares so purchased. Such certificate or certificates shall be dated and deemed to have been issued as of the date of the surrender of this Warrant Certificate and payment of the Exercise Price, as aforesaid. The right of purchase represented by this Warrant Certificate shall be exercisable, at the election of the Holder, in full at any time or in part from time to time. In the event the Holder shall exercise fewer than all the Warrants evidenced hereby, a new Warrant Certificate shall be issued evidencing the remaining unexercised Warrants. 2.3 EXERCISE PRICE. The price per share at which each Warrant Share shall be purchased upon exercise of each Warrant (the "Exercise Price") shall be $4.56, subject to adjustment pursuant to Section 6 LESS an amount per Warrant equal to the dividends in respect of the Warrant Shares that the holder would have received had such Warrant been exercised on August 20, 1997. The aggregate Exercise Price for all Warrant Shares subject to this Warrant Certificate shall be rounded to the next higher $0.01. 3 SECTION 3. PAYMENT OF TAXES. The Company covenants and agrees that it will pay when due and payable all documentary, stamp and other similar taxes, if any, which may be payable in respect of the issuance or delivery of the Warrants or of the Warrant Shares purchasable and issuable upon the exercise of the Warrants; PROVIDED, HOWEVER, that the Company shall not be required to pay any such tax or other charge imposed in respect of the transfer of Warrants, or the issuance or delivery of certificates for Warrant Shares or other Securities in respect of the Warrant Shares upon the exercise of Warrants, to a person or entity other than a then-existing registered Holder of Warrants. SECTION 4. MUTILATED OR MISSING WARRANTS. In the event this Warrant Certificate shall be mutilated, lost, stolen or destroyed, the Company shall issue and deliver in exchange and substitution for and upon cancellation of the mutilated Warrant Certificate, or in lieu of and in substitution for the Warrant Certificate lost, stolen or destroyed, a new Warrant Certificate of like tenor and representing an equivalent right or interest, but only upon, in the event of a lost, stolen or destroyed certificate, receipt of evidence satisfactory to the Company of such loss, theft or destruction and, if requested by the Company, upon indemnity that also is satisfactory to it; PROVIDED that a written undertaking of such loss, theft or destruction of this Warrant Certificate by the registered Holder hereof shall be deemed a satisfactory indemnity of the Company for purposes of this Section 4. In making application for such a substitute Warrant Certificate, the Holder shall also comply with such other reasonable requirements as the Company may prescribe. SECTION 5. RESERVATION AND AVAILABILITY OF WARRANT SHARES; PURCHASE AND CANCELLATION OF WARRANTS. 5.1 RESERVATION OF WARRANT SHARES. (a) The Company shall at all times reserve and keep available free from preemptive rights, out of the aggregate of its authorized but unissued shares of Common Stock, for the purpose of enabling it to satisfy any obligations to issue the Warrant Shares upon exercise of the Warrants, the full number of Warrant Shares deliverable upon the exercise of all the Warrants evidenced by this Warrant Certificate. The Company or, if appointed, the transfer agent for the Common Stock and every subsequent transfer agent for any shares of the Company's capital stock issuable upon the exercise of any of the rights of purchase aforesaid (each, a "Transfer Agent") shall be irrevocably authorized and directed at all times to reserve such number of authorized shares of Common Stock as shall be required for such purpose. The Company will keep a copy of this Warrant Certificate on file with each Transfer Agent. The Company will furnish such Transfer Agent a copy of all notices of adjustments and certificates related thereto which are transmitted to the Holder pursuant to Section 6 hereof. (b) The Company covenants that all Warrant Shares issuable upon exercise of the Warrants will, upon issuance, be fully paid, nonassessable and free from preemptive rights and free from all taxes, liens, charges and security interests with respect to the issuance thereof. 4 (c) Before taking any action which would cause an adjustment pursuant to Section 6, the Company will take any and all corporate action which may, in the opinion of its counsel, be necessary in order that the Company may validly and legally issue fully paid and nonassessable Warrant Shares at the Exercise Price as so adjusted. 5.2 WARRANT SHARES RECORD DATE. Each person in whose name any stock certificate for Warrant Shares is issued shall for all purposes be deemed to have become the holder of record of the Warrant Shares represented thereby, and such stock certificate shall be dated the date upon which this Warrant Certificate was duly surrendered and payment of the Exercise Price (and any applicable transfer taxes) was made. 5.3 CANCELLATION OF WARRANT. Upon surrender of the Warrant Certificate for exchange, substitution, transfer or exercise, it shall be cancelled by the Company and retired. SECTION 6. ADJUSTMENT OF NUMBER OF WARRANT SHARES AND EXERCISE PRICE. The number of securities purchasable upon the exercise of each Warrant and the Exercise Price shall be subject to adjustment from time to time upon the happening of certain events as hereinafter described. 6.1 MANDATORY ADJUSTMENTS. The number of securities purchasable upon the exercise of the Warrants and the Exercise Price shall be subject to adjustment as follows: (a) In case the Company shall (i) declare or pay a dividend on any of its outstanding Common Stock in shares of Common Stock or make a distribution to holders of its outstanding Common Stock in shares of Common Stock, (ii) subdivide any of its outstanding Common Stock into a greater number of shares of Common Stock, (iii) combine any of its outstanding Common Stock into a smaller number of shares of Common Stock or (iv) issue by reclassification of any of its shares of Common Stock other securities of the Company (including any such reclassification in connection with a consolidation, merger or other business combination in which the Company is the surviving corporation), the number and kind of Warrant Shares purchasable and issuable upon exercise of the Warrants shall be adjusted so that the Holder, upon exercise thereof, shall be entitled to receive the number and kind of Warrant Shares and other securities of the Company that the Holder would have owned or have been entitled to receive after the happening of any of the events described above had the Warrants been exercised and the relevant Warrant Shares issued in the name of the Holder immediately prior to the happening of such event or, if applicable, any record date with respect thereto. An adjustment made pursuant to this paragraph (a) shall become effective on the date of the dividend payment, subdivision, combination or issuance retroactive to the record date with respect thereto, if any, for such event. Upon adjustment of the number of Warrant Shares as provided in this paragraph (a), the Exercise Price payable upon exercise of each Warrant shall be adjusted by multiplying such Exercise Price immediately prior to such 5 adjustment by a fraction of which the numerator shall be the number of Warrant Shares purchasable upon the exercise of each Warrant immediately prior to such adjustment and of which the denominator shall be the number of Warrant Shares purchasable immediately thereafter. (b) In case the Company shall distribute to all holders of its outstanding Common Stock evidences of indebtedness of the Company, cash (including cash dividends payable out of consolidated earnings or earned surplus) or assets or securities other than its Common Stock (including stock of a subsidiary or securities convertible into or exercisable for such stock but excluding dividends or distributions referred to in Sections 6.1(a) above or Section 6.1(c) below) (any such evidences of indebtedness, cash, assets or securities, the "assets or securities"), then, in each case, the Exercise Price shall be adjusted by subtracting from the Exercise Price then in effect the value per share (as determined in accordance with Section 6.2(b)) of the assets or securities that the Holder would have been entitled to receive as a result of such distribution had the Warrant been exercised and the relevant Warrant Shares issued in the name of the Holder immediately prior to the record date for such distribution; PROVIDED that if, after giving effect to such adjustment, the Exercise Price would be less than $0.01 per share, the Company shall distribute such assets or securities to the Holder as if the Holder had exercised the Warrants and the Warrant Shares had been issued in the name of the Holder immediately prior to the record date for such distribution. Any adjustment required by this Section 6.1(b) shall be made whenever any such distribution is made, and shall become effective on the date of distribution retroactive to the record date for the determination of shareholders entitled to receive such distribution. (c) If at any time after the date hereof the Company shall issue or sell any shares of Common Stock or any warrants, options or rights to subscribe for or purchase Common Stock or securities convertible into Common Stock (but excluding distributions referred to in paragraph (a) or (b) above or (d) below), and the consideration per share for, or the price per share at which such warrant, option or right is exercisable for or convertible into, such Common Stock is less than the Fair Market Value (as defined below) of the Common Stock immediately prior to such issuance or sale, then, forthwith upon such issuance or sale, the Exercise Price shall be reduced to the price determined by multiplying the Exercise Price in effect immediately prior to the time of such issuance or sale by a fraction the numerator of which shall be the sum of (i) the number of shares of Common Stock outstanding immediately prior to such issuance or sale MULTIPLIED BY the Fair Market Value immediately prior to such issuance or sale and (ii) the consideration received by the Company upon such issuance or sale, and the denominator of which shall be the total number of shares of Common Stock outstanding immediately after such issuance or sale MULTIPLIED BY the Fair Market Value immediately prior to such issuance or sale. Notwithstanding the foregoing, the Company may, without adjustment to the Exercise Price pursuant to this Section 6.1(c), issue options, warrants or rights to subscribe for shares of its Common Stock to officers, directors, employees, 6 consultants or agents of the Company pursuant to the terms of any stock option plan or arrangement approved by the Board of Directors, and may issue shares of its Common Stock upon the exercise of any such stock options, warrants or rights; PROVIDED, HOWEVER, that the aggregate number of shares of Common Stock that may be issued at any one time under such stock option plan or arrangement without adjustment to the Exercise Price under this Section 6.1(c) shall not exceed, in the aggregate 482,000 shares (appropiately adjusted for stock splits, dividends and/or combinations. As used herein, "Fair Market Value" of the Common Stock or other securities means, on any date, the average of the last sale price, regular way, for the 10-business day period immediately preceding such date, or if no such sales took place during such 10-business day period, the average of the closing bid and asked prices, regular way, for each day in such 10-business day period, in either case as reported on the principal consolidated transaction reporting system with respect to securities listed on the principal national securities exchange on which the shares of Common Stock or such other securities are listed, or, if the Common Stock or such other securities are not listed or admitted to trading on any national securities exchange, the average of the last quoted sale price for such 10-business day period or, if not so quoted, the average of the high bid and low asked prices for each day in such 10-business day period in the over-the-counter market, as reported by the National Association of Securities Dealers, Inc. Automated Quotation System or such other system then in use, or, if on any such date the Common Stock is not quoted by any such organization, the average of the closing bid and asked prices during such 10-business day period as furnished by a professional market maker making a market in the Common Stock or such other securities selected by the Board of Directors of the Company. If the shares of Common Stock or such other securities are not publicly held or so listed or publicly traded, "Fair Market Value" shall mean the fair market value per share of Common Stock or such other securities as determined by the Company and the holders of at least a majority of the Warrants issued to the Warrantholders that are then outstanding. negotiating in good faith toward agreeing upon such value. If no agreement can be reached within 14 days from the date of receipt by Required Purchasers of the notice required by Section 6.2(a), the Company and the Required Purchasers shall appoint within 21 days from the date of such receipt a mutually acceptable independent investment banking firm to determine the Fair Market Value. Such firm shall make the necessary determination which shall be binding absent actual fraud or manifest error. The fees of such firm for making such determination and any related reimbursable expenses shall be paid by the Company. (d) If at any time after the date hereof the Company shall issue or sell to any person any securities convertible into or exercisable for Common Stock ("Convertible Securities") (other than securities distributed in a transaction described in paragraph (b) or (c) above), whether or not the rights to exchange or convert thereunder are immediately exercisable, and the price per share for which Common 7 Stock is issuable upon such conversion or exchange shall be less than the Fair Market Value in effect immediately prior to the time of such issue or sale, then the Exercise Price shall be adjusted as provided in subparagraph (c) above on the basis that (i) the maximum number of shares of Common Stock necessary to effect the conversion or exchange of all such Convertible Securities shall be deemed to have been issued and outstanding, (ii) the price per share of such shares shall be deemed to be the lowest possible price in any range of prices at which such additional shares are available to such holders, and (iii) the Company shall be deemed to have received all of the consideration payable therefor, if any, as of the date of actual issuance of such Convertible Securities. No adjustment of the Exercise Price shall be made under this subparagraph (d) upon the issuance of any Convertible Securities which are issued pursuant to the exercise of any warrants or other subscription or purchase rights therefor, if any such adjustment shall previously have been made upon the issuance of such warrants or other rights pursuant to subparagraph (c) above. No further adjustments of the Exercise Price shall be made upon the actual issuance of such Common Stock upon conversion or exchange of such Convertible Securities and, if any issue or sale of such Convertible Securities is made upon exercise of any warrant or other right to subscribe for or to purchase any such Convertible Securities for which adjustments of the Exercise Price have been or are to be made pursuant to other provisions of this Section 6.1, no further adjustments of the Exercise Price shall be made by reason of such issue or sale. For the purposes of this subparagraph (d), the date as of which the Exercise Price shall be computed shall be the earlier of (i) the date on which the Company shall enter into a firm contract for the issuance of such Convertible Securities and (ii) the date of actual issuance of such Convertible Securities. Such adjustments shall be made upon each issuance of Convertible Securities and shall become effective immediately after such issuance. (e) No adjustment in the number of Warrant Shares purchasable hereunder shall be required unless such adjustment would require an increase or decrease of at least one quarter of one percent (0.25%) in the number of Warrant Shares purchasable upon the exercise of each Warrant; PROVIDED, HOWEVER, that any adjustments which by reason of this Section 6.1(e) are not required to be made shall be made immediately prior to any exercise of any Warrants or, if no such exercise occurs prior to the time that any subsequent adjustment would be made, carried forward and taken into account in such subsequent adjustment. All calculations shall be made to the nearest one-thousandth of a share. No adjustment need be made for a change in the par value of the Warrant Shares. (f) Upon each adjustment of the Exercise Price pursuant to paragraphs (b) through (d) of this Section 6.1, this Warrant Certificate shall be deemed to evidence the right to purchase, at the adjusted Exercise Price, that number of Warrant Shares obtained by multiplying the number of Warrant Shares covered by this Warrant Certificate immediately prior to such adjustment by the Exercise Price in 8 effect prior to such adjustment and dividing the product so obtained by the Exercise Price in effect after such adjustment. (g) The number of shares of Common Stock outstanding at any given time shall not include shares directly or indirectly owned or held by or for the account of the Company or any of its subsidiaries, and the disposition of any such shares shall be considered an issue or sale of Common Stock for the purposes of this Section 6.1. 6.2 NOTICE OF ADJUSTMENT. (a) The Company hereby agrees that whenever any adjustment of the number of Warrant Shares purchasable upon the exercise of the Warrants or the Exercise Price of such Warrants is effected as herein provided, the Company shall promptly notify the Holder, by first class mail, postage prepaid, of such adjustment and shall deliver to the Holder a certificate of the Chief Financial Officer of the Company, setting forth in reasonable detail (i) the number of Warrant Shares purchasable upon the exercise of the Warrants and the Exercise Price of the Warrants after such adjustment, (ii) a brief statement of the facts requiring such adjustment and (iii) the computation by which such adjustment was made. (b) If any adjustment is required to be made pursuant to Section 6.1(b) (unless the PROVISO to the first sentence of that Section is applicable to the action), the Company and the holders of at least a majority of the Warrants issued to the Warrantholders that are then outstanding shall negotiate in good faith toward agreeing upon the value of the assets or securities and the necessary adjustment. If no agreement can be reached within 14 days from the date of receipt by Required Purchasers of such notice, the Company and the Required Purchasers shall appoint within 21 days from the date of such receipt a mutually acceptable independent investment banking firm to determine the necessary adjustment. Such firm shall make the necessary determination which shall be binding absent actual fraud or manifest error. The fees of such firm for making such determination and any related reimbursable expenses shall be paid by the Company. 6.3 PRESERVATION OF PURCHASE RIGHTS UPON MERGER, CONSOLIDATION, ETC. (a) In the event of any merger, consolidation or other acquisition or business combination in which the Company is not the surviving corporation or in which all of the outstanding Common Stock of the Company is converted into, acquired or exchanged for securities, cash or property or in the event of the sale or other disposition of all or substantially all the assets of the Company, then, and in each such case, proper provision shall be made so that, upon the basis and upon the terms and in the manner provided in this Section 6.3, the holder of this Warrant Certificate, upon the exercise of any of its Warrants at any time after the consummation of such consolidation, merger, transfer, reorganization or reclassification, shall be entitled to receive, in lieu of shares of Common Stock issuable upon such exercise prior to such consummation, the stock, securities, cash and assets to which such holder would have been entitled upon such consummation if such holder had so exercised 9 such Warrant immediately prior thereto, at the aggregate Exercise Price in effect for all shares of Common Stock issuable upon such exercise immediately prior to such consummation as adjusted to the time of such transaction (subject to adjustments subsequent to such corporate action as nearly equivalent as possible to the adjustments provided for in Section 6.1 above); provided, however, that the holder of this Warrant Certificate shall not be required to accept as consideration any property or securities the holding of which by such holder would be prohibited by any law, rule or regulation of any governmental entity or insurance industry regulatory body. Such undertaking shall provide for adjustments, which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 6; PROVIDED, HOWEVER, that if upon such consolidation, merger, transfer, reorganization or reclassification, different holders of Common Stock shall be entitled to receive different forms of consideration for their Common Stock, the form of such consideration thereafter deliverable upon the exercise of the Warrants shall be as determined in good faith by the Board of Directors, whose determination shall be conclusive. The provisions of this Section 6.3 shall also apply to successive mergers or consolidations. (b) Upon any liquidation, dissolution or winding up of the Company, the Holder shall receive such cash or property (less the Exercise Price) which the Holder would have been entitled to receive upon the happening of such liquidation, dissolution or winding up had the Warrants been exercised and the Warrant Shares issued immediately prior to the occurrence of such liquidation, dissolution or winding up. 6.4 STATEMENT ON THE WARRANT. Irrespective of any adjustments in the number or kind of securities purchasable upon the exercise of the Warrant or the Exercise Price, any Warrant Certificate theretofore or thereafter issued may continue to express the same price and number and any kind of shares as are stated in this Warrant Certificate. SECTION 7. FRACTIONAL INTERESTS. The Holder shall not be required to accept fractional securities on the exercise of Warrants. If any fraction of a security would be issuable on the exercise of Warrants, the Holder may, at its option, require the Company to pay to the Holder of such Warrants an amount in cash equal to the fair market value of such fraction. SECTION 8. REGISTRATION. The Holder shall, from time to time, have the rights, if any, with respect to registration of Warrant Shares as are set forth in the Registration Rights Agreement for such Warrant Shares. SECTION 9. NO RIGHTS AS A SHAREHOLDER; NOTICES TO HOLDER. Nothing contained in this Warrant Certificate shall be construed as conferring upon the Holder the right to vote or to consent or to receive notice as a shareholder in respect of any meeting of shareholders of the Company for the election of the directors of the Company or any other matter, or any rights whatsoever as a shareholder of the Company. If, however, at any time prior to the exercise of the Warrants evidenced by this Warrant Certificate, any of the following events shall occur: 10 (a) the Company shall declare any dividend payable in cash or in any securities upon its shares of Common Stock or make any distribution to the holders of its shares of Common Stock; (b) the Company shall offer to all holders of its shares of Common Stock any additional shares of Common Stock or securities convertible into or exchangeable for shares of Common Stock or any right to subscribe for or purchase any thereof; (c) a dissolution, liquidation or winding up of the Company (other than in connection with a consolidation, merger, sale, transfer or lease of all or substantially all of its property, assets and business as an entirety) shall be proposed; or (d) any consolidation or merger to which the Company is a party and for which approval of the holders of Common Stock is required, or of the conveyance or transfer of all or substantially all assets of the Company as, or substantially as, an entirety, or of any reclassification or change of outstanding shares of Common Stock issuable upon exercise of the Warrant (other than a change in par value to no par value, or from no par value to par value) or as a result of a subdivision or combination, then in any one or more of said events, the Company shall give to the Holder the greater of 15 business days' written notice and the number of days written notice required to be given to shareholders with respect to such action prior to the applicable record date hereinafter specified, stating (i) the date as of which the holders of record of shares of Common Stock to be entitled to receive any such dividends, rights or warrants are to be determined or (ii) the date on which any such dissolution, liquidation, winding up, consolidation, merger, conveyance or transfer is expected to become effective and the date as of which it is expected that holders of record of shares of Common Stock shall be entitled to exchange their shares of Common Stock for securities or other property, if any, deliverable upon such reclassification, consolidation, merger, conveyance, transfer, dissolution, liquidation, or winding up. SECTION 10. IDENTITY OF TRANSFER AGENT. Forthwith upon the appointment of any Transfer Agent for the Common Stock, or any other shares of the Company's capital stock issuable upon the exercise of the Warrants, the Company shall promptly notify the Holder of the name and address of such Transfer Agent. SECTION 11. NOTICES. Any notice, except as provided in Section 9 of this Warrant Certificate, or demand authorized by this Warrant Certificate to be given by the Holder to the Company, shall be in writing and shall be delivered in person or by facsimile transmission, or mailed by overnight courier, or otherwise delivered, to the Company, at 2250 South Tenth Street, San Jose, California 95112, attention of Chief Executive Officer, with a copy to J.F. Lehman Equity Investors I, L.P., 450 Park Avenue, New York, New York 11 10022, attention of Mr. Donald Glickman. The Company may change the address to which notices to it are to be delivered or mailed hereunder by notice to the Holder. Any notice pursuant to this Warrant Certificate by the Company to the Holder shall be in writing and shall be mailed by overnight courier or otherwise delivered, to the Holder at its address set forth in the Warrant Register. Notices delivered personally shall be effective at the time delivered by hand, notices sent by mail shall be effective when received, notices sent by facsimile transmission shall be effective when confirmed and notices sent by courier guaranteeing next day delivery shall be effective on the next business day after timely delivery to the courier. SECTION 12. AMENDMENT AND WAIVER. Any term, covenant, agreement or condition in this Warrant Certificate may be amended, or compliance therewith may be waived (either generally or in a particular instance and either retroactively or prospectively), by a written instrument or written instruments executed by the Company and the holders of at least 66 2/3% of the Warrants issued to the Warrantholders that are then outstanding; PROVIDED, HOWEVER, that no such amendment or waiver shall change the number of Warrant Shares issuable under the Warrants, change the Exercise Price, change the period during which the Warrants may be exercised or modify any provision of Section 6 or this Section 12 without the consent of the holders of all such Warrants then outstanding or shall have a disparate and adverse impact on any Warrantholder. SECTION 13. SUCCESSORS. All the covenants and provisions of this Warrant Certificate by or for the benefit of the Company shall bind and inure to the benefit of its respective successors and assigns hereunder. SECTION 14. GOVERNING LAW. This Warrant Certificate shall be construed in accordance with and governed by the internal laws of the State of California applicable to contracts executed and to be performed wholly within such state, without regard to the principles of conflicts or choice of law. SECTION 15. BENEFITS OF THIS WARRANT CERTIFICATE. Nothing in this Warrant Certificate shall be construed to give to any person or entity other than the Company and the Holder any legal or equitable right, remedy or claim under this Warrant Certificate; and this Warrant Certificate shall be for the sole and exclusive benefit of this Company and the Holder. SECTION 16. SURVIVAL OF RIGHTS AND DUTIES. This Warrant Certificate shall terminate and be of no further force and effect on the earlier of 5:00 P.M. (New York City time) on the Expiration Date or the date on which all of the Warrants have been exercised. SECTION 17. AGREEMENT TO BE BOUND. The Holder acknowledges and hereby agrees to be bound by such terms and conditions of the Shareholders' Agreement as 12 are by their terms applicable to the Holder. Any and all Warrant Shares issued upon exercise hereof shall, immediately upon such issuance, and without further action by or on behalf of the Holder or the Company, become subject to such terms and conditions of the Shareholders' Agreement as are by their terms applicable to such Warrant Shares. SECTION 17. CAPTIONS. The captions of the Sections and paragraphs of this Warrant Certificate have been inserted for convenience only and shall have no substantive effect. 13 IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be duly executed this 20th day of August 1997. BURKE INDUSTRIES, INC. By: /s/ Rocco C. Genovese _________________________________ Rocco C. Genovese, President 14 FORM OF ELECTION TO PURCHASE (To Be Executed by the Holder if the Holder Desires to Exercise Warrants Evidenced by the Foregoing Warrant Certificate) To Burke Industries, Inc.: The undersigned hereby irrevocably elects to exercise ____________ Warrants evidenced by the foregoing Warrant Certificate for, and to purchase thereunder, ____________ full shares of Common Stock issuable upon exercise of said Warrants and delivery of $_____ in cash (or in liquidation preference of the Series A 11.5% Cumulative Redeemable Preferred Stock of the Company, or any combination thereof) with and any applicable taxes payable by the undersigned pursuant to such Warrant Certificate. The undersigned requests that certificates for such shares be issued in the name of ____________________________. PLEASE INSERT SOCIAL SECURITY OR TAX IDENTIFICATION NUMBER (Please print name and address) ____________________________________ ____________________________________ ____________________________________ If said number of Warrants shall not be all the Warrants evidenced by the foregoing Warrant Certificate, the undersigned requests that a new Warrant Certificate evidencing the Warrants not so exercised be issued in the name of and delivered to: _______________________________________________________________________________ _______________________________________________________________________________ (Please print name and address) By:__________________________________ Name: Title: Dated: __________________ FORM OF ASSIGNMENT FOR VALUE RECEIVED, _____________________ hereby sells, assigns and transfers to each assignee set forth below all of the rights of the undersigned in and to the number of Warrants (as defined in and evidenced by the foregoing Warrant Certificate) set opposite the name of such assignee below and in and to the foregoing Warrant Certificate with respect to said Warrants and the shares of Common Stock issuable upon exercise of said Warrants: NAME OF ASSIGNEE ADDRESS NUMBER OF WARRANTS ---------------- ------- ------------------ If the total of said Warrants shall not be all the Warrants evidenced by the foregoing Warrant Certificate, the undersigned requests that a new Warrant Certificate evidencing the Warrants not so assigned be issued in the name of and delivered to the undersigned. By:__________________________ Name: Title: Dated: __________________ THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS AND MAY NOT BE TRANSFERRED, SOLD OR OTHERWISE DISPOSED OF EXCEPT WHILE SUCH A REGISTRATION IS IN EFFECT UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS OR PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT OR SUCH LAWS. THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE ALSO SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFERS SET FORTH IN A SHAREHOLDERS AGREEMENT, DATED AS OF AUGUST 20, 1997 (AS AMENDED, MODIFIED OR SUPPLEMENTED THROUGH THE DATE HEREOF, THE "SHAREHOLDERS AGREEMENT"), BY AND AMONG THE COMPANY AND THE SHAREHOLDERS NAMED THEREIN, A COPY OF WHICH IS AVAILABLE FOR INSPECTION AT THE OFFICES OF THE COMPANY. NO TRANSFER OF SUCH SECURITIES WILL BE MADE ON THE BOOKS OF THE COMPANY UNLESS ACCOMPANIED BY EVIDENCE OF COMPLIANCE WITH THE TERMS OF SUCH AGREEMENTS. EXERCISABLE AT ANY TIME SUBJECT TO THE PROVISIONS HEREOF NO. 2 BURKE INDUSTRIES, INC. WARRANT CERTIFICATE Warrant Certificate for Warrants to Purchase 203,939.46 Warrant Shares This Warrant Certificate certifies that, for value received, Massachusettes Mutual Life Insurance Company (the "Holder") is the owner of the number of Warrants (as defined in Section 1.2(a) below) set forth above, each of which entitles the Holder to purchase from Burke Industries, Inc., a California corporation (the "Company") at any time from and after the date hereof and until the Expiration Date (as defined in Section 2.1 hereof) one Warrant Share (as defined below), at the purchase price stated in Section 2.3 hereof (the "Exercise Price"). The number of Warrant Shares purchasable upon exercise of the Warrants and the Exercise Price shall be subject to adjustment from time to time as herein provided. For purposes of this Warrant Certificate, "Warrant Shares" shall mean shares of the Company's Common Stock, no par value (the "Common Stock"); PROVIDED, HOWEVER, that if, in accordance with Section 6.3 hereof, the securities issuable upon exercise of the Warrants are issued by an entity other than the Company or there is a change in the class of securities so issuable, then the "Warrant Shares" shall mean the securities so issuable by such entity or the securities of the class of securities so issuable. The Warrants are subject to the following terms, conditions and provisions: SECTION 1. REGISTRATION; TRANSFERABILITY; EXCHANGE OF WARRANT CERTIFICATE. 1.1 REGISTRATION. The Company shall number and register the Warrants in a register (the "Warrant Register") maintained at the principal office of the Company (the "Office"). The Company shall be entitled to treat the Holder of the Warrants as the owner thereof for all purposes and shall not be bound to recognize any equitable or other claim to or interest in such Warrants on the part of any other person. 1.2 TRANSFER AND EXCHANGE. (a) Subject to compliance with any restrictions on transfer set forth in the Shareholders Agreement, dated as of August 20, 1997, by and among the Company, Holder, MassMutual Corporate Value Partners Limited, MassMutual High Yield Partners LLC, Paribas North America, Inc. and the other shareholders named therein (the "Shareholders' Agreement") (Holder and Massachusetts Mutual Life Insurance Company, MassMutual Corporate Value Partners Limited, MassMutual High Yield Partners LLC, Paribas North America, Inc. and Jackson National Life Insurance Company shall sometimes be collectively referred to herein as the "Initial Warrantholders"), the warrants issued to the Initial Warrantholders (the "Warrants") shall be transferable only on the Warrant Register upon delivery thereof by the Holder or by his duly authorized attorney or representative or accompanied by proper evidence of succession, assignment or authority to transfer. Upon any such registration of transfer, a new Warrant Certificate, in substantially the form of this Warrant Certificate, evidencing the Warrants so transferred shall be issued to the transferee of such Warrants and a new Warrant Certificate, in substantially the form of this Warrant Certificate, evidencing the remaining Warrants, if any, not so transferred, shall be issued to the Holder. In all cases of transfer by an attorney, the original power of attorney, duly approved, or a copy thereof, duly certified, shall be deposited and shall remain with the Company. In case of transfers by executors, administrators, guardians or other legal representatives, duly authenticated evidence of their authority shall be produced, and may be required to be deposited and to remain with the Company in its discretion. No transfer of the Warrants or any interest therein other than in compliance with this Section 1.2 shall be made or recorded in the Warrant Register, and any such purported transfer shall be void and of no effect. (b) This Warrant Certificate is exchangeable, in whole or in part, upon the surrender hereof by the holder hereof at the Office for new Warrant Certificates, in substantially the form of this Warrant Certificate, evidencing in the aggregate the right to purchase the number of Warrant Shares that may then be purchased hereunder, each of such new Warrant Certificates to be dated the date of such exchange and to represent the right to purchase such number of Warrant Shares as shall be designated by the holder of such new Warrant Certificates at the time of such surrender. 2 SECTION 2. TERM OF WARRANTS; EXERCISE OF WARRANTS. 2.1 TERM OF WARRANT. Subject to the terms of this Warrant Certificate, the Holder shall have the right, which may be exercised by the registered Holder hereof from time to time on any Business Day before 5:00 P.M. (New York City time) during the period through and including February 20, 2008 (the "Expiration Date") to purchase from the Company an aggregate of 203,939.56 fully paid and nonassessable Warrant Shares or such other number of Warrant Shares which the Holder may at the time be entitled to purchase in accordance with this Warrant Certificate. At 5:00 P.M. (New York City time) on the Expiration Date, each Warrant not exercised prior thereto shall be and become void and of no value. 2.2 EXERCISE OF WARRANTS. Subject to the terms of this Warrant Certificate, the Warrants evidenced by this Warrant Certificate may be exercised in whole or in part, upon surrender to the Company, at its Office, of this Warrant Certificate, with a Purchase Form substantially in the form attached hereto duly completed and signed, and upon payment to the Company of the Exercise Price. Payment of the aggregate Exercise Price shall be in cash; PROVIDED, HOWEVER, that in lieu of payment in cash, the Holder may, at its option, pay all or a portion of the aggregate Exercise Price by tendering shares it holds of the Series A 11.5% Cumulative Redeemable Preferred Stock of the Company, which shares shall be valued at their stated liquidation value, plus any accrued but unpaid dividends thereon, to the date of exercise pursuant to this Section 2.2. Payment of the aggregate Exercise Price in cash shall be by wire transfer in immediately available funds to an account designated in writing by the Company to the Holder. Upon the surrender of this Warrant Certificate, with the Purchase Form duly executed, and payment of the Exercise Price as aforesaid, the Company shall (subject to compliance, if necessary, with applicable provisions of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended), promptly and, in any event within ten Business Days, issue and deliver to or upon the written order of the Holder and in such name or names as the Holder may designate a certificate or certificates for such number of Warrant Shares so purchased. Such certificate or certificates shall be dated and deemed to have been issued as of the date of the surrender of this Warrant Certificate and payment of the Exercise Price, as aforesaid. The right of purchase represented by this Warrant Certificate shall be exercisable, at the election of the Holder, in full at any time or in part from time to time. In the event the Holder shall exercise fewer than all the Warrants evidenced hereby, a new Warrant Certificate shall be issued evidencing the remaining unexercised Warrants. 2.3 EXERCISE PRICE. The price per share at which each Warrant Share shall be purchased upon exercise of each Warrant (the "Exercise Price") shall be $4.56, subject to adjustment pursuant to Section 6 LESS an amount per Warrant equal to the dividends in respect of the Warrant Shares that the holder would have received had such Warrant been exercised on August 20, 1997. The aggregate Exercise Price for all Warrant Shares subject to this Warrant Certificate shall be rounded to the next higher $0.01. 3 SECTION 3. PAYMENT OF TAXES. The Company covenants and agrees that it will pay when due and payable all documentary, stamp and other similar taxes, if any, which may be payable in respect of the issuance or delivery of the Warrants or of the Warrant Shares purchasable and issuable upon the exercise of the Warrants; PROVIDED, HOWEVER, that the Company shall not be required to pay any such tax or other charge imposed in respect of the transfer of Warrants, or the issuance or delivery of certificates for Warrant Shares or other Securities in respect of the Warrant Shares upon the exercise of Warrants, to a person or entity other than a then-existing registered Holder of Warrants. SECTION 4. MUTILATED OR MISSING WARRANTS. In the event this Warrant Certificate shall be mutilated, lost, stolen or destroyed, the Company shall issue and deliver in exchange and substitution for and upon cancellation of the mutilated Warrant Certificate, or in lieu of and in substitution for the Warrant Certificate lost, stolen or destroyed, a new Warrant Certificate of like tenor and representing an equivalent right or interest, but only upon, in the event of a lost, stolen or destroyed certificate, receipt of evidence satisfactory to the Company of such loss, theft or destruction and, if requested by the Company, upon indemnity that also is satisfactory to it; PROVIDED that a written undertaking of such loss, theft or destruction of this Warrant Certificate by the registered Holder hereof shall be deemed a satisfactory indemnity of the Company for purposes of this Section 4. In making application for such a substitute Warrant Certificate, the Holder shall also comply with such other reasonable requirements as the Company may prescribe. SECTION 5. RESERVATION AND AVAILABILITY OF WARRANT SHARES; PURCHASE AND CANCELLATION OF WARRANTS. 5.1 RESERVATION OF WARRANT SHARES. (a) The Company shall at all times reserve and keep available free from preemptive rights, out of the aggregate of its authorized but unissued shares of Common Stock, for the purpose of enabling it to satisfy any obligations to issue the Warrant Shares upon exercise of the Warrants, the full number of Warrant Shares deliverable upon the exercise of all the Warrants evidenced by this Warrant Certificate. The Company or, if appointed, the transfer agent for the Common Stock and every subsequent transfer agent for any shares of the Company's capital stock issuable upon the exercise of any of the rights of purchase aforesaid (each, a "Transfer Agent") shall be irrevocably authorized and directed at all times to reserve such number of authorized shares of Common Stock as shall be required for such purpose. The Company will keep a copy of this Warrant Certificate on file with each Transfer Agent. The Company will furnish such Transfer Agent a copy of all notices of adjustments and certificates related thereto which are transmitted to the Holder pursuant to Section 6 hereof. (b) The Company covenants that all Warrant Shares issuable upon exercise of the Warrants will, upon issuance, be fully paid, nonassessable and free from preemptive rights and free from all taxes, liens, charges and security interests with respect to the issuance thereof. 4 (c) Before taking any action which would cause an adjustment pursuant to Section 6, the Company will take any and all corporate action which may, in the opinion of its counsel, be necessary in order that the Company may validly and legally issue fully paid and nonassessable Warrant Shares at the Exercise Price as so adjusted. 5.2 WARRANT SHARES RECORD DATE. Each person in whose name any stock certificate for Warrant Shares is issued shall for all purposes be deemed to have become the holder of record of the Warrant Shares represented thereby, and such stock certificate shall be dated the date upon which this Warrant Certificate was duly surrendered and payment of the Exercise Price (and any applicable transfer taxes) was made. 5.3 CANCELLATION OF WARRANT. Upon surrender of the Warrant Certificate for exchange, substitution, transfer or exercise, it shall be cancelled by the Company and retired. SECTION 6. ADJUSTMENT OF NUMBER OF WARRANT SHARES AND EXERCISE PRICE. The number of securities purchasable upon the exercise of each Warrant and the Exercise Price shall be subject to adjustment from time to time upon the happening of certain events as hereinafter described. 6.1 MANDATORY ADJUSTMENTS. The number of securities purchasable upon the exercise of the Warrants and the Exercise Price shall be subject to adjustment as follows: (a) In case the Company shall (i) declare or pay a dividend on any of its outstanding Common Stock in shares of Common Stock or make a distribution to holders of its outstanding Common Stock in shares of Common Stock, (ii) subdivide any of its outstanding Common Stock into a greater number of shares of Common Stock, (iii) combine any of its outstanding Common Stock into a smaller number of shares of Common Stock or (iv) issue by reclassification of any of its shares of Common Stock other securities of the Company (including any such reclassification in connection with a consolidation, merger or other business combination in which the Company is the surviving corporation), the number and kind of Warrant Shares purchasable and issuable upon exercise of the Warrants shall be adjusted so that the Holder, upon exercise thereof, shall be entitled to receive the number and kind of Warrant Shares and other securities of the Company that the Holder would have owned or have been entitled to receive after the happening of any of the events described above had the Warrants been exercised and the relevant Warrant Shares issued in the name of the Holder immediately prior to the happening of such event or, if applicable, any record date with respect thereto. An adjustment made pursuant to this paragraph (a) shall become effective on the date of the dividend payment, subdivision, combination or issuance retroactive to the record date with respect thereto, if any, for such event. Upon adjustment of the number of Warrant Shares as provided in this paragraph (a), the Exercise Price payable upon exercise of each Warrant shall be adjusted by multiplying such Exercise Price immediately prior to such adjustment by a fraction of which the numerator shall be the number of Warrant Shares purchasable upon the exercise of each Warrant immediately prior to such 5 adjustment and of which the denominator shall be the number of Warrant Shares purchasable immediately thereafter. (b) In case the Company shall distribute to all holders of its outstanding Common Stock evidences of indebtedness of the Company, cash (including cash dividends payable out of consolidated earnings or earned surplus) or assets or securities other than its Common Stock (including stock of a subsidiary or securities convertible into or exercisable for such stock but excluding dividends or distributions referred to in Sections 6.1(a) above or Section 6.1(c) below) (any such evidences of indebtedness, cash, assets or securities, the "assets or securities"), then, in each case, the Exercise Price shall be adjusted by subtracting from the Exercise Price then in effect the value per share (as determined in accordance with Section 6.2(b)) of the assets or securities that the Holder would have been entitled to receive as a result of such distribution had the Warrant been exercised and the relevant Warrant Shares issued in the name of the Holder immediately prior to the record date for such distribution; PROVIDED that if, after giving effect to such adjustment, the Exercise Price would be less than $0.01 per share, the Company shall distribute such assets or securities to the Holder as if the Holder had exercised the Warrants and the Warrant Shares had been issued in the name of the Holder immediately prior to the record date for such distribution. Any adjustment required by this Section 6.1(b) shall be made whenever any such distribution is made, and shall become effective on the date of distribution retroactive to the record date for the determination of shareholders entitled to receive such distribution. (c) If at any time after the date hereof the Company shall issue or sell any shares of Common Stock or any warrants, options or rights to subscribe for or purchase Common Stock or securities convertible into Common Stock (but excluding distributions referred to in paragraph (a) or (b) above or (d) below), and the consideration per share for, or the price per share at which such warrant, option or right is exercisable for or convertible into, such Common Stock is less than the Fair Market Value (as defined below) of the Common Stock immediately prior to such issuance or sale, then, forthwith upon such issuance or sale, the Exercise Price shall be reduced to the price determined by multiplying the Exercise Price in effect immediately prior to the time of such issuance or sale by a fraction the numerator of which shall be the sum of (i) the number of shares of Common Stock outstanding immediately prior to such issuance or sale MULTIPLIED BY the Fair Market Value immediately prior to such issuance or sale and (ii) the consideration received by the Company upon such issuance or sale, and the denominator of which shall be the total number of shares of Common Stock outstanding immediately after such issuance or sale MULTIPLIED BY the Fair Market Value immediately prior to such issuance or sale. Notwithstanding the foregoing, the Company may, without adjustment to the Exercise Price pursuant to this Section 6.1(c), issue options, warrants or rights to subscribe for shares of its Common Stock to officers, directors, employees, 6 consultants or agents of the Company pursuant to the terms of any stock option plan or arrangement approved by the Board of Directors, and may issue shares of its Common Stock upon the exercise of any such stock options, warrants or rights; PROVIDED, HOWEVER, that the aggregate number of shares of Common Stock that may be issued at any one time under such stock option plan or arrangement without adjustment to the Exercise Price under this Section 6.1(c) shall not exceed, in the aggregate 482,000 shares (appropiately adjusted for stock splits, dividends and/or combinations. As used herein, "Fair Market Value" of the Common Stock or other securities means, on any date, the average of the last sale price, regular way, for the 10-business day period immediately preceding such date, or if no such sales took place during such 10-business day period, the average of the closing bid and asked prices, regular way, for each day in such 10-business day period, in either case as reported on the principal consolidated transaction reporting system with respect to securities listed on the principal national securities exchange on which the shares of Common Stock or such other securities are listed, or, if the Common Stock or such other securities are not listed or admitted to trading on any national securities exchange, the average of the last quoted sale price for such 10-business day period or, if not so quoted, the average of the high bid and low asked prices for each day in such 10-business day period in the over-the-counter market, as reported by the National Association of Securities Dealers, Inc. Automated Quotation System or such other system then in use, or, if on any such date the Common Stock is not quoted by any such organization, the average of the closing bid and asked prices during such 10-business day period as furnished by a professional market maker making a market in the Common Stock or such other securities selected by the Board of Directors of the Company. If the shares of Common Stock or such other securities are not publicly held or so listed or publicly traded, "Fair Market Value" shall mean the fair market value per share of Common Stock or such other securities as determined by the Company and the holders of at least a majority of the Warrants issued to the Warrantholders that are then outstanding. negotiating in good faith toward agreeing upon such value. If no agreement can be reached within 14 days from the date of receipt by Required Purchasers of the notice required by Section 6.2(a), the Company and the Required Purchasers shall appoint within 21 days from the date of such receipt a mutually acceptable independent investment banking firm to determine the Fair Market Value. Such firm shall make the necessary determination which shall be binding absent actual fraud or manifest error. The fees of such firm for making such determination and any related reimbursable expenses shall be paid by the Company. (d) If at any time after the date hereof the Company shall issue or sell to any person any securities convertible into or exercisable for Common Stock ("Convertible Securities") (other than securities distributed in a transaction described in paragraph (b) or (c) above), whether or not the rights to exchange or convert thereunder are immediately exercisable, and the price per share for which Common 7 Stock is issuable upon such conversion or exchange shall be less than the Fair Market Value in effect immediately prior to the time of such issue or sale, then the Exercise Price shall be adjusted as provided in subparagraph (c) above on the basis that (i) the maximum number of shares of Common Stock necessary to effect the conversion or exchange of all such Convertible Securities shall be deemed to have been issued and outstanding, (ii) the price per share of such shares shall be deemed to be the lowest possible price in any range of prices at which such additional shares are available to such holders, and (iii) the Company shall be deemed to have received all of the consideration payable therefor, if any, as of the date of actual issuance of such Convertible Securities. No adjustment of the Exercise Price shall be made under this subparagraph (d) upon the issuance of any Convertible Securities which are issued pursuant to the exercise of any warrants or other subscription or purchase rights therefor, if any such adjustment shall previously have been made upon the issuance of such warrants or other rights pursuant to subparagraph (c) above. No further adjustments of the Exercise Price shall be made upon the actual issuance of such Common Stock upon conversion or exchange of such Convertible Securities and, if any issue or sale of such Convertible Securities is made upon exercise of any warrant or other right to subscribe for or to purchase any such Convertible Securities for which adjustments of the Exercise Price have been or are to be made pursuant to other provisions of this Section 6.1, no further adjustments of the Exercise Price shall be made by reason of such issue or sale. For the purposes of this subparagraph (d), the date as of which the Exercise Price shall be computed shall be the earlier of (i) the date on which the Company shall enter into a firm contract for the issuance of such Convertible Securities and (ii) the date of actual issuance of such Convertible Securities. Such adjustments shall be made upon each issuance of Convertible Securities and shall become effective immediately after such issuance. (e) No adjustment in the number of Warrant Shares purchasable hereunder shall be required unless such adjustment would require an increase or decrease of at least one quarter of one percent (0.25%) in the number of Warrant Shares purchasable upon the exercise of each Warrant; PROVIDED, HOWEVER, that any adjustments which by reason of this Section 6.1(e) are not required to be made shall be made immediately prior to any exercise of any Warrants or, if no such exercise occurs prior to the time that any subsequent adjustment would be made, carried forward and taken into account in such subsequent adjustment. All calculations shall be made to the nearest one-thousandth of a share. No adjustment need be made for a change in the par value of the Warrant Shares. (f) Upon each adjustment of the Exercise Price pursuant to paragraphs (b) through (d) of this Section 6.1, this Warrant Certificate shall be deemed to evidence the right to purchase, at the adjusted Exercise Price, that number of Warrant Shares obtained by multiplying the number of Warrant Shares covered by this Warrant Certificate immediately prior to such adjustment by the Exercise Price in 8 effect prior to such adjustment and dividing the product so obtained by the Exercise Price in effect after such adjustment. (g) The number of shares of Common Stock outstanding at any given time shall not include shares directly or indirectly owned or held by or for the account of the Company or any of its subsidiaries, and the disposition of any such shares shall be considered an issue or sale of Common Stock for the purposes of this Section 6.1. 6.2 NOTICE OF ADJUSTMENT. (a) The Company hereby agrees that whenever any adjustment of the number of Warrant Shares purchasable upon the exercise of the Warrants or the Exercise Price of such Warrants is effected as herein provided, the Company shall promptly notify the Holder, by first class mail, postage prepaid, of such adjustment and shall deliver to the Holder a certificate of the Chief Financial Officer of the Company, setting forth in reasonable detail (i) the number of Warrant Shares purchasable upon the exercise of the Warrants and the Exercise Price of the Warrants after such adjustment, (ii) a brief statement of the facts requiring such adjustment and (iii) the computation by which such adjustment was made. (b) If any adjustment is required to be made pursuant to Section 6.1(b) (unless the PROVISO to the first sentence of that Section is applicable to the action), the Company and the holders of at least a majority of the Warrants issued to the Warrantholders that are then outstanding shall negotiate in good faith toward agreeing upon the value of the assets or securities and the necessary adjustment. If no agreement can be reached within 14 days from the date of receipt by Required Purchasers of such notice, the Company and the Required Purchasers shall appoint within 21 days from the date of such receipt a mutually acceptable independent investment banking firm to determine the necessary adjustment. Such firm shall make the necessary determination which shall be binding absent actual fraud or manifest error. The fees of such firm for making such determination and any related reimbursable expenses shall be paid by the Company. 6.3 PRESERVATION OF PURCHASE RIGHTS UPON MERGER, CONSOLIDATION, ETC. (a) In the event of any merger, consolidation or other acquisition or business combination in which the Company is not the surviving corporation or in which all of the outstanding Common Stock of the Company is converted into, acquired or exchanged for securities, cash or property or in the event of the sale or other disposition of all or substantially all the assets of the Company, then, and in each such case, proper provision shall be made so that, upon the basis and upon the terms and in the manner provided in this Section 6.3, the holder of this Warrant Certificate, upon the exercise of any of its Warrants at any time after the consummation of such consolidation, merger, transfer, reorganization or reclassification, shall be entitled to receive, in lieu of shares of Common Stock issuable upon such exercise prior to such consummation, the stock, securities, cash and assets to which such holder would have been entitled upon such consummation if such holder had so exercised 9 such Warrant immediately prior thereto, at the aggregate Exercise Price in effect for all shares of Common Stock issuable upon such exercise immediately prior to such consummation as adjusted to the time of such transaction (subject to adjustments subsequent to such corporate action as nearly equivalent as possible to the adjustments provided for in Section 6.1 above); provided, however, that the holder of this Warrant Certificate shall not be required to accept as consideration any property or securities the holding of which by such holder would be prohibited by any law, rule or regulation of any governmental entity or insurance industry regulatory body. Such undertaking shall provide for adjustments, which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 6; PROVIDED, HOWEVER, that if upon such consolidation, merger, transfer, reorganization or reclassification, different holders of Common Stock shall be entitled to receive different forms of consideration for their Common Stock, the form of such consideration thereafter deliverable upon the exercise of the Warrants shall be as determined in good faith by the Board of Directors, whose determination shall be conclusive. The provisions of this Section 6.3 shall also apply to successive mergers or consolidations. (b) Upon any liquidation, dissolution or winding up of the Company, the Holder shall receive such cash or property (less the Exercise Price) which the Holder would have been entitled to receive upon the happening of such liquidation, dissolution or winding up had the Warrants been exercised and the Warrant Shares issued immediately prior to the occurrence of such liquidation, dissolution or winding up. 6.4 STATEMENT ON THE WARRANT. Irrespective of any adjustments in the number or kind of securities purchasable upon the exercise of the Warrant or the Exercise Price, any Warrant Certificate theretofore or thereafter issued may continue to express the same price and number and any kind of shares as are stated in this Warrant Certificate. SECTION 7. FRACTIONAL INTERESTS. The Holder shall not be required to accept fractional securities on the exercise of Warrants. If any fraction of a security would be issuable on the exercise of Warrants, the Holder may, at its option, require the Company to pay to the Holder of such Warrants an amount in cash equal to the fair market value of such fraction. SECTION 8. REGISTRATION. The Holder shall, from time to time, have the rights, if any, with respect to registration of Warrant Shares as are set forth in the Registration Rights Agreement for such Warrant Shares. SECTION 9. NO RIGHTS AS A SHAREHOLDER; NOTICES TO HOLDER. Nothing contained in this Warrant Certificate shall be construed as conferring upon the Holder the right to vote or to consent or to receive notice as a shareholder in respect of any meeting of shareholders of the Company for the election of the directors of the Company or any other matter, or any rights whatsoever as a shareholder of the Company. If, however, at any time prior to the exercise of the Warrants evidenced by this Warrant Certificate, any of the following events shall occur: 10 (a) the Company shall declare any dividend payable in cash or in any securities upon its shares of Common Stock or make any distribution to the holders of its shares of Common Stock; (b) the Company shall offer to all holders of its shares of Common Stock any additional shares of Common Stock or securities convertible into or exchangeable for shares of Common Stock or any right to subscribe for or purchase any thereof; (c) a dissolution, liquidation or winding up of the Company (other than in connection with a consolidation, merger, sale, transfer or lease of all or substantially all of its property, assets and business as an entirety) shall be proposed; or (d) any consolidation or merger to which the Company is a party and for which approval of the holders of Common Stock is required, or of the conveyance or transfer of all or substantially all assets of the Company as, or substantially as, an entirety, or of any reclassification or change of outstanding shares of Common Stock issuable upon exercise of the Warrant (other than a change in par value to no par value, or from no par value to par value) or as a result of a subdivision or combination, then in any one or more of said events, the Company shall give to the Holder the greater of 15 business days' written notice and the number of days written notice required to be given to shareholders with respect to such action prior to the applicable record date hereinafter specified, stating (i) the date as of which the holders of record of shares of Common Stock to be entitled to receive any such dividends, rights or warrants are to be determined or (ii) the date on which any such dissolution, liquidation, winding up, consolidation, merger, conveyance or transfer is expected to become effective and the date as of which it is expected that holders of record of shares of Common Stock shall be entitled to exchange their shares of Common Stock for securities or other property, if any, deliverable upon such reclassification, consolidation, merger, conveyance, transfer, dissolution, liquidation, or winding up. SECTION 10. IDENTITY OF TRANSFER AGENT. Forthwith upon the appointment of any Transfer Agent for the Common Stock, or any other shares of the Company's capital stock issuable upon the exercise of the Warrants, the Company shall promptly notify the Holder of the name and address of such Transfer Agent. SECTION 11. NOTICES. Any notice, except as provided in Section 9 of this Warrant Certificate, or demand authorized by this Warrant Certificate to be given by the Holder to the Company, shall be in writing and shall be delivered in person or by facsimile transmission, or mailed by overnight courier, or otherwise delivered, to the Company, at 2250 South Tenth Street, San Jose, California 95112, attention of Chief Executive Officer, with a copy to J.F. Lehman Equity Investors I, L.P., 450 Park Avenue, New York, New York 11 10022, attention of Mr. Donald Glickman. The Company may change the address to which notices to it are to be delivered or mailed hereunder by notice to the Holder. Any notice pursuant to this Warrant Certificate by the Company to the Holder shall be in writing and shall be mailed by overnight courier or otherwise delivered, to the Holder at its address set forth in the Warrant Register. Notices delivered personally shall be effective at the time delivered by hand, notices sent by mail shall be effective when received, notices sent by facsimile transmission shall be effective when confirmed and notices sent by courier guaranteeing next day delivery shall be effective on the next business day after timely delivery to the courier. SECTION 12. AMENDMENT AND WAIVER. Any term, covenant, agreement or condition in this Warrant Certificate may be amended, or compliance therewith may be waived (either generally or in a particular instance and either retroactively or prospectively), by a written instrument or written instruments executed by the Company and the holders of at least 66 2/3% of the Warrants issued to the Warrantholders that are then outstanding; PROVIDED, HOWEVER, that no such amendment or waiver shall change the number of Warrant Shares issuable under the Warrants, change the Exercise Price, change the period during which the Warrants may be exercised or modify any provision of Section 6 or this Section 12 without the consent of the holders of all such Warrants then outstanding or shall have a disparate and adverse impact on any Warrantholder. SECTION 13. SUCCESSORS. All the covenants and provisions of this Warrant Certificate by or for the benefit of the Company shall bind and inure to the benefit of its respective successors and assigns hereunder. SECTION 14. GOVERNING LAW. This Warrant Certificate shall be construed in accordance with and governed by the internal laws of the State of California applicable to contracts executed and to be performed wholly within such state, without regard to the principles of conflicts or choice of law. SECTION 15. BENEFITS OF THIS WARRANT CERTIFICATE. Nothing in this Warrant Certificate shall be construed to give to any person or entity other than the Company and the Holder any legal or equitable right, remedy or claim under this Warrant Certificate; and this Warrant Certificate shall be for the sole and exclusive benefit of this Company and the Holder. SECTION 16. SURVIVAL OF RIGHTS AND DUTIES. This Warrant Certificate shall terminate and be of no further force and effect on the earlier of 5:00 P.M. (New York City time) on the Expiration Date or the date on which all of the Warrants have been exercised. SECTION 17. AGREEMENT TO BE BOUND. The Holder acknowledges and hereby agrees to be bound by such terms and conditions of the Shareholders' Agreement as 12 are by their terms applicable to the Holder. Any and all Warrant Shares issued upon exercise hereof shall, immediately upon such issuance, and without further action by or on behalf of the Holder or the Company, become subject to such terms and conditions of the Shareholders' Agreement as are by their terms applicable to such Warrant Shares. SECTION 17. CAPTIONS. The captions of the Sections and paragraphs of this Warrant Certificate have been inserted for convenience only and shall have no substantive effect. 13 IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be duly executed this 20th day of August 1997. BURKE INDUSTRIES, INC. By: /s/ ROCCO C. GENOVESE -------------------------- Rocco C. Genovese, President 14 FORM OF ELECTION TO PURCHASE (To Be Executed by the Holder if the Holder Desires to Exercise Warrants Evidenced by the Foregoing Warrant Certificate) To Burke Industries, Inc.: The undersigned hereby irrevocably elects to exercise ____________ Warrants evidenced by the foregoing Warrant Certificate for, and to purchase thereunder, ____________ full shares of Common Stock issuable upon exercise of said Warrants and delivery of $_____ in cash (or in liquidation preference of the Series A 11.5% Cumulative Redeemable Preferred Stock of the Company, or any combination thereof) with and any applicable taxes payable by the undersigned pursuant to such Warrant Certificate. The undersigned requests that certificates for such shares be issued in the name of ____________________________. PLEASE INSERT SOCIAL SECURITY OR TAX IDENTIFICATION NUMBER (Please print name and address) ____________________________________ ____________________________________ ____________________________________ If said number of Warrants shall not be all the Warrants evidenced by the foregoing Warrant Certificate, the undersigned requests that a new Warrant Certificate evidencing the Warrants not so exercised be issued in the name of and delivered to: ________________________________________________________________________ ________________________________________________________________________ (Please print name and address) By:______________________________ Name: Title: Dated: __________________ FORM OF ASSIGNMENT FOR VALUE RECEIVED, hereby sells, assigns and transfers to each assignee set forth below all of the rights of the undersigned in and to the number of Warrants (as defined in and evidenced by the foregoing Warrant Certificate) set opposite the name of such assignee below and in and to the foregoing Warrant Certificate with respect to said Warrants and the shares of Common Stock issuable upon exercise of said Warrants: NAME OF ASSIGNEE ADDRESS NUMBER OF WARRANTS ---------------- ----------------------------- ------------------ If the total of said Warrants shall not be all the Warrants evidenced by the foregoing Warrant Certificate, the undersigned requests that a new Warrant Certificate evidencing the Warrants not so assigned be issued in the name of and delivered to the undersigned. By: -------------------------- Name: Title: Dated: __________________ THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS AND MAY NOT BE TRANSFERRED, SOLD OR OTHERWISE DISPOSED OF EXCEPT WHILE SUCH A REGISTRATION IS IN EFFECT UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS OR PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT OR SUCH LAWS. THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE ALSO SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFERS SET FORTH IN A SHAREHOLDERS AGREEMENT, DATED AS OF AUGUST 20, 1997 (AS AMENDED, MODIFIED OR SUPPLEMENTED THROUGH THE DATE HEREOF, THE "SHAREHOLDERS AGREEMENT"), BY AND AMONG THE COMPANY AND THE SHAREHOLDERS NAMED THEREIN, A COPY OF WHICH IS AVAILABLE FOR INSPECTION AT THE OFFICES OF THE COMPANY. NO TRANSFER OF SUCH SECURITIES WILL BE MADE ON THE BOOKS OF THE COMPANY UNLESS ACCOMPANIED BY EVIDENCE OF COMPLIANCE WITH THE TERMS OF SUCH AGREEMENTS. EXERCISABLE AT ANY TIME SUBJECT TO THE PROVISIONS HEREOF NO. 3 BURKE INDUSTRIES, INC. WARRANT CERTIFICATE Warrant Certificate for Warrants to Purchase 122,535.11 Warrant Shares This Warrant Certificate certifies that, for value received, Gerlach & Co. (the "Holder") is the owner of the number of Warrants (as defined in Section 1.2(a) below) set forth above, each of which entitles the Holder to purchase from Burke Industries, Inc., a California corporation (the "Company") at any time from and after the date hereof and until the Expiration Date (as defined in Section 2.1 hereof) one Warrant Share (as defined below), at the purchase price stated in Section 2.3 hereof (the "Exercise Price"). The number of Warrant Shares purchasable upon exercise of the Warrants and the Exercise Price shall be subject to adjustment from time to time as herein provided. For purposes of this Warrant Certificate, "Warrant Shares" shall mean shares of the Company's Common Stock, no par value (the "Common Stock"); PROVIDED, HOWEVER, that if, in accordance with Section 6.3 hereof, the securities issuable upon exercise of the Warrants are issued by an entity other than the Company or there is a change in the class of securities so issuable, then the "Warrant Shares" shall mean the securities so issuable by such entity or the securities of the class of securities so issuable. The Warrants are subject to the following terms, conditions and provisions: SECTION 1. REGISTRATION; TRANSFERABILITY; EXCHANGE OF WARRANT CERTIFICATE. 1.1 REGISTRATION. The Company shall number and register the Warrants in a register (the "Warrant Register") maintained at the principal office of the Company (the "Office"). The Company shall be entitled to treat the Holder of the Warrants as the owner thereof for all purposes and shall not be bound to recognize any equitable or other claim to or interest in such Warrants on the part of any other person. 1.2 TRANSFER AND EXCHANGE. (a) Subject to compliance with any restrictions on transfer set forth in the Shareholders Agreement, dated as of August 20, 1997, by and among the Company, Holder, Massachusetts Mutual Life Insurance Company, MassMutual Corporate Value Partners Limited, Jackson National Life Insurance Company, Paribas North America, Inc. and the other shareholders named therein (the "Shareholders' Agreement") (Holder and Massachusetts Mutual Life Insurance Company, MassMutual Corporate Value Partners Limited, MassMutual High Yield Partners LLC and Paribas North America, Inc. shall sometimes be collectively referred to herein as the "Initial Warrantholders"), the warrants issued to the Initial Warrantholders (the "Warrants") shall be transferable only on the Warrant Register upon delivery thereof by the Holder or by his duly authorized attorney or representative or accompanied by proper evidence of succession, assignment or authority to transfer. Upon any such registration of transfer, a new Warrant Certificate, in substantially the form of this Warrant Certificate, evidencing the Warrants so transferred shall be issued to the transferee of such Warrants and a new Warrant Certificate, in substantially the form of this Warrant Certificate, evidencing the remaining Warrants, if any, not so transferred, shall be issued to the Holder. In all cases of transfer by an attorney, the original power of attorney, duly approved, or a copy thereof, duly certified, shall be deposited and shall remain with the Company. In case of transfers by executors, administrators, guardians or other legal representatives, duly authenticated evidence of their authority shall be produced, and may be required to be deposited and to remain with the Company in its discretion. No transfer of the Warrants or any interest therein other than in compliance with this Section 1.2 shall be made or recorded in the Warrant Register, and any such purported transfer shall be void and of no effect. (b) This Warrant Certificate is exchangeable, in whole or in part, upon the surrender hereof by the holder hereof at the Office for new Warrant Certificates, in substantially the form of this Warrant Certificate, evidencing in the aggregate the right to purchase the number of Warrant Shares that may then be purchased hereunder, each of such new Warrant Certificates to be dated the date of such exchange and to represent the right to purchase such number of Warrant Shares as shall be designated by the holder of such new Warrant Certificates at the time of such surrender. 2 SECTION 2. TERM OF WARRANTS; EXERCISE OF WARRANTS. 2.1 TERM OF WARRANT. Subject to the terms of this Warrant Certificate, the Holder shall have the right, which may be exercised by the registered Holder hereof from time to time on any Business Day before 5:00 P.M. (New York City time) during the period through and including February 20, 2008 (the "Expiration Date") to purchase from the Company an aggregate of 122,535.11 fully paid and nonassessable Warrant Shares or such other number of Warrant Shares which the Holder may at the time be entitled to purchase in accordance with this Warrant Certificate. At 5:00 P.M. (New York City time) on the Expiration Date, each Warrant not exercised prior thereto shall be and become void and of no value. 2.2 EXERCISE OF WARRANTS. Subject to the terms of this Warrant Certificate, the Warrants evidenced by this Warrant Certificate may be exercised in whole or in part, upon surrender to the Company, at its Office, of this Warrant Certificate, with a Purchase Form substantially in the form attached hereto duly completed and signed, and upon payment to the Company of the Exercise Price. Payment of the aggregate Exercise Price shall be in cash; PROVIDED, HOWEVER, that in lieu of payment in cash, the Holder may, at its option, pay all or a portion of the aggregate Exercise Price by tendering shares it holds of the Series A 11.5% Cumulative Redeemable Preferred Stock of the Company, which shares shall be valued at their stated liquidation value, plus any accrued but unpaid dividends thereon, to the date of exercise pursuant to this Section 2.2. Payment of the aggregate Exercise Price in cash shall be by wire transfer in immediately available funds to an account designated in writing by the Company to the Holder. Upon the surrender of this Warrant Certificate, with the Purchase Form duly executed, and payment of the Exercise Price as aforesaid, the Company shall (subject to compliance, if necessary, with applicable provisions of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended), promptly and, in any event within ten Business Days, issue and deliver to or upon the written order of the Holder and in such name or names as the Holder may designate a certificate or certificates for such number of Warrant Shares so purchased. Such certificate or certificates shall be dated and deemed to have been issued as of the date of the surrender of this Warrant Certificate and payment of the Exercise Price, as aforesaid. The right of purchase represented by this Warrant Certificate shall be exercisable, at the election of the Holder, in full at any time or in part from time to time. In the event the Holder shall exercise fewer than all the Warrants evidenced hereby, a new Warrant Certificate shall be issued evidencing the remaining unexercised Warrants. 2.3 EXERCISE PRICE. The price per share at which each Warrant Share shall be purchased upon exercise of each Warrant (the "Exercise Price") shall be $4.56, subject to adjustment pursuant to Section 6 LESS an amount per Warrant equal to the dividends in respect of the Warrant Shares that the holder would have received had such Warrant been exercised on August 20, 1997. The aggregate Exercise Price for all Warrant Shares subject to this Warrant Certificate shall be rounded to the next higher $0.01. 3 SECTION 3. PAYMENT OF TAXES. The Company covenants and agrees that it will pay when due and payable all documentary, stamp and other similar taxes, if any, which may be payable in respect of the issuance or delivery of the Warrants or of the Warrant Shares purchasable and issuable upon the exercise of the Warrants; PROVIDED, HOWEVER, that the Company shall not be required to pay any such tax or other charge imposed in respect of the transfer of Warrants, or the issuance or delivery of certificates for Warrant Shares or other Securities in respect of the Warrant Shares upon the exercise of Warrants, to a person or entity other than a then-existing registered Holder of Warrants. SECTION 4. MUTILATED OR MISSING WARRANTS. In the event this Warrant Certificate shall be mutilated, lost, stolen or destroyed, the Company shall issue and deliver in exchange and substitution for and upon cancellation of the mutilated Warrant Certificate, or in lieu of and in substitution for the Warrant Certificate lost, stolen or destroyed, a new Warrant Certificate of like tenor and representing an equivalent right or interest, but only upon, in the event of a lost, stolen or destroyed certificate, receipt of evidence satisfactory to the Company of such loss, theft or destruction and, if requested by the Company, upon indemnity that also is satisfactory to it; PROVIDED that a written undertaking of such loss, theft or destruction of this Warrant Certificate by the registered Holder hereof shall be deemed a satisfactory indemnity of the Company for purposes of this Section 4. In making application for such a substitute Warrant Certificate, the Holder shall also comply with such other reasonable requirements as the Company may prescribe. SECTION 5. RESERVATION AND AVAILABILITY OF WARRANT SHARES; PURCHASE AND CANCELLATION OF WARRANTS. 5.1 RESERVATION OF WARRANT SHARES. (a) The Company shall at all times reserve and keep available free from preemptive rights, out of the aggregate of its authorized but unissued shares of Common Stock, for the purpose of enabling it to satisfy any obligations to issue the Warrant Shares upon exercise of the Warrants, the full number of Warrant Shares deliverable upon the exercise of all the Warrants evidenced by this Warrant Certificate. The Company or, if appointed, the transfer agent for the Common Stock and every subsequent transfer agent for any shares of the Company's capital stock issuable upon the exercise of any of the rights of purchase aforesaid (each, a "Transfer Agent") shall be irrevocably authorized and directed at all times to reserve such number of authorized shares of Common Stock as shall be required for such purpose. The Company will keep a copy of this Warrant Certificate on file with each Transfer Agent. The Company will furnish such Transfer Agent a copy of all notices of adjustments and certificates related thereto which are transmitted to the Holder pursuant to Section 6 hereof. (b) The Company covenants that all Warrant Shares issuable upon exercise of the Warrants will, upon issuance, be fully paid, nonassessable and free from preemptive rights and free from all taxes, liens, charges and security interests with respect to the issuance thereof. 4 (c) Before taking any action which would cause an adjustment pursuant to Section 6, the Company will take any and all corporate action which may, in the opinion of its counsel, be necessary in order that the Company may validly and legally issue fully paid and nonassessable Warrant Shares at the Exercise Price as so adjusted. 5.2 WARRANT SHARES RECORD DATE. Each person in whose name any stock certificate for Warrant Shares is issued shall for all purposes be deemed to have become the holder of record of the Warrant Shares represented thereby, and such stock certificate shall be dated the date upon which this Warrant Certificate was duly surrendered and payment of the Exercise Price (and any applicable transfer taxes) was made. 5.3 CANCELLATION OF WARRANT. Upon surrender of the Warrant Certificate for exchange, substitution, transfer or exercise, it shall be cancelled by the Company and retired. SECTION 6. ADJUSTMENT OF NUMBER OF WARRANT SHARES AND EXERCISE PRICE. The number of securities purchasable upon the exercise of each Warrant and the Exercise Price shall be subject to adjustment from time to time upon the happening of certain events as hereinafter described. 6.1 MANDATORY ADJUSTMENTS. The number of securities purchasable upon the exercise of the Warrants and the Exercise Price shall be subject to adjustment as follows: (a) In case the Company shall (i) declare or pay a dividend on any of its outstanding Common Stock in shares of Common Stock or make a distribution to holders of its outstanding Common Stock in shares of Common Stock, (ii) subdivide any of its outstanding Common Stock into a greater number of shares of Common Stock, (iii) combine any of its outstanding Common Stock into a smaller number of shares of Common Stock or (iv) issue by reclassification of any of its shares of Common Stock other securities of the Company (including any such reclassification in connection with a consolidation, merger or other business combination in which the Company is the surviving corporation), the number and kind of Warrant Shares purchasable and issuable upon exercise of the Warrants shall be adjusted so that the Holder, upon exercise thereof, shall be entitled to receive the number and kind of Warrant Shares and other securities of the Company that the Holder would have owned or have been entitled to receive after the happening of any of the events described above had the Warrants been exercised and the relevant Warrant Shares issued in the name of the Holder immediately prior to the happening of such event or, if applicable, any record date with respect thereto. An adjustment made pursuant to this paragraph (a) shall become effective on the date of the dividend payment, subdivision, combination or issuance retroactive to the record date with respect thereto, if any, for such event. Upon adjustment of the number of Warrant Shares as provided in this paragraph (a), the Exercise Price payable upon exercise of each Warrant shall be adjusted by multiplying such Exercise Price immediately prior to such adjustment by a fraction of which the numerator shall be the number of Warrant Shares purchasable upon the exercise of each Warrant immediately prior to such 5 adjustment and of which the denominator shall be the number of Warrant Shares purchasable immediately thereafter. (b) In case the Company shall distribute to all holders of its outstanding Common Stock evidences of indebtedness of the Company, cash (including cash dividends payable out of consolidated earnings or earned surplus) or assets or securities other than its Common Stock (including stock of a subsidiary or securities convertible into or exercisable for such stock but excluding dividends or distributions referred to in Sections 6.1(a) above or Section 6.1(c) below) (any such evidences of indebtedness, cash, assets or securities, the "assets or securities"), then, in each case, the Exercise Price shall be adjusted by subtracting from the Exercise Price then in effect the value per share (as determined in accordance with Section 6.2(b)) of the assets or securities that the Holder would have been entitled to receive as a result of such distribution had the Warrant been exercised and the relevant Warrant Shares issued in the name of the Holder immediately prior to the record date for such distribution; PROVIDED that if, after giving effect to such adjustment, the Exercise Price would be less than $0.01 per share, the Company shall distribute such assets or securities to the Holder as if the Holder had exercised the Warrants and the Warrant Shares had been issued in the name of the Holder immediately prior to the record date for such distribution. Any adjustment required by this Section 6.1(b) shall be made whenever any such distribution is made, and shall become effective on the date of distribution retroactive to the record date for the determination of shareholders entitled to receive such distribution. (c) If at any time after the date hereof the Company shall issue or sell any shares of Common Stock or any warrants, options or rights to subscribe for or purchase Common Stock or securities convertible into Common Stock (but excluding distributions referred to in paragraph (a) or (b) above or (d) below), and the consideration per share for, or the price per share at which such warrant, option or right is exercisable for or convertible into, such Common Stock is less than the Fair Market Value (as defined below) of the Common Stock immediately prior to such issuance or sale, then, forthwith upon such issuance or sale, the Exercise Price shall be reduced to the price determined by multiplying the Exercise Price in effect immediately prior to the time of such issuance or sale by a fraction the numerator of which shall be the sum of (i) the number of shares of Common Stock outstanding immediately prior to such issuance or sale MULTIPLIED BY the Fair Market Value immediately prior to such issuance or sale and (ii) the consideration received by the Company upon such issuance or sale, and the denominator of which shall be the total number of shares of Common Stock outstanding immediately after such issuance or sale MULTIPLIED BY the Fair Market Value immediately prior to such issuance or sale. Notwithstanding the foregoing, the Company may, without adjustment to the Exercise Price pursuant to this Section 6.1(c), issue options, warrants or rights to subscribe for shares of its Common Stock to officers, directors, employees, 6 consultants or agents of the Company pursuant to the terms of any stock option plan or arrangement approved by the Board of Directors, and may issue shares of its Common Stock upon the exercise of any such stock options, warrants or rights; PROVIDED, HOWEVER, that the aggregate number of shares of Common Stock that may be issued at any one time under such stock option plan or arrangement without adjustment to the Exercise Price under this Section 6.1(c) shall not exceed, in the aggregate 482,000 shares (appropiately adjusted for stock splits, dividends and/or combinations. As used herein, "Fair Market Value" of the Common Stock or other securities means, on any date, the average of the last sale price, regular way, for the 10-business day period immediately preceding such date, or if no such sales took place during such 10-business day period, the average of the closing bid and asked prices, regular way, for each day in such 10-business day period, in either case as reported on the principal consolidated transaction reporting system with respect to securities listed on the principal national securities exchange on which the shares of Common Stock or such other securities are listed, or, if the Common Stock or such other securities are not listed or admitted to trading on any national securities exchange, the average of the last quoted sale price for such 10-business day period or, if not so quoted, the average of the high bid and low asked prices for each day in such 10-business day period in the over-the-counter market, as reported by the National Association of Securities Dealers, Inc. Automated Quotation System or such other system then in use, or, if on any such date the Common Stock is not quoted by any such organization, the average of the closing bid and asked prices during such 10-business day period as furnished by a professional market maker making a market in the Common Stock or such other securities selected by the Board of Directors of the Company. If the shares of Common Stock or such other securities are not publicly held or so listed or publicly traded,"Fair Market Value" shall mean the fair market value per share of Common Stock or such other securities as determined by the Company and the holders of at least a majority of the Warrants issued to the Warrantholders that are then outstanding. negotiating in good faith toward agreeing upon such value. If no agreement can be reached within 14 days from the date of receipt by Required Purchasers of the notice required by Section 6.2(a), the Company and the Required Purchasers shall appoint within 21 days from the date of such receipt a mutually acceptable independent investment banking firm to determine the Fair Market Value. Such firm shall make the necessary determination which shall be binding absent actual fraud or manifest error. The fees of such firm for making such determination and any related reimbursable expenses shall be paid by the Company. (d) If at any time after the date hereof the Company shall issue or sell to any person any securities convertible into or exercisable for Common Stock ("Convertible Securities") (other than securities distributed in a transaction described in paragraph (b) or (c) above), whether or not the rights to exchange or convert thereunder are immediately exercisable, and the price per share for which Common 7 Stock is issuable upon such conversion or exchange shall be less than the Fair Market Value in effect immediately prior to the time of such issue or sale, then the Exercise Price shall be adjusted as provided in subparagraph (c) above on the basis that (i) the maximum number of shares of Common Stock necessary to effect the conversion or exchange of all such Convertible Securities shall be deemed to have been issued and outstanding, (ii) the price per share of such shares shall be deemed to be the lowest possible price in any range of prices at which such additional shares are available to such holders, and (iii) the Company shall be deemed to have received all of the consideration payable therefor, if any, as of the date of actual issuance of such Convertible Securities. No adjustment of the Exercise Price shall be made under this subparagraph (d) upon the issuance of any Convertible Securities which are issued pursuant to the exercise of any warrants or other subscription or purchase rights therefor, if any such adjustment shall previously have been made upon the issuance of such warrants or other rights pursuant to subparagraph (c) above. No further adjustments of the Exercise Price shall be made upon the actual issuance of such Common Stock upon conversion or exchange of such Convertible Securities and, if any issue or sale of such Convertible Securities is made upon exercise of any warrant or other right to subscribe for or to purchase any such Convertible Securities for which adjustments of the Exercise Price have been or are to be made pursuant to other provisions of this Section 6.1, no further adjustments of the Exercise Price shall be made by reason of such issue or sale. For the purposes of this subparagraph (d), the date as of which the Exercise Price shall be computed shall be the earlier of (i) the date on which the Company shall enter into a firm contract for the issuance of such Convertible Securities and (ii) the date of actual issuance of such Convertible Securities. Such adjustments shall be made upon each issuance of Convertible Securities and shall become effective immediately after such issuance. (e) No adjustment in the number of Warrant Shares purchasable hereunder shall be required unless such adjustment would require an increase or decrease of at least one quarter of one percent (0.25%) in the number of Warrant Shares purchasable upon the exercise of each Warrant; PROVIDED, HOWEVER, that any adjustments which by reason of this Section 6.1(e) are not required to be made shall be made immediately prior to any exercise of any Warrants or, if no such exercise occurs prior to the time that any subsequent adjustment would be made, carried forward and taken into account in such subsequent adjustment. All calculations shall be made to the nearest one-thousandth of a share. No adjustment need be made for a change in the par value of the Warrant Shares. (f) Upon each adjustment of the Exercise Price pursuant to paragraphs (b) through (d) of this Section 6.1, this Warrant Certificate shall be deemed to evidence the right to purchase, at the adjusted Exercise Price, that number of Warrant Shares obtained by multiplying the number of Warrant Shares covered by this Warrant Certificate immediately prior to such adjustment by the Exercise Price in 8 effect prior to such adjustment and dividing the product so obtained by the Exercise Price in effect after such adjustment. (g) The number of shares of Common Stock outstanding at any given time shall not include shares directly or indirectly owned or held by or for the account of the Company or any of its subsidiaries, and the disposition of any such shares shall be considered an issue or sale of Common Stock for the purposes of this Section 6.1. 6.2 NOTICE OF ADJUSTMENT. (a) The Company hereby agrees that whenever any adjustment of the number of Warrant Shares purchasable upon the exercise of the Warrants or the Exercise Price of such Warrants is effected as herein provided, the Company shall promptly notify the Holder, by first class mail, postage prepaid, of such adjustment and shall deliver to the Holder a certificate of the Chief Financial Officer of the Company, setting forth in reasonable detail (i) the number of Warrant Shares purchasable upon the exercise of the Warrants and the Exercise Price of the Warrants after such adjustment, (ii) a brief statement of the facts requiring such adjustment and (iii) the computation by which such adjustment was made. (b) If any adjustment is required to be made pursuant to Section 6.1(b) (unless the PROVISO to the first sentence of that Section is applicable to the action), the Company and the holders of at least a majority of the Warrants issued to the Warrantholders that are then outstanding shall negotiate in good faith toward agreeing upon the value of the assets or securities and the necessary adjustment. If no agreement can be reached within 14 days from the date of receipt by Required Purchasers of such notice, the Company and the Required Purchasers shall appoint within 21 days from the date of such receipt a mutually acceptable independent investment banking firm to determine the necessary adjustment. Such firm shall make the necessary determination which shall be binding absent actual fraud or manifest error. The fees of such firm for making such determination and any related reimbursable expenses shall be paid by the Company. 6.3 PRESERVATION OF PURCHASE RIGHTS UPON MERGER, CONSOLIDATION, ETC. (a) In the event of any merger, consolidation or other acquisition or business combination in which the Company is not the surviving corporation or in which all of the outstanding Common Stock of the Company is converted into, acquired or exchanged for securities, cash or property or in the event of the sale or other disposition of all or substantially all the assets of the Company, then, and in each such case, proper provision shall be made so that, upon the basis and upon the terms and in the manner provided in this Section 6.3, the holder of this Warrant Certificate, upon the exercise of any of its Warrants at any time after the consummation of such consolidation, merger, transfer, reorganization or reclassification, shall be entitled to receive, in lieu of shares of Common Stock issuable upon such exercise prior to such consummation, the stock, securities, cash and assets to which such holder would have been entitled upon such consummation if such holder had so exercised 9 such Warrant immediately prior thereto, at the aggregate Exercise Price in effect for all shares of Common Stock issuable upon such exercise immediately prior to such consummation as adjusted to the time of such transaction (subject to adjustments subsequent to such corporate action as nearly equivalent as possible to the adjustments provided for in Section 6.1 above); provided, however, that the holder of this Warrant Certificate shall not be required to accept as consideration any property or securities the holding of which by such holder would be prohibited by any law, rule or regulation of any governmental entity or insurance industry regulatory body. Such undertaking shall provide for adjustments, which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 6; PROVIDED, HOWEVER, that if upon such consolidation, merger, transfer, reorganization or reclassification, different holders of Common Stock shall be entitled to receive different forms of consideration for their Common Stock, the form of such consideration thereafter deliverable upon the exercise of the Warrants shall be as determined in good faith by the Board of Directors, whose determination shall be conclusive. The provisions of this Section 6.3 shall also apply to successive mergers or consolidations. (b) Upon any liquidation, dissolution or winding up of the Company, the Holder shall receive such cash or property (less the Exercise Price) which the Holder would have been entitled to receive upon the happening of such liquidation, dissolution or winding up had the Warrants been exercised and the Warrant Shares issued immediately prior to the occurrence of such liquidation, dissolution or winding up. 6.4 STATEMENT ON THE WARRANT. Irrespective of any adjustments in the number or kind of securities purchasable upon the exercise of the Warrant or the Exercise Price, any Warrant Certificate theretofore or thereafter issued may continue to express the same price and number and any kind of shares as are stated in this Warrant Certificate. SECTION 7. FRACTIONAL INTERESTS. The Holder shall not be required to accept fractional securities on the exercise of Warrants. If any fraction of a security would be issuable on the exercise of Warrants, the Holder may, at its option, require the Company to pay to the Holder of such Warrants an amount in cash equal to the fair market value of such fraction. SECTION 8. REGISTRATION. The Holder shall, from time to time, have the rights, if any, with respect to registration of Warrant Shares as are set forth in the Registration Rights Agreement for such Warrant Shares. SECTION 9. NO RIGHTS AS A SHAREHOLDER; NOTICES TO HOLDER. Nothing contained in this Warrant Certificate shall be construed as conferring upon the Holder the right to vote or to consent or to receive notice as a shareholder in respect of any meeting of shareholders of the Company for the election of the directors of the Company or any other matter, or any rights whatsoever as a shareholder of the Company. If, however, at any time prior to the exercise of the Warrants evidenced by this Warrant Certificate, any of the following events shall occur: 10 (a) the Company shall declare any dividend payable in cash or in any securities upon its shares of Common Stock or make any distribution to the holders of its shares of Common Stock; (b) the Company shall offer to all holders of its shares of Common Stock any additional shares of Common Stock or securities convertible into or exchangeable for shares of Common Stock or any right to subscribe for or purchase any thereof; (c) a dissolution, liquidation or winding up of the Company (other than in connection with a consolidation, merger, sale, transfer or lease of all or substantially all of its property, assets and business as an entirety) shall be proposed; or (d) any consolidation or merger to which the Company is a party and for which approval of the holders of Common Stock is required, or of the conveyance or transfer of all or substantially all assets of the Company as, or substantially as, an entirety, or of any reclassification or change of outstanding shares of Common Stock issuable upon exercise of the Warrant (other than a change in par value to no par value, or from no par value to par value) or as a result of a subdivision or combination, then in any one or more of said events, the Company shall give to the Holder the greater of 15 business days' written notice and the number of days written notice required to be given to shareholders with respect to such action prior to the applicable record date hereinafter specified, stating (i) the date as of which the holders of record of shares of Common Stock to be entitled to receive any such dividends, rights or warrants are to be determined or (ii) the date on which any such dissolution, liquidation, winding up, consolidation, merger, conveyance or transfer is expected to become effective and the date as of which it is expected that holders of record of shares of Common Stock shall be entitled to exchange their shares of Common Stock for securities or other property, if any, deliverable upon such reclassification, consolidation, merger, conveyance, transfer, dissolution, liquidation, or winding up. SECTION 10. IDENTITY OF TRANSFER AGENT. Forthwith upon the appointment of any Transfer Agent for the Common Stock, or any other shares of the Company's capital stock issuable upon the exercise of the Warrants, the Company shall promptly notify the Holder of the name and address of such Transfer Agent. SECTION 11. NOTICES. Any notice, except as provided in Section 9 of this Warrant Certificate, or demand authorized by this Warrant Certificate to be given by the Holder to the Company, shall be in writing and shall be delivered in person or by facsimile transmission, or mailed by overnight courier, or otherwise delivered, to the Company, at 2250 South Tenth Street, San Jose, California 95112, attention of Chief Executive Officer, with a copy to J.F. Lehman Equity Investors I, L.P., 450 Park Avenue, New York, New York 11 10022, attention of Mr. Donald Glickman. The Company may change the address to which notices to it are to be delivered or mailed hereunder by notice to the Holder. Any notice pursuant to this Warrant Certificate by the Company to the Holder shall be in writing and shall be mailed by overnight courier or otherwise delivered, to the Holder at its address set forth in the Warrant Register. Notices delivered personally shall be effective at the time delivered by hand, notices sent by mail shall be effective when received, notices sent by facsimile transmission shall be effective when confirmed and notices sent by courier guaranteeing next day delivery shall be effective on the next business day after timely delivery to the courier. SECTION 12. AMENDMENT AND WAIVER. Any term, covenant, agreement or condition in this Warrant Certificate may be amended, or compliance therewith may be waived (either generally or in a particular instance and either retroactively or prospectively), by a written instrument or written instruments executed by the Company and the holders of at least 66 2/3% of the Warrants issued to the Warrantholders that are then outstanding; PROVIDED, HOWEVER, that no such amendment or waiver shall change the number of Warrant Shares issuable under the Warrants, change the Exercise Price, change the period during which the Warrants may be exercised or modify any provision of Section 6 or this Section 12 without the consent of the holders of all such Warrants then outstanding or shall have a disparate and adverse impact on any Warrantholder. SECTION 13. SUCCESSORS. All the covenants and provisions of this Warrant Certificate by or for the benefit of the Company shall bind and inure to the benefit of its respective successors and assigns hereunder. SECTION 14. GOVERNING LAW. This Warrant Certificate shall be construed in accordance with and governed by the internal laws of the State of California applicable to contracts executed and to be performed wholly within such state, without regard to the principles of conflicts or choice of law. SECTION 15. BENEFITS OF THIS WARRANT CERTIFICATE. Nothing in this Warrant Certificate shall be construed to give to any person or entity other than the Company and the Holder any legal or equitable right, remedy or claim under this Warrant Certificate; and this Warrant Certificate shall be for the sole and exclusive benefit of this Company and the Holder. SECTION 16. SURVIVAL OF RIGHTS AND DUTIES. This Warrant Certificate shall terminate and be of no further force and effect on the earlier of 5:00 P.M. (New York City time) on the Expiration Date or the date on which all of the Warrants have been exercised. SECTION 17. AGREEMENT TO BE BOUND. The Holder acknowledges and hereby agrees to be bound by such terms and conditions of the Shareholders' Agreement as 12 are by their terms applicable to the Holder. Any and all Warrant Shares issued upon exercise hereof shall, immediately upon such issuance, and without further action by or on behalf of the Holder or the Company, become subject to such terms and conditions of the Shareholders' Agreement as are by their terms applicable to such Warrant Shares. SECTION 17. CAPTIONS. The captions of the Sections and paragraphs of this Warrant Certificate have been inserted for convenience only and shall have no substantive effect. 13 IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be duly executed this 20th day of August 1997. BURKE INDUSTRIES, INC. By: /s/ Rocco C. Genovese ----------------------------- Rocco C. Genovese, President 14 FORM OF ELECTION TO PURCHASE (To Be Executed by the Holder if the Holder Desires to Exercise Warrants Evidenced by the Foregoing Warrant Certificate) To Burke Industries, Inc.: The undersigned hereby irrevocably elects to exercise ____________ Warrants evidenced by the foregoing Warrant Certificate for, and to purchase thereunder, ____________ full shares of Common Stock issuable upon exercise of said Warrants and delivery of $_____ in cash (or in liquidation preference of the Series A 11.5% Cumulative Redeemable Preferred Stock of the Company, or any combination thereof) with and any applicable taxes payable by the undersigned pursuant to such Warrant Certificate. The undersigned requests that certificates for such shares be issued in the name of ____________________________. PLEASE INSERT SOCIAL SECURITY OR TAX IDENTIFICATION NUMBER (Please print name and address) ____________________________________ ____________________________________ ____________________________________ If said number of Warrants shall not be all the Warrants evidenced by the foregoing Warrant Certificate, the undersigned requests that a new Warrant Certificate evidencing the Warrants not so exercised be issued in the name of and delivered to: _______________________________________________________________________________ _______________________________________________________________________________ (Please print name and address) By:__________________________________ Name: Title: Dated: __________________ FORM OF ASSIGNMENT FOR VALUE RECEIVED, _____________________ hereby sells, assigns and transfers to each assignee set forth below all of the rights of the undersigned in and to the number of Warrants (as defined in and evidenced by the foregoing Warrant Certificate) set opposite the name of such assignee below and in and to the foregoing Warrant Certificate with respect to said Warrants and the shares of Common Stock issuable upon exercise of said Warrants: NAME OF ASSIGNEE ADDRESS NUMBER OF WARRANTS ---------------- ------- ------------------ If the total of said Warrants shall not be all the Warrants evidenced by the foregoing Warrant Certificate, the undersigned requests that a new Warrant Certificate evidencing the Warrants not so assigned be issued in the name of and delivered to the undersigned. By:__________________________ Name: Title: Dated: __________________ THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS AND MAY NOT BE TRANSFERRED, SOLD OR OTHERWISE DISPOSED OF EXCEPT WHILE SUCH A REGISTRATION IS IN EFFECT UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS OR PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT OR SUCH LAWS. THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE ALSO SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFERS SET FORTH IN A SHAREHOLDERS AGREEMENT, DATED AS OF AUGUST 20, 1997 (AS AMENDED, MODIFIED OR SUPPLEMENTED THROUGH THE DATE HEREOF, THE "SHAREHOLDERS AGREEMENT"), BY AND AMONG THE COMPANY AND THE SHAREHOLDERS NAMED THEREIN, A COPY OF WHICH IS AVAILABLE FOR INSPECTION AT THE OFFICES OF THE COMPANY. NO TRANSFER OF SUCH SECURITIES WILL BE MADE ON THE BOOKS OF THE COMPANY UNLESS ACCOMPANIED BY EVIDENCE OF COMPLIANCE WITH THE TERMS OF SUCH AGREEMENTS. EXERCISABLE AT ANY TIME SUBJECT TO THE PROVISIONS HEREOF NO. 4 BURKE INDUSTRIES, INC. WARRANT CERTIFICATE Warrant Certificate for Warrants to Purchase 101,969.78 Warrant Shares This Warrant Certificate certifies that, for value received, Gerlach & Co. (the "Holder") is the owner of the number of Warrants (as defined in Section 1.2(a) below) set forth above, each of which entitles the Holder to purchase from Burke Industries, Inc., a California corporation (the "Company") at any time from and after the date hereof and until the Expiration Date (as defined in Section 2.1 hereof) one Warrant Share (as defined below), at the purchase price stated in Section 2.3 hereof (the "Exercise Price"). The number of Warrant Shares purchasable upon exercise of the Warrants and the Exercise Price shall be subject to adjustment from time to time as herein provided. For purposes of this Warrant Certificate, "Warrant Shares" shall mean shares of the Company's Common Stock, no par value (the "Common Stock"); PROVIDED, HOWEVER, that if, in accordance with Section 6.3 hereof, the securities issuable upon exercise of the Warrants are issued by an entity other than the Company or there is a change in the class of securities so issuable, then the "Warrant Shares" shall mean the securities so issuable by such entity or the securities of the class of securities so issuable. The Warrants are subject to the following terms, conditions and provisions: SECTION 1. REGISTRATION; TRANSFERABILITY; EXCHANGE OF WARRANT CERTIFICATE. 1.1 REGISTRATION. The Company shall number and register the Warrants in a register (the "Warrant Register") maintained at the principal office of the Company (the "Office"). The Company shall be entitled to treat the Holder of the Warrants as the owner thereof for all purposes and shall not be bound to recognize any equitable or other claim to or interest in such Warrants on the part of any other person. 1.2 TRANSFER AND EXCHANGE. (a) Subject to compliance with any restrictions on transfer set forth in the Shareholders Agreement, dated as of August 20, 1997, by and among the Company, Holder, Massachusetts Mutual Life Insurance Company, MassMutual High Yield Partners LLC, Paribas North America, Inc., Jackson National Life Insurance Company and the other shareholders named therein (the "Shareholders' Agreement") (Holder and Massachusetts Mutual Life Insurance Company, MassMutual High Yield Partners LLC, Paribas North America, Inc. and Jackson National Life Insurance Company shall sometimes be collectively referred to herein as the "Initial Warrantholders"), the warrants issued to the Initial Warrantholders (the "Warrants") shall be transferable only on the Warrant Register upon delivery thereof by the Holder or by his duly authorized attorney or representative or accompanied by proper evidence of succession, assignment or authority to transfer. Upon any such registration of transfer, a new Warrant Certificate, in substantially the form of this Warrant Certificate, evidencing the Warrants so transferred shall be issued to the transferee of such Warrants and a new Warrant Certificate, in substantially the form of this Warrant Certificate, evidencing the remaining Warrants, if any, not so transferred, shall be issued to the Holder. In all cases of transfer by an attorney, the original power of attorney, duly approved, or a copy thereof, duly certified, shall be deposited and shall remain with the Company. In case of transfers by executors, administrators, guardians or other legal representatives, duly authenticated evidence of their authority shall be produced, and may be required to be deposited and to remain with the Company in its discretion. No transfer of the Warrants or any interest therein other than in compliance with this Section 1.2 shall be made or recorded in the Warrant Register, and any such purported transfer shall be void and of no effect. (b) This Warrant Certificate is exchangeable, in whole or in part, upon the surrender hereof by the holder hereof at the Office for new Warrant Certificates, in substantially the form of this Warrant Certificate, evidencing in the aggregate the right to purchase the number of Warrant Shares that may then be purchased hereunder, each of such new Warrant Certificates to be dated the date of such exchange and to represent the right to purchase such number of Warrant Shares as shall be designated by the holder of such new Warrant Certificates at the time of such surrender. 2 SECTION 2. TERM OF WARRANTS; EXERCISE OF WARRANTS. 2.1 TERM OF WARRANT. Subject to the terms of this Warrant Certificate, the Holder shall have the right, which may be exercised by the registered Holder hereof from time to time on any Business Day before 5:00 P.M. (New York City time) during the period through and including February 20, 2008 (the "Expiration Date") to purchase from the Company an aggregate of 101,969.78 fully paid and nonassessable Warrant Shares or such other number of Warrant Shares which the Holder may at the time be entitled to purchase in accordance with this Warrant Certificate. At 5:00 P.M. (New York City time) on the Expiration Date, each Warrant not exercised prior thereto shall be and become void and of no value. 2.2 EXERCISE OF WARRANTS. Subject to the terms of this Warrant Certificate, the Warrants evidenced by this Warrant Certificate may be exercised in whole or in part, upon surrender to the Company, at its Office, of this Warrant Certificate, with a Purchase Form substantially in the form attached hereto duly completed and signed, and upon payment to the Company of the Exercise Price. Payment of the aggregate Exercise Price shall be in cash; PROVIDED, HOWEVER, that in lieu of payment in cash, the Holder may, at its option, pay all or a portion of the aggregate Exercise Price by tendering shares it holds of the Series A 11.5% Cumulative Redeemable Preferred Stock of the Company, which shares shall be valued at their stated liquidation value, plus any accrued but unpaid dividends thereon, to the date of exercise pursuant to this Section 2.2. Payment of the aggregate Exercise Price in cash shall be by wire transfer in immediately available funds to an account designated in writing by the Company to the Holder. Upon the surrender of this Warrant Certificate, with the Purchase Form duly executed, and payment of the Exercise Price as aforesaid, the Company shall (subject to compliance, if necessary, with applicable provisions of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended), promptly and, in any event within ten Business Days, issue and deliver to or upon the written order of the Holder and in such name or names as the Holder may designate a certificate or certificates for such number of Warrant Shares so purchased. Such certificate or certificates shall be dated and deemed to have been issued as of the date of the surrender of this Warrant Certificate and payment of the Exercise Price, as aforesaid. The right of purchase represented by this Warrant Certificate shall be exercisable, at the election of the Holder, in full at any time or in part from time to time. In the event the Holder shall exercise fewer than all the Warrants evidenced hereby, a new Warrant Certificate shall be issued evidencing the remaining unexercised Warrants. 2.3 EXERCISE PRICE. The price per share at which each Warrant Share shall be purchased upon exercise of each Warrant (the "Exercise Price") shall be $4.56, subject to adjustment pursuant to Section 6 LESS an amount per Warrant equal to the dividends in respect of the Warrant Shares that the holder would have received had such Warrant been exercised on August 20, 1997. The aggregate Exercise Price for all Warrant Shares subject to this Warrant Certificate shall be rounded to the next higher $0.01. 3 SECTION 3. PAYMENT OF TAXES. The Company covenants and agrees that it will pay when due and payable all documentary, stamp and other similar taxes, if any, which may be payable in respect of the issuance or delivery of the Warrants or of the Warrant Shares purchasable and issuable upon the exercise of the Warrants; PROVIDED, HOWEVER, that the Company shall not be required to pay any such tax or other charge imposed in respect of the transfer of Warrants, or the issuance or delivery of certificates for Warrant Shares or other Securities in respect of the Warrant Shares upon the exercise of Warrants, to a person or entity other than a then-existing registered Holder of Warrants. SECTION 4. MUTILATED OR MISSING WARRANTS. In the event this Warrant Certificate shall be mutilated, lost, stolen or destroyed, the Company shall issue and deliver in exchange and substitution for and upon cancellation of the mutilated Warrant Certificate, or in lieu of and in substitution for the Warrant Certificate lost, stolen or destroyed, a new Warrant Certificate of like tenor and representing an equivalent right or interest, but only upon, in the event of a lost, stolen or destroyed certificate, receipt of evidence satisfactory to the Company of such loss, theft or destruction and, if requested by the Company, upon indemnity that also is satisfactory to it; PROVIDED that a written undertaking of such loss, theft or destruction of this Warrant Certificate by the registered Holder hereof shall be deemed a satisfactory indemnity of the Company for purposes of this Section 4. In making application for such a substitute Warrant Certificate, the Holder shall also comply with such other reasonable requirements as the Company may prescribe. SECTION 5. RESERVATION AND AVAILABILITY OF WARRANT SHARES; PURCHASE AND CANCELLATION OF WARRANTS. 5.1 RESERVATION OF WARRANT SHARES. (a) The Company shall at all times reserve and keep available free from preemptive rights, out of the aggregate of its authorized but unissued shares of Common Stock, for the purpose of enabling it to satisfy any obligations to issue the Warrant Shares upon exercise of the Warrants, the full number of Warrant Shares deliverable upon the exercise of all the Warrants evidenced by this Warrant Certificate. The Company or, if appointed, the transfer agent for the Common Stock and every subsequent transfer agent for any shares of the Company's capital stock issuable upon the exercise of any of the rights of purchase aforesaid (each, a "Transfer Agent") shall be irrevocably authorized and directed at all times to reserve such number of authorized shares of Common Stock as shall be required for such purpose. The Company will keep a copy of this Warrant Certificate on file with each Transfer Agent. The Company will furnish such Transfer Agent a copy of all notices of adjustments and certificates related thereto which are transmitted to the Holder pursuant to Section 6 hereof. (b) The Company covenants that all Warrant Shares issuable upon exercise of the Warrants will, upon issuance, be fully paid, nonassessable and free from preemptive rights and free from all taxes, liens, charges and security interests with respect to the issuance thereof. 4 (c) Before taking any action which would cause an adjustment pursuant to Section 6, the Company will take any and all corporate action which may, in the opinion of its counsel, be necessary in order that the Company may validly and legally issue fully paid and nonassessable Warrant Shares at the Exercise Price as so adjusted. 5.2 WARRANT SHARES RECORD DATE. Each person in whose name any stock certificate for Warrant Shares is issued shall for all purposes be deemed to have become the holder of record of the Warrant Shares represented thereby, and such stock certificate shall be dated the date upon which this Warrant Certificate was duly surrendered and payment of the Exercise Price (and any applicable transfer taxes) was made. 5.3 CANCELLATION OF WARRANT. Upon surrender of the Warrant Certificate for exchange, substitution, transfer or exercise, it shall be cancelled by the Company and retired. SECTION 6. ADJUSTMENT OF NUMBER OF WARRANT SHARES AND EXERCISE PRICE. The number of securities purchasable upon the exercise of each Warrant and the Exercise Price shall be subject to adjustment from time to time upon the happening of certain events as hereinafter described. 6.1 MANDATORY ADJUSTMENTS. The number of securities purchasable upon the exercise of the Warrants and the Exercise Price shall be subject to adjustment as follows: (a) In case the Company shall (i) declare or pay a dividend on any of its outstanding Common Stock in shares of Common Stock or make a distribution to holders of its outstanding Common Stock in shares of Common Stock, (ii) subdivide any of its outstanding Common Stock into a greater number of shares of Common Stock, (iii) combine any of its outstanding Common Stock into a smaller number of shares of Common Stock or (iv) issue by reclassification of any of its shares of Common Stock other securities of the Company (including any such reclassification in connection with a consolidation, merger or other business combination in which the Company is the surviving corporation), the number and kind of Warrant Shares purchasable and issuable upon exercise of the Warrants shall be adjusted so that the Holder, upon exercise thereof, shall be entitled to receive the number and kind of Warrant Shares and other securities of the Company that the Holder would have owned or have been entitled to receive after the happening of any of the events described above had the Warrants been exercised and the relevant Warrant Shares issued in the name of the Holder immediately prior to the happening of such event or, if applicable, any record date with respect thereto. An adjustment made pursuant to this paragraph (a) shall become effective on the date of the dividend payment, subdivision, combination or issuance retroactive to the record date with respect thereto, if any, for such event. Upon adjustment of the number of Warrant Shares as provided in this paragraph (a), the Exercise Price payable upon exercise of each Warrant shall be adjusted by multiplying such Exercise Price immediately prior to such 5 adjustment by a fraction of which the numerator shall be the number of Warrant Shares purchasable upon the exercise of each Warrant immediately prior to such adjustment and of which the denominator shall be the number of Warrant Shares purchasable immediately thereafter. (b) In case the Company shall distribute to all holders of its outstanding Common Stock evidences of indebtedness of the Company, cash (including cash dividends payable out of consolidated earnings or earned surplus) or assets or securities other than its Common Stock (including stock of a subsidiary or securities convertible into or exercisable for such stock but excluding dividends or distributions referred to in Sections 6.1(a) above or Section 6.1(c) below) (any such evidences of indebtedness, cash, assets or securities, the "assets or securities"), then, in each case, the Exercise Price shall be adjusted by subtracting from the Exercise Price then in effect the value per share (as determined in accordance with Section 6.2(b)) of the assets or securities that the Holder would have been entitled to receive as a result of such distribution had the Warrant been exercised and the relevant Warrant Shares issued in the name of the Holder immediately prior to the record date for such distribution; PROVIDED that if, after giving effect to such adjustment, the Exercise Price would be less than $0.01 per share, the Company shall distribute such assets or securities to the Holder as if the Holder had exercised the Warrants and the Warrant Shares had been issued in the name of the Holder immediately prior to the record date for such distribution. Any adjustment required by this Section 6.1(b) shall be made whenever any such distribution is made, and shall become effective on the date of distribution retroactive to the record date for the determination of shareholders entitled to receive such distribution. (c) If at any time after the date hereof the Company shall issue or sell any shares of Common Stock or any warrants, options or rights to subscribe for or purchase Common Stock or securities convertible into Common Stock (but excluding distributions referred to in paragraph (a) or (b) above or (d) below), and the consideration per share for, or the price per share at which such warrant, option or right is exercisable for or convertible into, such Common Stock is less than the Fair Market Value (as defined below) of the Common Stock immediately prior to such issuance or sale, then, forthwith upon such issuance or sale, the Exercise Price shall be reduced to the price determined by multiplying the Exercise Price in effect immediately prior to the time of such issuance or sale by a fraction the numerator of which shall be the sum of (i) the number of shares of Common Stock outstanding immediately prior to such issuance or sale MULTIPLIED BY the Fair Market Value immediately prior to such issuance or sale and (ii) the consideration received by the Company upon such issuance or sale, and the denominator of which shall be the total number of shares of Common Stock outstanding immediately after such issuance or sale MULTIPLIED BY the Fair Market Value immediately prior to such issuance or sale. Notwithstanding the foregoing, the Company may, without adjustment to the Exercise Price pursuant to this Section 6.1(c), issue options, warrants or rights to subscribe for shares of its Common Stock to officers, directors, employees, 6 consultants or agents of the Company pursuant to the terms of any stock option plan or arrangement approved by the Board of Directors, and may issue shares of its Common Stock upon the exercise of any such stock options, warrants or rights; PROVIDED, HOWEVER, that the aggregate number of shares of Common Stock that may be issued at any one time under such stock option plan or arrangement without adjustment to the Exercise Price under this Section 6.1(c) shall not exceed, in the aggregate 482,000 shares (appropiately adjusted for stock splits, dividends and/or combinations. As used herein, "Fair Market Value" of the Common Stock or other securities means, on any date, the average of the last sale price, regular way, for the 10-business day period immediately preceding such date, or if no such sales took place during such 10-business day period, the average of the closing bid and asked prices, regular way, for each day in such 10-business day period, in either case as reported on the principal consolidated transaction reporting system with respect to securities listed on the principal national securities exchange on which the shares of Common Stock or such other securities are listed, or, if the Common Stock or such other securities are not listed or admitted to trading on any national securities exchange, the average of the last quoted sale price for such 10-business day period or, if not so quoted, the average of the high bid and low asked prices for each day in such 10-business day period in the over-the-counter market, as reported by the National Association of Securities Dealers, Inc. Automated Quotation System or such other system then in use, or, if on any such date the Common Stock is not quoted by any such organization, the average of the closing bid and asked prices during such 10-business day period as furnished by a professional market maker making a market in the Common Stock or such other securities selected by the Board of Directors of the Company. If the shares of Common Stock or such other securities are not publicly held or so listed or publicly traded, "Fair Market Value" shall mean the fair market value per share of Common Stock or such other securities as determined by the Company and the holders of at least a majority of the Warrants issued to the Warrantholders that are then outstanding. negotiating in good faith toward agreeing upon such value. If no agreement can be reached within 14 days from the date of receipt by Required Purchasers of the notice required by Section 6.2(a), the Company and the Required Purchasers shall appoint within 21 days from the date of such receipt a mutually acceptable independent investment banking firm to determine the Fair Market Value. Such firm shall make the necessary determination which shall be binding absent actual fraud or manifest error. The fees of such firm for making such determination and any related reimbursable expenses shall be paid by the Company. (d) If at any time after the date hereof the Company shall issue or sell to any person any securities convertible into or exercisable for Common Stock ("Convertible Securities") (other than securities distributed in a transaction described in paragraph (b) or (c) above), whether or not the rights to exchange or convert thereunder are immediately exercisable, and the price per share for which Common 7 Stock is issuable upon such conversion or exchange shall be less than the Fair Market Value in effect immediately prior to the time of such issue or sale, then the Exercise Price shall be adjusted as provided in subparagraph (c) above on the basis that (i) the maximum number of shares of Common Stock necessary to effect the conversion or exchange of all such Convertible Securities shall be deemed to have been issued and outstanding, (ii) the price per share of such shares shall be deemed to be the lowest possible price in any range of prices at which such additional shares are available to such holders, and (iii) the Company shall be deemed to have received all of the consideration payable therefor, if any, as of the date of actual issuance of such Convertible Securities. No adjustment of the Exercise Price shall be made under this subparagraph (d) upon the issuance of any Convertible Securities which are issued pursuant to the exercise of any warrants or other subscription or purchase rights therefor, if any such adjustment shall previously have been made upon the issuance of such warrants or other rights pursuant to subparagraph (c) above. No further adjustments of the Exercise Price shall be made upon the actual issuance of such Common Stock upon conversion or exchange of such Convertible Securities and, if any issue or sale of such Convertible Securities is made upon exercise of any warrant or other right to subscribe for or to purchase any such Convertible Securities for which adjustments of the Exercise Price have been or are to be made pursuant to other provisions of this Section 6.1, no further adjustments of the Exercise Price shall be made by reason of such issue or sale. For the purposes of this subparagraph (d), the date as of which the Exercise Price shall be computed shall be the earlier of (i) the date on which the Company shall enter into a firm contract for the issuance of such Convertible Securities and (ii) the date of actual issuance of such Convertible Securities. Such adjustments shall be made upon each issuance of Convertible Securities and shall become effective immediately after such issuance. (e) No adjustment in the number of Warrant Shares purchasable hereunder shall be required unless such adjustment would require an increase or decrease of at least one quarter of one percent (0.25%) in the number of Warrant Shares purchasable upon the exercise of each Warrant; PROVIDED, HOWEVER, that any adjustments which by reason of this Section 6.1(e) are not required to be made shall be made immediately prior to any exercise of any Warrants or, if no such exercise occurs prior to the time that any subsequent adjustment would be made, carried forward and taken into account in such subsequent adjustment. All calculations shall be made to the nearest one-thousandth of a share. No adjustment need be made for a change in the par value of the Warrant Shares. (f) Upon each adjustment of the Exercise Price pursuant to paragraphs (b) through (d) of this Section 6.1, this Warrant Certificate shall be deemed to evidence the right to purchase, at the adjusted Exercise Price, that number of Warrant Shares obtained by multiplying the number of Warrant Shares covered by this Warrant Certificate immediately prior to such adjustment by the Exercise Price in 8 effect prior to such adjustment and dividing the product so obtained by the Exercise Price in effect after such adjustment. (g) The number of shares of Common Stock outstanding at any given time shall not include shares directly or indirectly owned or held by or for the account of the Company or any of its subsidiaries, and the disposition of any such shares shall be considered an issue or sale of Common Stock for the purposes of this Section 6.1. 6.2 NOTICE OF ADJUSTMENT. (a) The Company hereby agrees that whenever any adjustment of the number of Warrant Shares purchasable upon the exercise of the Warrants or the Exercise Price of such Warrants is effected as herein provided, the Company shall promptly notify the Holder, by first class mail, postage prepaid, of such adjustment and shall deliver to the Holder a certificate of the Chief Financial Officer of the Company, setting forth in reasonable detail (i) the number of Warrant Shares purchasable upon the exercise of the Warrants and the Exercise Price of the Warrants after such adjustment, (ii) a brief statement of the facts requiring such adjustment and (iii) the computation by which such adjustment was made. (b) If any adjustment is required to be made pursuant to Section 6.1(b) (unless the PROVISO to the first sentence of that Section is applicable to the action), the Company and the holders of at least a majority of the Warrants issued to the Warrantholders that are then outstanding shall negotiate in good faith toward agreeing upon the value of the assets or securities and the necessary adjustment. If no agreement can be reached within 14 days from the date of receipt by Required Purchasers of such notice, the Company and the Required Purchasers shall appoint within 21 days from the date of such receipt a mutually acceptable independent investment banking firm to determine the necessary adjustment. Such firm shall make the necessary determination which shall be binding absent actual fraud or manifest error. The fees of such firm for making such determination and any related reimbursable expenses shall be paid by the Company. 6.3 PRESERVATION OF PURCHASE RIGHTS UPON MERGER, CONSOLIDATION, ETC. (a) In the event of any merger, consolidation or other acquisition or business combination in which the Company is not the surviving corporation or in which all of the outstanding Common Stock of the Company is converted into, acquired or exchanged for securities, cash or property or in the event of the sale or other disposition of all or substantially all the assets of the Company, then, and in each such case, proper provision shall be made so that, upon the basis and upon the terms and in the manner provided in this Section 6.3, the holder of this Warrant Certificate, upon the exercise of any of its Warrants at any time after the consummation of such consolidation, merger, transfer, reorganization or reclassification, shall be entitled to receive, in lieu of shares of Common Stock issuable upon such exercise prior to such consummation, the stock, securities, cash and assets to which such holder would have been entitled upon such consummation if such holder had so exercised 9 such Warrant immediately prior thereto, at the aggregate Exercise Price in effect for all shares of Common Stock issuable upon such exercise immediately prior to such consummation as adjusted to the time of such transaction (subject to adjustments subsequent to such corporate action as nearly equivalent as possible to the adjustments provided for in Section 6.1 above); provided, however, that the holder of this Warrant Certificate shall not be required to accept as consideration any property or securities the holding of which by such holder would be prohibited by any law, rule or regulation of any governmental entity or insurance industry regulatory body. Such undertaking shall provide for adjustments, which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 6; PROVIDED, HOWEVER, that if upon such consolidation, merger, transfer, reorganization or reclassification, different holders of Common Stock shall be entitled to receive different forms of consideration for their Common Stock, the form of such consideration thereafter deliverable upon the exercise of the Warrants shall be as determined in good faith by the Board of Directors, whose determination shall be conclusive. The provisions of this Section 6.3 shall also apply to successive mergers or consolidations. (b) Upon any liquidation, dissolution or winding up of the Company, the Holder shall receive such cash or property (less the Exercise Price) which the Holder would have been entitled to receive upon the happening of such liquidation, dissolution or winding up had the Warrants been exercised and the Warrant Shares issued immediately prior to the occurrence of such liquidation, dissolution or winding up. 6.4 STATEMENT ON THE WARRANT. Irrespective of any adjustments in the number or kind of securities purchasable upon the exercise of the Warrant or the Exercise Price, any Warrant Certificate theretofore or thereafter issued may continue to express the same price and number and any kind of shares as are stated in this Warrant Certificate. SECTION 7. FRACTIONAL INTERESTS. The Holder shall not be required to accept fractional securities on the exercise of Warrants. If any fraction of a security would be issuable on the exercise of Warrants, the Holder may, at its option, require the Company to pay to the Holder of such Warrants an amount in cash equal to the fair market value of such fraction. SECTION 8. REGISTRATION. The Holder shall, from time to time, have the rights, if any, with respect to registration of Warrant Shares as are set forth in the Registration Rights Agreement for such Warrant Shares. SECTION 9. NO RIGHTS AS A SHAREHOLDER; NOTICES TO HOLDER. Nothing contained in this Warrant Certificate shall be construed as conferring upon the Holder the right to vote or to consent or to receive notice as a shareholder in respect of any meeting of shareholders of the Company for the election of the directors of the Company or any other matter, or any rights whatsoever as a shareholder of the Company. If, however, at any time prior to the exercise of the Warrants evidenced by this Warrant Certificate, any of the following events shall occur: 10 (a) the Company shall declare any dividend payable in cash or in any securities upon its shares of Common Stock or make any distribution to the holders of its shares of Common Stock; (b) the Company shall offer to all holders of its shares of Common Stock any additional shares of Common Stock or securities convertible into or exchangeable for shares of Common Stock or any right to subscribe for or purchase any thereof; (c) a dissolution, liquidation or winding up of the Company (other than in connection with a consolidation, merger, sale, transfer or lease of all or substantially all of its property, assets and business as an entirety) shall be proposed; or (d) any consolidation or merger to which the Company is a party and for which approval of the holders of Common Stock is required, or of the conveyance or transfer of all or substantially all assets of the Company as, or substantially as, an entirety, or of any reclassification or change of outstanding shares of Common Stock issuable upon exercise of the Warrant (other than a change in par value to no par value, or from no par value to par value) or as a result of a subdivision or combination, then in any one or more of said events, the Company shall give to the Holder the greater of 15 business days' written notice and the number of days written notice required to be given to shareholders with respect to such action prior to the applicable record date hereinafter specified, stating (i) the date as of which the holders of record of shares of Common Stock to be entitled to receive any such dividends, rights or warrants are to be determined or (ii) the date on which any such dissolution, liquidation, winding up, consolidation, merger, conveyance or transfer is expected to become effective and the date as of which it is expected that holders of record of shares of Common Stock shall be entitled to exchange their shares of Common Stock for securities or other property, if any, deliverable upon such reclassification, consolidation, merger, conveyance, transfer, dissolution, liquidation, or winding up. SECTION 10. IDENTITY OF TRANSFER AGENT. Forthwith upon the appointment of any Transfer Agent for the Common Stock, or any other shares of the Company's capital stock issuable upon the exercise of the Warrants, the Company shall promptly notify the Holder of the name and address of such Transfer Agent. SECTION 11. NOTICES. Any notice, except as provided in Section 9 of this Warrant Certificate, or demand authorized by this Warrant Certificate to be given by the Holder to the Company, shall be in writing and shall be delivered in person or by facsimile transmission, or mailed by overnight courier, or otherwise delivered, to the Company, at 2250 South Tenth Street, San Jose, California 95112, attention of Chief Executive Officer, with a copy to J.F. Lehman Equity Investors I, L.P., 450 Park Avenue, New York, New York 11 10022, attention of Mr. Donald Glickman. The Company may change the address to which notices to it are to be delivered or mailed hereunder by notice to the Holder. Any notice pursuant to this Warrant Certificate by the Company to the Holder shall be in writing and shall be mailed by overnight courier or otherwise delivered, to the Holder at its address set forth in the Warrant Register. Notices delivered personally shall be effective at the time delivered by hand, notices sent by mail shall be effective when received, notices sent by facsimile transmission shall be effective when confirmed and notices sent by courier guaranteeing next day delivery shall be effective on the next business day after timely delivery to the courier. SECTION 12. AMENDMENT AND WAIVER. Any term, covenant, agreement or condition in this Warrant Certificate may be amended, or compliance therewith may be waived (either generally or in a particular instance and either retroactively or prospectively), by a written instrument or written instruments executed by the Company and the holders of at least 66K% of the Warrants issued to the Warrantholders that are then outstanding; PROVIDED, HOWEVER, that no such amendment or waiver shall change the number of Warrant Shares issuable under the Warrants, change the Exercise Price, change the period during which the Warrants may be exercised or modify any provision of Section 6 or this Section 12 without the consent of the holders of all such Warrants then outstanding or shall have a disparate and adverse impact on any Warrantholder. SECTION 13. SUCCESSORS. All the covenants and provisions of this Warrant Certificate by or for the benefit of the Company shall bind and inure to the benefit of its respective successors and assigns hereunder. SECTION 14. GOVERNING LAW. This Warrant Certificate shall be construed in accordance with and governed by the internal laws of the State of California applicable to contracts executed and to be performed wholly within such state, without regard to the principles of conflicts or choice of law. SECTION 15. BENEFITS OF THIS WARRANT CERTIFICATE. Nothing in this Warrant Certificate shall be construed to give to any person or entity other than the Company and the Holder any legal or equitable right, remedy or claim under this Warrant Certificate; and this Warrant Certificate shall be for the sole and exclusive benefit of this Company and the Holder. SECTION 16. SURVIVAL OF RIGHTS AND DUTIES. This Warrant Certificate shall terminate and be of no further force and effect on the earlier of 5:00 P.M. (New York City time) on the Expiration Date or the date on which all of the Warrants have been exercised. SECTION 17. AGREEMENT TO BE BOUND. The Holder acknowledges and hereby agrees to be bound by such terms and conditions of the Shareholders' Agreement as 12 are by their terms applicable to the Holder. Any and all Warrant Shares issued upon exercise hereof shall, immediately upon such issuance, and without further action by or on behalf of the Holder or the Company, become subject to such terms and conditions of the Shareholders' Agreement as are by their terms applicable to such Warrant Shares. SECTION 17. CAPTIONS. The captions of the Sections and paragraphs of this Warrant Certificate have been inserted for convenience only and shall have no substantive effect. 13 IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be duly executed this 20th day of August 1997. BURKE INDUSTRIES, INC. By: /s/ Rocco C. Genovese ---------------------------- Rocco C. Genovese, President 14 FORM OF ELECTION TO PURCHASE (To Be Executed by the Holder if the Holder Desires to Exercise Warrants Evidenced by the Foregoing Warrant Certificate) To Burke Industries, Inc.: The undersigned hereby irrevocably elects to exercise ____________ Warrants evidenced by the foregoing Warrant Certificate for, and to purchase thereunder, ____________ full shares of Common Stock issuable upon exercise of said Warrants and delivery of $_____ in cash (or in liquidation preference of the Series A 11.5% Cumulative Redeemable Preferred Stock of the Company, or any combination thereof) with and any applicable taxes payable by the undersigned pursuant to such Warrant Certificate. The undersigned requests that certificates for such shares be issued in the name of ____________________________. PLEASE INSERT SOCIAL SECURITY OR TAX IDENTIFICATION NUMBER (Please print name and address) __________________________________ __________________________________ __________________________________ If said number of Warrants shall not be all the Warrants evidenced by the foregoing Warrant Certificate, the undersigned requests that a new Warrant Certificate evidencing the Warrants not so exercised be issued in the name of and delivered to: ______________________________________________________________________________ ______________________________________________________________________________ (Please print name and address) By:______________________________ Name: Title: Dated: __________________ FORM OF ASSIGNMENT FOR VALUE RECEIVED, _____________________ hereby sells, assigns and transfers to each assignee set forth below all of the rights of the undersigned in and to the number of Warrants (as defined in and evidenced by the foregoing Warrant Certificate) set opposite the name of such assignee below and in and to the foregoing Warrant Certificate with respect to said Warrants and the shares of Common Stock issuable upon exercise of said Warrants: NAME OF ASSIGNEE ADDRESS NUMBER OF WARRANTS ---------------- ------- ------------------ If the total of said Warrants shall not be all the Warrants evidenced by the foregoing Warrant Certificate, the undersigned requests that a new Warrant Certificate evidencing the Warrants not so assigned be issued in the name of and delivered to the undersigned. By:______________________________ Name: Title: Dated: __________________ THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS AND MAY NOT BE TRANSFERRED, SOLD OR OTHERWISE DISPOSED OF EXCEPT WHILE SUCH A REGISTRATION IS IN EFFECT UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS OR PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT OR SUCH LAWS. THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE ALSO SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFERS SET FORTH IN A SHAREHOLDERS AGREEMENT, DATED AS OF AUGUST 20, 1997 (AS AMENDED, MODIFIED OR SUPPLEMENTED THROUGH THE DATE HEREOF, THE "SHAREHOLDERS AGREEMENT"), BY AND AMONG THE COMPANY AND THE SHAREHOLDERS NAMED THEREIN, A COPY OF WHICH IS AVAILABLE FOR INSPECTION AT THE OFFICES OF THE COMPANY. NO TRANSFER OF SUCH SECURITIES WILL BE MADE ON THE BOOKS OF THE COMPANY UNLESS ACCOMPANIED BY EVIDENCE OF COMPLIANCE WITH THE TERMS OF SUCH AGREEMENTS. EXERCISABLE AT ANY TIME SUBJECT TO THE PROVISIONS HEREOF NO. 5 BURKE INDUSTRIES, INC. WARRANT CERTIFICATE Warrant Certificate for Warrants to Purchase 107,111.11 Warrant Shares This Warrant Certificate certifies that, for value received, Paribas North America, Inc. (the "Holder") is the owner of the number of Warrants (as defined in Section 1.2(a) below) set forth above, each of which entitles the Holder to purchase from Burke Industries, Inc., a California corporation (the "Company") at any time from and after the date hereof and until the Expiration Date (as defined in Section 2.1 hereof) one Warrant Share (as defined below), at the purchase price stated in Section 2.3 hereof (the "Exercise Price"). The number of Warrant Shares purchasable upon exercise of the Warrants and the Exercise Price shall be subject to adjustment from time to time as herein provided. For purposes of this Warrant Certificate, "Warrant Shares" shall mean shares of the Company's Common Stock, no par value (the "Common Stock"); PROVIDED, HOWEVER, that if, in accordance with Section 6.3 hereof, the securities issuable upon exercise of the Warrants are issued by an entity other than the Company or there is a change in the class of securities so issuable, then the "Warrant Shares" shall mean the securities so issuable by such entity or the securities of the class of securities so issuable. The Warrants are subject to the following terms, conditions and provisions: SECTION 1. REGISTRATION; TRANSFERABILITY; EXCHANGE OF WARRANT CERTIFICATE. 1.1 REGISTRATION. The Company shall number and register the Warrants in a register (the "Warrant Register") maintained at the principal office of the Company (the "Office"). The Company shall be entitled to treat the Holder of the Warrants as the owner thereof for all purposes and shall not be bound to recognize any equitable or other claim to or interest in such Warrants on the part of any other person. 1.2 TRANSFER AND EXCHANGE. (a) Subject to compliance with any restrictions on transfer set forth in the Shareholders Agreement, dated as of August 20, 1997, by and among the Company, Holder, Massachusetts Mutual Life Insurance Company, MassMutual Corporate Value Partners Limited, MassMutual High Yield Partners LLC, Jackson National Life Insurance Company, and the other shareholders named therein (the "Shareholders' Agreement") (Holder and Massachusetts Mutual Life Insurance Company, MassMutual Corporate Value Partners Limited, MassMutual High Yield Partners LLC and Jackson National Life Insurance Company shall sometimes be collectively referred to herein as the "Initial Warrantholders"), the warrants issued to the Initial Warrantholders (the "Warrants") shall be transferable only on the Warrant Register upon delivery thereof by the Holder or by his duly authorized attorney or representative or accompanied by proper evidence of succession, assignment or authority to transfer. Upon any such registration of transfer, a new Warrant Certificate, in substantially the form of this Warrant Certificate, evidencing the Warrants so transferred shall be issued to the transferee of such Warrants and a new Warrant Certificate, in substantially the form of this Warrant Certificate, evidencing the remaining Warrants, if any, not so transferred, shall be issued to the Holder. In all cases of transfer by an attorney, the original power of attorney, duly approved, or a copy thereof, duly certified, shall be deposited and shall remain with the Company. In case of transfers by executors, administrators, guardians or other legal representatives, duly authenticated evidence of their authority shall be produced, and may be required to be deposited and to remain with the Company in its discretion. No transfer of the Warrants or any interest therein other than in compliance with this Section 1.2 shall be made or recorded in the Warrant Register, and any such purported transfer shall be void and of no effect. (b) This Warrant Certificate is exchangeable, in whole or in part, upon the surrender hereof by the holder hereof at the Office for new Warrant Certificates, in substantially the form of this Warrant Certificate, evidencing in the aggregate the right to purchase the number of Warrant Shares that may then be purchased hereunder, each of such new Warrant Certificates to be dated the date of such exchange and to represent the right to purchase such number of Warrant Shares as shall be designated by the holder of such new Warrant Certificates at the time of such surrender. 2 SECTION 2. TERM OF WARRANTS; EXERCISE OF WARRANTS. 2.1 TERM OF WARRANT. Subject to the terms of this Warrant Certificate, the Holder shall have the right, which may be exercised by the registered Holder hereof from time to time on any Business Day before 5:00 P.M. (New York City time) during the period through and including February 20, 2008 (the "Expiration Date") to purchase from the Company an aggregate of 107,111.11 fully paid and nonassessable Warrant Shares or such other number of Warrant Shares which the Holder may at the time be entitled to purchase in accordance with this Warrant Certificate. At 5:00 P.M. (New York City time) on the Expiration Date, each Warrant not exercised prior thereto shall be and become void and of no value. 2.2 EXERCISE OF WARRANTS. Subject to the terms of this Warrant Certificate, the Warrants evidenced by this Warrant Certificate may be exercised in whole or in part, upon surrender to the Company, at its Office, of this Warrant Certificate, with a Purchase Form substantially in the form attached hereto duly completed and signed, and upon payment to the Company of the Exercise Price. Payment of the aggregate Exercise Price shall be in cash; PROVIDED, HOWEVER, that in lieu of payment in cash, the Holder may, at its option, pay all or a portion of the aggregate Exercise Price by tendering shares it holds of the Series A 11.5% Cumulative Redeemable Preferred Stock of the Company, which shares shall be valued at their stated liquidation value, plus any accrued but unpaid dividends thereon, to the date of exercise pursuant to this Section 2.2. Payment of the aggregate Exercise Price in cash shall be by wire transfer in immediately available funds to an account designated in writing by the Company to the Holder. Upon the surrender of this Warrant Certificate, with the Purchase Form duly executed, and payment of the Exercise Price as aforesaid, the Company shall (subject to compliance, if necessary, with applicable provisions of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended), promptly and, in any event within ten Business Days, issue and deliver to or upon the written order of the Holder and in such name or names as the Holder may designate a certificate or certificates for such number of Warrant Shares so purchased. Such certificate or certificates shall be dated and deemed to have been issued as of the date of the surrender of this Warrant Certificate and payment of the Exercise Price, as aforesaid. The right of purchase represented by this Warrant Certificate shall be exercisable, at the election of the Holder, in full at any time or in part from time to time. In the event the Holder shall exercise fewer than all the Warrants evidenced hereby, a new Warrant Certificate shall be issued evidencing the remaining unexercised Warrants. 2.3 EXERCISE PRICE. The price per share at which each Warrant Share shall be purchased upon exercise of each Warrant (the "Exercise Price") shall be $4.56, subject to adjustment pursuant to Section 6 LESS an amount per Warrant equal to the dividends in respect of the Warrant Shares that the holder would have received had such Warrant been exercised on August 20, 1997. The aggregate Exercise Price for all Warrant Shares subject to this Warrant Certificate shall be rounded to the next higher $0.01. 3 SECTION 3. PAYMENT OF TAXES. The Company covenants and agrees that it will pay when due and payable all documentary, stamp and other similar taxes, if any, which may be payable in respect of the issuance or delivery of the Warrants or of the Warrant Shares purchasable and issuable upon the exercise of the Warrants; PROVIDED, HOWEVER, that the Company shall not be required to pay any such tax or other charge imposed in respect of the transfer of Warrants, or the issuance or delivery of certificates for Warrant Shares or other Securities in respect of the Warrant Shares upon the exercise of Warrants, to a person or entity other than a then-existing registered Holder of Warrants. SECTION 4. MUTILATED OR MISSING WARRANTS. In the event this Warrant Certificate shall be mutilated, lost, stolen or destroyed, the Company shall issue and deliver in exchange and substitution for and upon cancellation of the mutilated Warrant Certificate, or in lieu of and in substitution for the Warrant Certificate lost, stolen or destroyed, a new Warrant Certificate of like tenor and representing an equivalent right or interest, but only upon, in the event of a lost, stolen or destroyed certificate, receipt of evidence satisfactory to the Company of such loss, theft or destruction and, if requested by the Company, upon indemnity that also is satisfactory to it; PROVIDED that a written undertaking of such loss, theft or destruction of this Warrant Certificate by the registered Holder hereof shall be deemed a satisfactory indemnity of the Company for purposes of this Section 4. In making application for such a substitute Warrant Certificate, the Holder shall also comply with such other reasonable requirements as the Company may prescribe. SECTION 5. RESERVATION AND AVAILABILITY OF WARRANT SHARES; PURCHASE AND CANCELLATION OF WARRANTS. 5.1 RESERVATION OF WARRANT SHARES. (a) The Company shall at all times reserve and keep available free from preemptive rights, out of the aggregate of its authorized but unissued shares of Common Stock, for the purpose of enabling it to satisfy any obligations to issue the Warrant Shares upon exercise of the Warrants, the full number of Warrant Shares deliverable upon the exercise of all the Warrants evidenced by this Warrant Certificate. The Company or, if appointed, the transfer agent for the Common Stock and every subsequent transfer agent for any shares of the Company's capital stock issuable upon the exercise of any of the rights of purchase aforesaid (each, a "Transfer Agent") shall be irrevocably authorized and directed at all times to reserve such number of authorized shares of Common Stock as shall be required for such purpose. The Company will keep a copy of this Warrant Certificate on file with each Transfer Agent. The Company will furnish such Transfer Agent a copy of all notices of adjustments and certificates related thereto which are transmitted to the Holder pursuant to Section 6 hereof. (b) The Company covenants that all Warrant Shares issuable upon exercise of the Warrants will, upon issuance, be fully paid, nonassessable and free from preemptive rights and free from all taxes, liens, charges and security interests with respect to the issuance thereof. 4 (c) Before taking any action which would cause an adjustment pursuant to Section 6, the Company will take any and all corporate action which may, in the opinion of its counsel, be necessary in order that the Company may validly and legally issue fully paid and nonassessable Warrant Shares at the Exercise Price as so adjusted. 5.2 WARRANT SHARES RECORD DATE. Each person in whose name any stock certificate for Warrant Shares is issued shall for all purposes be deemed to have become the holder of record of the Warrant Shares represented thereby, and such stock certificate shall be dated the date upon which this Warrant Certificate was duly surrendered and payment of the Exercise Price (and any applicable transfer taxes) was made. 5.3 CANCELLATION OF WARRANT. Upon surrender of the Warrant Certificate for exchange, substitution, transfer or exercise, it shall be cancelled by the Company and retired. SECTION 6. ADJUSTMENT OF NUMBER OF WARRANT SHARES AND EXERCISE PRICE. The number of securities purchasable upon the exercise of each Warrant and the Exercise Price shall be subject to adjustment from time to time upon the happening of certain events as hereinafter described. 6.1 MANDATORY ADJUSTMENTS. The number of securities purchasable upon the exercise of the Warrants and the Exercise Price shall be subject to adjustment as follows: (a) In case the Company shall (i) declare or pay a dividend on any of its outstanding Common Stock in shares of Common Stock or make a distribution to holders of its outstanding Common Stock in shares of Common Stock, (ii) subdivide any of its outstanding Common Stock into a greater number of shares of Common Stock, (iii) combine any of its outstanding Common Stock into a smaller number of shares of Common Stock or (iv) issue by reclassification of any of its shares of Common Stock other securities of the Company (including any such reclassification in connection with a consolidation, merger or other business combination in which the Company is the surviving corporation), the number and kind of Warrant Shares purchasable and issuable upon exercise of the Warrants shall be adjusted so that the Holder, upon exercise thereof, shall be entitled to receive the number and kind of Warrant Shares and other securities of the Company that the Holder would have owned or have been entitled to receive after the happening of any of the events described above had the Warrants been exercised and the relevant Warrant Shares issued in the name of the Holder immediately prior to the happening of such event or, if applicable, any record date with respect thereto. An adjustment made pursuant to this paragraph (a) shall become effective on the date of the dividend payment, subdivision, combination or issuance retroactive to the record date with respect thereto, if any, for such event. Upon adjustment of the number of Warrant Shares as provided in this paragraph (a), the Exercise Price payable upon exercise of each Warrant shall be adjusted by multiplying such Exercise Price immediately prior to such adjustment by a fraction of which the numerator shall be the number of Warrant Shares purchasable upon the exercise of each Warrant immediately prior to such 5 adjustment and of which the denominator shall be the number of Warrant Shares purchasable immediately thereafter. (b) In case the Company shall distribute to all holders of its outstanding Common Stock evidences of indebtedness of the Company, cash (including cash dividends payable out of consolidated earnings or earned surplus) or assets or securities other than its Common Stock (including stock of a subsidiary or securities convertible into or exercisable for such stock but excluding dividends or distributions referred to in Sections 6.1(a) above or Section 6.1(c) below) (any such evidences of indebtedness, cash, assets or securities, the "assets or securities"), then, in each case, the Exercise Price shall be adjusted by subtracting from the Exercise Price then in effect the value per share (as determined in accordance with Section 6.2(b)) of the assets or securities that the Holder would have been entitled to receive as a result of such distribution had the Warrant been exercised and the relevant Warrant Shares issued in the name of the Holder immediately prior to the record date for such distribution; PROVIDED that if, after giving effect to such adjustment, the Exercise Price would be less than $0.01 per share, the Company shall distribute such assets or securities to the Holder as if the Holder had exercised the Warrants and the Warrant Shares had been issued in the name of the Holder immediately prior to the record date for such distribution. Any adjustment required by this Section 6.1(b) shall be made whenever any such distribution is made, and shall become effective on the date of distribution retroactive to the record date for the determination of shareholders entitled to receive such distribution. (c) If at any time after the date hereof the Company shall issue or sell any shares of Common Stock or any warrants, options or rights to subscribe for or purchase Common Stock or securities convertible into Common Stock (but excluding distributions referred to in paragraph (a) or (b) above or (d) below), and the consideration per share for, or the price per share at which such warrant, option or right is exercisable for or convertible into, such Common Stock is less than the Fair Market Value (as defined below) of the Common Stock immediately prior to such issuance or sale, then, forthwith upon such issuance or sale, the Exercise Price shall be reduced to the price determined by multiplying the Exercise Price in effect immediately prior to the time of such issuance or sale by a fraction the numerator of which shall be the sum of (i) the number of shares of Common Stock outstanding immediately prior to such issuance or sale MULTIPLIED BY the Fair Market Value immediately prior to such issuance or sale and (ii) the consideration received by the Company upon such issuance or sale, and the denominator of which shall be the total number of shares of Common Stock outstanding immediately after such issuance or sale MULTIPLIED BY the Fair Market Value immediately prior to such issuance or sale. Notwithstanding the foregoing, the Company may, without adjustment to the Exercise Price pursuant to this Section 6.1(c), issue options, warrants or rights to subscribe for shares of its Common Stock to officers, directors, employees, 6 consultants or agents of the Company pursuant to the terms of any stock option plan or arrangement approved by the Board of Directors, and may issue shares of its Common Stock upon the exercise of any such stock options, warrants or rights; PROVIDED, HOWEVER, that the aggregate number of shares of Common Stock that may be issued at any one time under such stock option plan or arrangement without adjustment to the Exercise Price under this Section 6.1(c) shall not exceed, in the aggregate 482,000 shares (appropriately adjusted for stock splits, dividends and/or combinations. As used herein, "Fair Market Value" of the Common Stock or other securities means, on any date, the average of the last sale price, regular way, for the 10-business day period immediately preceding such date, or if no such sales took place during such 10-business day period, the average of the closing bid and asked prices, regular way, for each day in such 10-business day period, in either case as reported on the principal consolidated transaction reporting system with respect to securities listed on the principal national securities exchange on which the shares of Common Stock or such other securities are listed, or, if the Common Stock or such other securities are not listed or admitted to trading on any national securities exchange, the average of the last quoted sale price for such 10-business day period or, if not so quoted, the average of the high bid and low asked prices for each day in such 10-business day period in the over-the-counter market, as reported by the National Association of Securities Dealers, Inc. Automated Quotation System or such other system then in use, or, if on any such date the Common Stock is not quoted by any such organization, the average of the closing bid and asked prices during such 10-business day period as furnished by a professional market maker making a market in the Common Stock or such other securities selected by the Board of Directors of the Company. If the shares of Common Stock or such other securities are not publicly held or so listed or publicly traded, "Fair Market Value" shall mean the fair market value per share of Common Stock or such other securities as determined by the Company and the holders of at least a majority of the Warrants issued to the Warrantholders that are then outstanding. negotiating in good faith toward agreeing upon such value. If no agreement can be reached within 14 days from the date of receipt by Required Purchasers of the notice required by Section 6.2(a), the Company and the Required Purchasers shall appoint within 21 days from the date of such receipt a mutually acceptable independent investment banking firm to determine the Fair Market Value. Such firm shall make the necessary determination which shall be binding absent actual fraud or manifest error. The fees of such firm for making such determination and any related reimbursable expenses shall be paid by the Company. (d) If at any time after the date hereof the Company shall issue or sell to any person any securities convertible into or exercisable for Common Stock ("Convertible Securities") (other than securities distributed in a transaction described in paragraph (b) or (c) above), whether or not the rights to exchange or convert thereunder are immediately exercisable, and the price per share for which Common 7 Stock is issuable upon such conversion or exchange shall be less than the Fair Market Value in effect immediately prior to the time of such issue or sale, then the Exercise Price shall be adjusted as provided in subparagraph (c) above on the basis that (i) the maximum number of shares of Common Stock necessary to effect the conversion or exchange of all such Convertible Securities shall be deemed to have been issued and outstanding, (ii) the price per share of such shares shall be deemed to be the lowest possible price in any range of prices at which such additional shares are available to such holders, and (iii) the Company shall be deemed to have received all of the consideration payable therefor, if any, as of the date of actual issuance of such Convertible Securities. No adjustment of the Exercise Price shall be made under this subparagraph (d) upon the issuance of any Convertible Securities which are issued pursuant to the exercise of any warrants or other subscription or purchase rights therefor, if any such adjustment shall previously have been made upon the issuance of such warrants or other rights pursuant to subparagraph (c) above. No further adjustments of the Exercise Price shall be made upon the actual issuance of such Common Stock upon conversion or exchange of such Convertible Securities and, if any issue or sale of such Convertible Securities is made upon exercise of any warrant or other right to subscribe for or to purchase any such Convertible Securities for which adjustments of the Exercise Price have been or are to be made pursuant to other provisions of this Section 6.1, no further adjustments of the Exercise Price shall be made by reason of such issue or sale. For the purposes of this subparagraph (d), the date as of which the Exercise Price shall be computed shall be the earlier of (i) the date on which the Company shall enter into a firm contract for the issuance of such Convertible Securities and (ii) the date of actual issuance of such Convertible Securities. Such adjustments shall be made upon each issuance of Convertible Securities and shall become effective immediately after such issuance. (e) No adjustment in the number of Warrant Shares purchasable hereunder shall be required unless such adjustment would require an increase or decrease of at least one quarter of one percent (0.25%) in the number of Warrant Shares purchasable upon the exercise of each Warrant; PROVIDED, HOWEVER, that any adjustments which by reason of this Section 6.1(e) are not required to be made shall be made immediately prior to any exercise of any Warrants or, if no such exercise occurs prior to the time that any subsequent adjustment would be made, carried forward and taken into account in such subsequent adjustment. All calculations shall be made to the nearest one-thousandth of a share. No adjustment need be made for a change in the par value of the Warrant Shares. (f) Upon each adjustment of the Exercise Price pursuant to paragraphs (b) through (d) of this Section 6.1, this Warrant Certificate shall be deemed to evidence the right to purchase, at the adjusted Exercise Price, that number of Warrant Shares obtained by multiplying the number of Warrant Shares covered by this Warrant Certificate immediately prior to such adjustment by the Exercise Price in 8 effect prior to such adjustment and dividing the product so obtained by the Exercise Price in effect after such adjustment. (g) The number of shares of Common Stock outstanding at any given time shall not include shares directly or indirectly owned or held by or for the account of the Company or any of its subsidiaries, and the disposition of any such shares shall be considered an issue or sale of Common Stock for the purposes of this Section 6.1. 6.2 NOTICE OF ADJUSTMENT. (a) The Company hereby agrees that whenever any adjustment of the number of Warrant Shares purchasable upon the exercise of the Warrants or the Exercise Price of such Warrants is effected as herein provided, the Company shall promptly notify the Holder, by first class mail, postage prepaid, of such adjustment and shall deliver to the Holder a certificate of the Chief Financial Officer of the Company, setting forth in reasonable detail (i) the number of Warrant Shares purchasable upon the exercise of the Warrants and the Exercise Price of the Warrants after such adjustment, (ii) a brief statement of the facts requiring such adjustment and (iii) the computation by which such adjustment was made. (b) If any adjustment is required to be made pursuant to Section 6.1(b) (unless the PROVISO to the first sentence of that Section is applicable to the action), the Company and the holders of at least a majority of the Warrants issued to the Warrantholders that are then outstanding shall negotiate in good faith toward agreeing upon the value of the assets or securities and the necessary adjustment. If no agreement can be reached within 14 days from the date of receipt by Required Purchasers of such notice, the Company and the Required Purchasers shall appoint within 21 days from the date of such receipt a mutually acceptable independent investment banking firm to determine the necessary adjustment. Such firm shall make the necessary determination which shall be binding absent actual fraud or manifest error. The fees of such firm for making such determination and any related reimbursable expenses shall be paid by the Company. 6.3 PRESERVATION OF PURCHASE RIGHTS UPON MERGER, CONSOLIDATION, ETC. (a) In the event of any merger, consolidation or other acquisition or business combination in which the Company is not the surviving corporation or in which all of the outstanding Common Stock of the Company is converted into, acquired or exchanged for securities, cash or property or in the event of the sale or other disposition of all or substantially all the assets of the Company, then, and in each such case, proper provision shall be made so that, upon the basis and upon the terms and in the manner provided in this Section 6.3, the holder of this Warrant Certificate, upon the exercise of any of its Warrants at any time after the consummation of such consolidation, merger, transfer, reorganization or reclassification, shall be entitled to receive, in lieu of shares of Common Stock issuable upon such exercise prior to such consummation, the stock, securities, cash and assets to which such holder would have been entitled upon such consummation if such holder had so exercised 9 such Warrant immediately prior thereto, at the aggregate Exercise Price in effect for all shares of Common Stock issuable upon such exercise immediately prior to such consummation as adjusted to the time of such transaction (subject to adjustments subsequent to such corporate action as nearly equivalent as possible to the adjustments provided for in Section 6.1 above); provided, however, that the holder of this Warrant Certificate shall not be required to accept as consideration any property or securities the holding of which by such holder would be prohibited by any law, rule or regulation of any governmental entity or insurance industry regulatory body. Such undertaking shall provide for adjustments, which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 6; PROVIDED, HOWEVER, that if upon such consolidation, merger, transfer, reorganization or reclassification, different holders of Common Stock shall be entitled to receive different forms of consideration for their Common Stock, the form of such consideration thereafter deliverable upon the exercise of the Warrants shall be as determined in good faith by the Board of Directors, whose determination shall be conclusive. The provisions of this Section 6.3 shall also apply to successive mergers or consolidations. (b) Upon any liquidation, dissolution or winding up of the Company, the Holder shall receive such cash or property (less the Exercise Price) which the Holder would have been entitled to receive upon the happening of such liquidation, dissolution or winding up had the Warrants been exercised and the Warrant Shares issued immediately prior to the occurrence of such liquidation, dissolution or winding up. 6.4 STATEMENT ON THE WARRANT. Irrespective of any adjustments in the number or kind of securities purchasable upon the exercise of the Warrant or the Exercise Price, any Warrant Certificate theretofore or thereafter issued may continue to express the same price and number and any kind of shares as are stated in this Warrant Certificate. SECTION 7. FRACTIONAL INTERESTS. The Holder shall not be required to accept fractional securities on the exercise of Warrants. If any fraction of a security would be issuable on the exercise of Warrants, the Holder may, at its option, require the Company to pay to the Holder of such Warrants an amount in cash equal to the fair market value of such fraction. SECTION 8. REGISTRATION. The Holder shall, from time to time, have the rights, if any, with respect to registration of Warrant Shares as are set forth in the Registration Rights Agreement for such Warrant Shares. SECTION 9. NO RIGHTS AS A SHAREHOLDER; NOTICES TO HOLDER. Nothing contained in this Warrant Certificate shall be construed as conferring upon the Holder the right to vote or to consent or to receive notice as a shareholder in respect of any meeting of shareholders of the Company for the election of the directors of the Company or any other matter, or any rights whatsoever as a shareholder of the Company. If, however, at any time prior to the exercise of the Warrants evidenced by this Warrant Certificate, any of the following events shall occur: 10 (a) the Company shall declare any dividend payable in cash or in any securities upon its shares of Common Stock or make any distribution to the holders of its shares of Common Stock; (b) the Company shall offer to all holders of its shares of Common Stock any additional shares of Common Stock or securities convertible into or exchangeable for shares of Common Stock or any right to subscribe for or purchase any thereof; (c) a dissolution, liquidation or winding up of the Company (other than in connection with a consolidation, merger, sale, transfer or lease of all or substantially all of its property, assets and business as an entirety) shall be proposed; or (d) any consolidation or merger to which the Company is a party and for which approval of the holders of Common Stock is required, or of the conveyance or transfer of all or substantially all assets of the Company as, or substantially as, an entirety, or of any reclassification or change of outstanding shares of Common Stock issuable upon exercise of the Warrant (other than a change in par value to no par value, or from no par value to par value) or as a result of a subdivision or combination, then in any one or more of said events, the Company shall give to the Holder the greater of 15 business days' written notice and the number of days written notice required to be given to shareholders with respect to such action prior to the applicable record date hereinafter specified, stating (i) the date as of which the holders of record of shares of Common Stock to be entitled to receive any such dividends, rights or warrants are to be determined or (ii) the date on which any such dissolution, liquidation, winding up, consolidation, merger, conveyance or transfer is expected to become effective and the date as of which it is expected that holders of record of shares of Common Stock shall be entitled to exchange their shares of Common Stock for securities or other property, if any, deliverable upon such reclassification, consolidation, merger, conveyance, transfer, dissolution, liquidation, or winding up. SECTION 10. IDENTITY OF TRANSFER AGENT. Forthwith upon the appointment of any Transfer Agent for the Common Stock, or any other shares of the Company's capital stock issuable upon the exercise of the Warrants, the Company shall promptly notify the Holder of the name and address of such Transfer Agent. SECTION 11. NOTICES. Any notice, except as provided in Section 9 of this Warrant Certificate, or demand authorized by this Warrant Certificate to be given by the Holder to the Company, shall be in writing and shall be delivered in person or by facsimile transmission, or mailed by overnight courier, or otherwise delivered, to the Company, at 2250 South Tenth Street, San Jose, California 95112, attention of Chief Executive Officer, with a copy to J.F. Lehman Equity Investors I, L.P., 450 Park Avenue, New York, New York 11 10022, attention of Mr. Donald Glickman. The Company may change the address to which notices to it are to be delivered or mailed hereunder by notice to the Holder. Any notice pursuant to this Warrant Certificate by the Company to the Holder shall be in writing and shall be mailed by overnight courier or otherwise delivered, to the Holder at its address set forth in the Warrant Register. Notices delivered personally shall be effective at the time delivered by hand, notices sent by mail shall be effective when received, notices sent by facsimile transmission shall be effective when confirmed and notices sent by courier guaranteeing next day delivery shall be effective on the next business day after timely delivery to the courier. SECTION 12. AMENDMENT AND WAIVER. Any term, covenant, agreement or condition in this Warrant Certificate may be amended, or compliance therewith may be waived (either generally or in a particular instance and either retroactively or prospectively), by a written instrument or written instruments executed by the Company and the holders of at least 662/3% of the Warrants issued to the Warrantholders that are then outstanding; PROVIDED, HOWEVER, that no such amendment or waiver shall change the number of Warrant Shares issuable under the Warrants, change the Exercise Price, change the period during which the Warrants may be exercised or modify any provision of Section 6 or this Section 12 without the consent of the holders of all such Warrants then outstanding or shall have a disparate and adverse impact on any Warrantholder. SECTION 13. SUCCESSORS. All the covenants and provisions of this Warrant Certificate by or for the benefit of the Company shall bind and inure to the benefit of its respective successors and assigns hereunder. SECTION 14. GOVERNING LAW. This Warrant Certificate shall be construed in accordance with and governed by the internal laws of the State of California applicable to contracts executed and to be performed wholly within such state, without regard to the principles of conflicts or choice of law. SECTION 15. BENEFITS OF THIS WARRANT CERTIFICATE. Nothing in this Warrant Certificate shall be construed to give to any person or entity other than the Company and the Holder any legal or equitable right, remedy or claim under this Warrant Certificate; and this Warrant Certificate shall be for the sole and exclusive benefit of this Company and the Holder. SECTION 16. SURVIVAL OF RIGHTS AND DUTIES. This Warrant Certificate shall terminate and be of no further force and effect on the earlier of 5:00 P.M. (New York City time) on the Expiration Date or the date on which all of the Warrants have been exercised. SECTION 17. AGREEMENT TO BE BOUND. The Holder acknowledges and hereby agrees to be bound by such terms and conditions of the Shareholders' Agreement as 12 are by their terms applicable to the Holder. Any and all Warrant Shares issued upon exercise hereof shall, immediately upon such issuance, and without further action by or on behalf of the Holder or the Company, become subject to such terms and conditions of the Shareholders' Agreement as are by their terms applicable to such Warrant Shares. SECTION 17. CAPTIONS. The captions of the Sections and paragraphs of this Warrant Certificate have been inserted for convenience only and shall have no substantive effect. 13 IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be duly executed this 20th day of August 1997. BURKE INDUSTRIES, INC. By: /s/ Rocco C. Genovese ------------------------------- Rocco C. Genovese, President 14 FORM OF ELECTION TO PURCHASE (To Be Executed by the Holder if the Holder Desires to Exercise Warrants Evidenced by the Foregoing Warrant Certificate) To Burke Industries, Inc.: The undersigned hereby irrevocably elects to exercise ____________ Warrants evidenced by the foregoing Warrant Certificate for, and to purchase thereunder, ____________ full shares of Common Stock issuable upon exercise of said Warrants and delivery of $_____ in cash (or in liquidation preference of the Series A 11.5% Cumulative Redeemable Preferred Stock of the Company, or any combination thereof) with and any applicable taxes payable by the undersigned pursuant to such Warrant Certificate. The undersigned requests that certificates for such shares be issued in the name of ____________________________. PLEASE INSERT SOCIAL SECURITY OR TAX IDENTIFICATION NUMBER (Please print name and address) ________________________________ ________________________________ ________________________________ If said number of Warrants shall not be all the Warrants evidenced by the foregoing Warrant Certificate, the undersigned requests that a new Warrant Certificate evidencing the Warrants not so exercised be issued in the name of and delivered to: ________________________________________________________________________ ________________________________________________________________________ (Please print name and address) By:_________________________ Name: Title: Dated: __________________ FORM OF ASSIGNMENT FOR VALUE RECEIVED,_________________ hereby sells, assigns and transfers to each assignee set forth below all of the rights of the undersigned in and to the number of Warrants (as defined in and evidenced by the foregoing Warrant Certificate) set opposite the name of such assignee below and in and to the foregoing Warrant Certificate with respect to said Warrants and the shares of Common Stock issuable upon exercise of said Warrants:
NAME OF ASSIGNEE ADDRESS NUMBER OF WARRANTS ---------------- ------------------------- ------------------
If the total of said Warrants shall not be all the Warrants evidenced by the foregoing Warrant Certificate, the undersigned requests that a new Warrant Certificate evidencing the Warrants not so assigned be issued in the name of and delivered to the undersigned. By: ------------------------------ Name: Title: Dated: --------------------- EX-10.11 13 EXH 10.11 MANAGEMENT AGREEMENT Exhibit 10.11 MANAGEMENT AGREEMENT This Management Agreement (this "Agreement"), dated as of August 20, 1997, by and between Burke Industries, Inc., a California corporation (the "Company") and J.F. Lehman & Company, a Delaware corporation (the "Advisor"). WHEREAS, the Board of Directors of the Company has determined to effect a recapitalization of Burke Industries, Inc. pursuant to which, among other things, (i) J.F. Lehman Equity Investors I, L.P. ("JFLEI"), an affiliate of the Advisor, will make a capital contribution in the amount of $20.0 million to JFL Merger Co., a wholly owned subsidiary of JFLEI and an affiliate of the Advisor ("MergerCo"), (ii) MergerCo will issue to certain purchasers $18.0 million in stated value of its Series A 11.5% Cumulative Redeemable Preferred Stock (the "Series A Preferred Stock") and warrants to purchase up to 20% of the shares of its common stock on a fully diluted basis (the "Warrants") in exchange for an aggregate of $18.0 million, (iii) MergerCo will offer and the Company will issue $110.0 million in aggregate principal amount of 10% Senior Notes due 2007 (the "Senior Notes"), (iv) MergerCo will merge with and into the Company, with the Company surviving such merger and assuming the liabilities and obligations of MergerCo (the "Merger"), including without limitation the liabilities and obligations with respect to the Series A Preferred Stock, the Warrants and the Senior Notes, (v) pursuant to the Merger Agreement, (A) each share of the Company's common stock, no par value (the "Common Stock") issued and outstanding immediately prior to the Merger, other than certain shares held by certain shareholders and members of management, will be converted into the right to receive approximately $9.16 per share in cash and (B) each outstanding vested option to purchase a share of Common Stock will be converted into the right to receive cash in the amount of approximately $9.16 per share less the exercise price for such option and (vi) the Company will enter into a new credit facility providing for revolving credit borrowings of up to $15.0 million (all such transactions shall be collectively referred to herein as the "Recapitalization"); WHEREAS, the Company desires to retain the Advisor to provide management, consulting and financial services to the Company after consummation of the Recapitalization; and WHEREAS, the Advisor wishes to provide such services to the Company and the Company wishes to compensate the Advisor for such services. NOW, THEREFORE, in consideration of the premises and the covenants and conditions contained herein, the parties hereto agree as follows: 1. COMPENSATION. (a) RECAPITALIZATION FEE. Upon consummation of the Recapitalization, the Company shall pay to the Advisor a one-time advisory fee (the "Recapitalization Fee") in the amount of $1,500,000 in consideration for services rendered by the Advisor to the Company in connection with the Recapitalization. The Recapitalization Fee shall be paid upon consummation of the 1 Recapitalization in immediately available funds by wire transfer to such account as the Advisor shall specify prior to the consummation of the Recapitalization. (b) ANNUAL FEE. In consideration for the advisory and consulting services to be rendered by the Advisor to the Company hereunder, including services in connection with strategic financial planning, investment management, management and administration and other matters relating to the business and operations of the Company, the Company shall pay to the Advisor a fee (the "Annual Fee") in the amount of $500,000 per annum for each year during the period commencing on October 1, 1998 and ending on the date of the termination this Agreement. The Annual Fee shall be payable in quarterly installments, payable in arrears beginning on January 1, 1999 and on the same calendar day of every third month thereafter until the date of termination of this Agreement. (c) FUTURE TRANSACTION FEES. The Advisor shall be entitled to receive such additional compensation under this Agreement for services rendered in transactions such as mergers, consolidations, sales or purchases of a significant amount of assets or capital stock, and financings involving the public or private offering of the Company's debt or equity securities or the incurrence of bank debt. The compensation to be payable to the Advisor for services rendered in connection with any such transaction shall be such compensation as is customary for the type of services rendered in similar transactions and as may be agreed upon by the Company and the Advisor at such time. (d) REIMBURSEMENTS FOR OUT-OF-POCKET EXPENSES. In addition to the fees set forth above, the Company shall reimburse the Advisor for all reasonable out-of-pocket expenses incurred by the Advisor in rendering the services to the Company contemplated by paragraphs (a), (b) and (c) above. All reimbursements for out-of-pocket expenses shall be made promptly upon or as soon as practicable, and in any event not later than 30 days, after presentation by the Advisor to the Company of a reasonably detailed statement of expenses in connection therewith. 2. INTEREST. In the event that the Company shall fail to pay all or any part of the fees or out-of-pocket expenses described in Section 1 hereof within 10 days after the date when due, then the Advisor shall be entitled to interest on the unpaid amount thereof at a rate equal to 10% per annum until paid. 3. INDEMNIFICATION. The Company will indemnify and hold harmless the Advisor, its affiliates and their respective partners (both general and limited), officers, directors, employees, agents and representatives (each such person being an "Indemnified Party") from and against any and all losses, claims, damages and liabilities, whether joint or several (the "Liabilities"), related to, arising out of or in connection with the services contemplated by this Agreement or the engagement of the Advisor pursuant to, and the performance by the Advisor of the services contemplated by, this Agreement. The Company will reimburse any Indemnified Party for all reasonable costs and expenses (including reasonable attorneys' fees and expenses) as they are incurred in connection with investigating, preparing, pursuing, defending or assisting in the defense of any action, claim, suit, investigation or proceeding for which the Indemnified Party would be entitled to indemnification under the terms of the previous sentence, or any action or proceeding arising therefrom, whether or not such Indemnified Party is a party hereto. The 2 Company will not be liable under the foregoing indemnification provision with respect to any Indemnified Party, to the extent that any loss, claim, damage, liability, cost or expense is determined by a court, in a final judgment from which no further appeal may be taken, to have resulted primarily from the gross negligence or willful misconduct of the Advisor. 4. TERM. This Agreement shall be effective as of the date hereof and shall continue in effect until the earliest to occur of (i) the tenth anniversary of this Agreement and (ii) the closing of a sale to an entity which is not an "Affiliate" (as defined in Section 12b-2 of the Securities Exchange Act of 1934) of the Company or any of its existing shareholders on the date hereof of all or substantially all of the capital stock or assets of the Company. The provisions of Sections 1(d), 2, 3 and otherwise as the context so requires shall survive the termination of this Agreement. 5. PERMISSIBLE ACTIVITIES. Subject to applicable law, nothing herein shall in any way preclude the Advisor, its affiliates or their respective partners (both general and limited), officers, directors, employees, agents or representatives from engaging in any business activities or from performing services for its or their own account or for the account of others, including for companies that may be in competition with the business conducted by the Company. 6. CONSULTING RELATIONSHIP. It is understood and agreed that the Advisor shall for all purposes hereof be deemed to be an independent contractor and shall not, unless otherwise expressly authorized by the Company, have any authority to act for or represent the Company in any way, execute any transaction on behalf of the Company or otherwise be deemed an agent of the Company. No federal, state or local withholding deductions shall be withheld from the fees and other amounts payable to the Advisor pursuant to this Agreement unless otherwise required by law. 7. MISCELLANEOUS. (a) No amendment or waiver of any provision of this Agreement, or consent to any departure by either party hereto from any such provision, shall be effective unless the same shall be in writing and signed by each of the parties hereto. Any amendment, waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. (b) Any and all notices hereunder shall, in the absence of receipted hand delivery, be deemed duly given when mailed, if the same shall be sent by registered or certified mail, return receipt requested, and the mailing date shall be deemed the date from which all time periods pertaining to a date of notice shall run. Notices shall be addressed to the parties at the following addresses: If to the Advisor: J.F. Lehman & Company 450 Park Avenue New York, New York 10022 Attention: Mr. Donald Glickman If to the Company: Burke Industries, Inc. 2250 South Tenth Street 3 San Jose, California 95112 Attention: Mr. Rocco C. Genovese (c) This Agreement shall constitute the entire agreement between the parties with respect to the subject matter hereof, and shall supersede all previous oral and written (and all contemporaneous oral) negotiations, commitments, agreements and understandings relating hereto. (d) THIS AGREEMENT SHALL BE GOVERNED BY, AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS MADE AND TO BE PERFORMED IN THAT STATE. This Agreement shall inure to the benefit of, and be binding upon, the Advisor and the Company, and their respective successors and permitted assigns. None of the rights or obligations of the parties hereunder may be assigned by either party without the prior written consent of the other party hereto, PROVIDED that the Advisor may assign its rights and obligations hereunder to any corporation or other entity controlled by or under common control with the Advisor. (e) This Agreement may be executed by one or more parties to this Agreement on any number of separate counterparts, and all of said counterparts taken together shall be deemed to constitute one and the same instrument. (f) The waiver by any party of any breach of this Agreement shall not operate as or be construed to be a waiver by such party of any subsequent breach. (g) Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed and delivered by their duly authorized officers or agents as of the date first above written. BURKE INDUSTRIES, INC. By: /s/ ROCCO C. GENOVESE --------------------- Rocco C. Genovese, Chief Executive Officer J.F. LEHMAN & COMPANY By: /s/ DONALD GLICKMAN ------------------- Donald Glickman, Managing Principal 4 EX-10.12 14 EXH 10.12 LEASE AGREEMENT EXHIBIT 10.12 [LOGO] AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE - NET (DO NOT USE THIS FORM FOR MULTI-TENANT PROPERTY) 1. BASIC PROVISIONS ("BASIC PROVISIONS") 1.1 PARTIES: This Lease ("LEASE"), dated for reference purposes only, April 30, 1997 is made by and between SENTER PROPERTIES, LLC, a California limited liability company ("LESSOR") and BURKE INDUSTRIES, INC., a California corporation ("LESSEE"), (collectively the "PARTIES," or individually a "PARTY"). 1.2 PREMISES: That certain real property, including all improvements therein or to be provided by Lessor under the terms of this Lease, and commonly known by the street address of 2049 Senter Road located in the County of Santa Clara, State of California and generally described as (describe briefly the nature of the property) an approximately, 82,000 square foot building and other improvements located on the property more specifically described in Exhibit "A" attached hereto and incorporated herein by this reference ("PREMISES"). (See Paragraph 2 for further provisions.) 1.3 TERM: See Addendum, Paragraph 3 1.4 EARLY POSSESSION:N/A ("EARLY POSSESSION DATE"). (See Paragraphs 3.2 and 3.3 for further provisions.) 1.5 BASE RENT: $ See Addendum, Paragraph 4 (See Paragraph 4 for further provisions.) /X/ If this box is checked, there are provisions in this Lease for the Base Rent to be adjusted. 1.6 BASE RENT PAID UPON EXECUTION: $ N/A 1.7 SECURITY DEPOSIT: $ 21,600.00 ("SECURITY DEPOSIT"). (See Paragraph 5 for further provisions.) 1.8 PERMITTED USE: Any lawful purpose (See Paragraph 6 for further provisions.) 1.9 INSURING PARTY: Lessee the "INSURING PARTY". (See Paragraph 8 for further provisions.) 1.12 ADDENDA. Attached hereto is an Addendum or Addenda consisting of Paragraphs 1 through 8 and Exhibits A all of which constitute a part of this Lease. 2. PREMISES. SEE ADDENDUM, PARAGRAPH 1 2.1 LETTING. Lessor hereby leases to Lessee, and Lessee hereby leases from Lessor, the Premises, for the term, at the rental, and upon all of the terms, covenants and conditions set forth in this Lease. Unless otherwise provided herein, any statement of square footage set forth in this Lease, or that may have been used in calculating rental, is an approximation which Lessor and Lessee agree is reasonable and the rental based thereon is not subject to revision whether or not the actual square footage is more or less. 2.2 CONDITION. Lessor shall deliver the Premises to Lessee clean and free of debris on the Commencement Date and warrants to Lessee that the existing plumbing, fire sprinkler system, lighting, air conditioning, heating, and loading doors, if any, in the Premises, other than those constructed by Lessee, shall be in good operating condition on the Commencement Date. If a non-compliance with said warranty exists as of the Commencement Date, Lessor shall, except as otherwise provided in this Lease, promptly after receipt of written notice from Lessee setting forth with specificity the nature and extent of such non-compliance, rectify same at Lessor's expense. If Lessee does not give Lessor written notice of a non-compliance with this warranty within thirty (30) days after the Commencement Date, correction of that non-compliance shall be the obligation of Lessee at Lessee's sole cost and expense. 2.3 COMPLIANCE WITH COVENANTS, RESTRICTIONS AND BUILDING CODE. Lessor warrants to Lessee that the improvements on the Premises comply with all applicable covenants or restrictions of record and applicable building codes, regulations and ordinances in effect on the Commencement Date. Said warranty does not apply to the use to which Lessee will put the Premises or to any Alterations or Utility Installations (as defined in Paragraph 7.3(a)) made or to be made by Lessee. If the Premises do not comply with said warranty, Lessor shall, except as otherwise provided in this Lease, promptly after receipt of written notice from Lessee setting forth with specificity the nature and extent of such non-compliance, rectify the same at Lessor's expense. If Lessee does not give Lessor written notice of a non-compliance with this warranty within six (6) months following the Commencement Date, correction of that non-compliance shall be the obligation of Lessee at Lessee's sole cost and expense. 2.4 ACCEPTANCE OF PREMISES. Lessee hereby acknowledges: (a) that it has been advised by the Brokers to satisfy itself with respect to the condition of the Premises (including but not limited to the electrical and fire sprinkler systems, security, environmental aspects, compliance with Applicable Law, as defined in Paragraph 6.3) and the present and future suitability of the Premises for Lessee's intended use, (b) that Lessee has made such investigation as it deems necessary with reference to such matters and assumes all responsibility therefor as the same relate to Lessee's occupancy of the Premises and/or the term of this Lease, and (c) that neither Lessor, nor any of Lessor's agents, has made any oral or written representations or warranties with respect to the said matters other than as set forth in this Lease. 2.5 LESSEE PRIOR OWNER/OCCUPANT. The warranties made by Lessor in this Paragraph 2 shall be of no force or effect if immediately prior to the date set forth in Paragraph 1.1 Lessee was the owner or occupant of the Premises. In such event, Lessee shall, at Lessee's sole cost and expense, correct any non-compliance of the Premises with said warranties. 3. TERM. 3.1 TERM. The Commencement Date, Expiration Date and Original Term of this Lease are as specified in Paragraph 1.3. NET PAGE 1 3.3 DELAY IN POSSESSION. IF for any reason Lessor cannot deliver possession of the Premises to Lessee as agreed herein by the Early Possession Date, if one is specified in Paragraph 1.4, or, if no Early Possession Date is specified, by the Commencement Date, Lessor shall not be subject to any liability therefor, nor shall such failure affect the validity of this Lease, or the obligations of Lessee hereunder, or extend the term hereof, but in such case, Lessee shall not, except as otherwise provided herein, be obligated to pay rent or perform any other obligation of Lessee under the terms of this Lease until Lessor delivers possession of the Premises to Lessee. If possession of the Premises is not delivered to Lessee within sixty (60) days after the Commencement Date, Lessee may, at its option, by notice in writing to Lessor within ten (10) days thereafter, cancel this Lease, in which event the Parties shall be discharged from all obligations hereunder; provided, however, that if such written notice by Lessee is not received by Lessor within said ten (10) day period, Lessee's right to cancel this Lease shall terminate and be of no further force or effect. Except as may be otherwise provided, and regardless of when the term actually commences, if possession is not tendered to Lessee when required by this Lease and Lessee does not terminate this Lease, as aforesaid, the period free of the obligation to pay Base Rent, if any, that Lessee would otherwise have enjoyed shall run from the date of delivery of possession and continue for a period equal to what Lessee would otherwise have enjoyed under the terms hereof, but minus any days of delay caused by the acts, changes or omissions of Lessee. 4. RENT. 4.1 BASE RENT. Lessee shall cause payment of Base Rent and other rent or charges, as the same may be adjusted from time to time, to be received by Lessor in lawful money of the United States, without offset or deduction, on or before the day on which it is due under the terms of this Lease. Base Rent and all other rent and charges for any period during the term hereof which is for less than one (1) full calendar month shall be prorated based upon the actual number of days of the calendar month involved. Payment of Base Rent and other charges shall be made to Lessor at its address stated herein or to such other persons or at such other addresses as Lessor may from time to time designate in writing to Lessee. 5. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon execution hereof the Security Deposit set forth in Paragraph 1.7 as security for Lessee's faithful performance of Lessee's obligations under this Lease. If Lessee fails to pay Base Rent or other rent or charges due hereunder, or otherwise Defaults under this Lease (as defined in Paragraph 13.1), Lessor may use, apply or retain all or any portion of said Security Deposit for the payment of any amount due Lessor or to reimburse or compensate Lessor for any liability, cost, expense, loss or damage (including attorneys' fees) which Lessor may suffer or incur by reason thereof. If Lessor uses or applies all or any portion of said Security Deposit, Lessee shall within ten (10) days after written request therefor deposit moneys with Lessor sufficient to restore said Security Deposit to the full amount required by this Lease. Any time the Base Rent increases during the term of this Lease, Lessee shall, upon written request from Lessor, deposit additional moneys with Lessor sufficient to maintain the same ratio between the Security Deposit and the Base Rent as those amounts are specified in the Basic Provisions. Lessor shall not be required to keep all or any part of the Security Deposit separate from its general accounts. Lessor shall, at the expiration or earlier termination of the term hereof and after Lessee has vacated the Premises, return to Lessee (or, at Lessor's option, to the last assignee, if any, of Lessee's interest herein), that portion of the Security Deposit not used or applied by Lessor. Unless otherwise expressly agreed in writing by Lessor, no part of the Security Deposit shall be considered to be held in trust, to bear interest or other increment for its use, or to be prepayment for any moneys to be paid by Lessee under this Lease. 6. USE. 6.1 USE. Lessee shall use and occupy the Premises only for the purposes set forth in Paragraph 1.8, or any other use which is comparable thereto, and for no other purpose. Lessee shall not use or permit the use of the Premises in a manner that creates waste or a nuisance, or that disturbs owners and/or occupants of, or causes damage to, neighboring premises or properties. Lessor hereby agrees to not unreasonably withhold or delay its consent to any written request by Lessee, Lessees assignees or subtenants, and by prospective assignees and subtenants of the Lessee, its assignees and subtenants, for a modification of said permitted purpose for which the premises may be used or occupied, so long as the same will not impair the structural integrity of the improvements on the Premises, the mechanical or electrical systems therein, is not significantly more burdensome to the Premises and the improvements thereon, and is otherwise permissible pursuant to this Paragraph 6. If Lessor elects to withhold such consent, Lessor shall within thirty (30) business days give a written notification of same, which notice shall include an explanation of Lessor's reasonable objections to the change in use. 6.2 HAZARDOUS SUBSTANCES. See Addendum, Paragraph 6 (a) REPORTABLE USES REQUIRE CONSENT. The term "HAZARDOUS SUBSTANCE" as used in this Lease shall mean any product, substance, chemical, material or waste whose presence, nature, quantity and/or intensity of existence, use, manufacture, disposal, transportation, spill, release or effect, either by itself or in combination with other materials expected to be on the Premises, is either: (i) potentially injurious to the public health, safety or welfare, the environment or the Premises, (ii) regulated or monitored by any governmental authority, or (iii) a basis for liability of Lessor to any governmental agency or third party under any applicable statute or common law theory. Hazardous Substance shall include, but not be limited to, hydrocarbons, petroleum, gasoline, crude oil or any products, by-products or fractions thereof. Lessee shall not engage in any activity in, on or about the Premises which constitutes a Reportable Use (as hereinafter defined) of Hazardous Substances without the express prior written consent of Lessor and compliance in a timely manner (at Lessee's sole cost and expense) with all Applicable Law (as defined in Paragraph 6.3). "REPORTABLE USE" shall mean (i) the installation or use of any above or below ground storage tank, (ii) the generation, possession, storage, use, transportation, or disposal of a Hazardous Substance that requires a permit from, or with respect to which a report, notice, registration or business plan is required to be filed with, any governmental authority. Reportable Use shall also include Lessee's being responsible for the presence in, on or about the Premises of a Hazardous Substance with respect to which any Applicable Law requires that a notice be given to persons entering or occupying the Premises or neighboring properties. Notwithstanding the foregoing, Lessee may, without Lessor's prior consent, but in compliance with all Applicable Law, use any ordinary and customary materials reasonably required to be used by Lessee in the normal course of Lessee's business permitted on the Premises, so long as such use is not a Reportable Use and does not expose the Premises or neighboring properties to any meaningful risk of contamination or damage or expose Lessor to any liability therefor. In addition, Lessor may (but without any obligation to do so) condition its consent to the use or presence of any Hazardous Substance, activity or storage tank by Lessee upon Lessee's giving Lessor such additional assurances as Lessor, in its reasonable discretion, deems necessary to protect itself, the public, the Premises and the environment against damage, contamination or injury and/or liability therefrom or therefor, including, but not limited to, the installation (and removal on or before Lease expiration or earlier termination) of reasonably necessary protective modifications to the Premises (such as concrete encasements) and/or the deposit of an additional Security Deposit under Paragraph 5 hereof. (b) DUTY TO INFORM LESSOR. If Lessee knows, or has reasonable cause to believe, that a Hazardous Substance, or a condition involving or resulting from same, has come to be located in, on, under or about the Premises, other than as previously consented to by Lessor, Lessee shall immediately give written notice of such fact to Lessor. Lessee shall also immediately give Lessor a copy of any statement, report, notice, registration, application, permit, business plan, license, claim, action or proceeding given to, or received from, any governmental authority or private party, or persons entering or occupying the Premises, concerning the presence, spill, release, discharge of, or exposure to, any Hazardous Substance or contamination in, on, or about the Premises, including but not limited to all such documents as may be involved in any Reportable Uses involving the Premises. (c) INDEMNIFICATION. Lessee's obligations under this Paragraph 6 shall include, but not be limited to, the effects of any contamination or injury to person, property or the environment and the cost of investigation (including consultant's and attorney's fees and testing), removal, remediation, restoration and/or abatement thereof, or of any contamination therein involved, and shall survive the expiration or earlier termination of this Lease. No termination, cancellation or release agreement entered into by Lessor and Lessee shall release Lessee from its obligations under this Lease with respect to Hazardous Substances or storage tanks, unless specifically so agreed by Lessor in writing at the time of such agreement. 6.3 LESSEE'S COMPLIANCE WITH LAW. Except as otherwise provided in this Lease, Lessee, shall, at Lessee's sole cost and expense, fully, diligently and in a timely manner, comply with all "APPLICABLE LAW," which term is used in this Lease to include all laws, rules, regulations, ordinances, directives, covenants, easements and restrictions of record, permits, the requirements of any applicable fire insurance underwriter or rating bureau, and the recommendations of Lessor's engineers and/or consultants, relating in any manner to the Premises (including but not limited to matters pertaining to (i) industrial hygiene, (ii) environmental conditions on, in, under or about the Premises, including soil and groundwater conditions, and (iii) the use, generation, manufacture, production, installation, maintenance, removal, transportation, storage, spill or release of any Hazardous Substance or storage tank), now in effect or which may hereafter come into effect, and whether or not reflecting a change in policy from any previously existing policy. Lessee shall, within five (5) days after receipt of Lessor's written request, provide Lessor with copies of all documents and information, including, but not limited to, permits, registrations, manifests, applications, reports and certificates, evidencing Lessee's compliance with any Applicable Law specified by Lessor, and shall immediately upon receipt, notify Lessor in writing (with copies of any documents involved) of any threatened or actual claim, notice, citation, warning, complaint or report pertaining to or involving failure by Lessee or the Premises to comply with any Applicable Law. 6.4 INSPECTION; COMPLIANCE. Lessor and Lessor's Lender(s) (as defined in Paragraph 8.3(a)) shall have the right to enter the Premises at any time, in the case of an emergency, and otherwise at reasonable times, for the purpose of inspecting the condition of the Premises and for verifying compliance by Lessee with this Lease and all Applicable Laws (as defined in Paragraph 6.3), and to employ experts and/or consultants in connection therewith and/or to advise Lessor with respect to Lessee's activities, including but not limited to the installation, operation, use, monitoring, maintenance, or removal of any Hazardous Substance or storage tank on or from the Premises. The costs and expenses of any such inspections shall be paid by the party requesting same, unless a Default or Breach of this Lease, violation of Applicable Law, or a contamination, caused or materially contributed to by Lessee is found to exist or be imminent, or unless the inspection is requested or ordered by a governmental authority as the result of any such existing or imminent violation or contamination. In any such case, Lessee shall upon request reimburse Lessor or Lessor's Lender, as the case may be, for the costs and expenses of such inspections. 7. MAINTENANCE; REPAIRS; UTILITY INSTALLATIONS; TRADE FIXTURES AND ALTERATIONS. 7.1 LESSEE'S OBLIGATIONS. (a) Subject to the provisions of Paragraphs 2.2 (Lessor's warranty as to condition), 2.3 (Lessor's warranty as to compliance with covenants, etc), NET PAGE 2 7.2 (Lessor's obligations to repair), 9 (damage and destruction), and 14 (condemnation), Lessee shall, at Lessee's sole cost and expense and at all times, keep the Premises and every part thereof in good order, condition and repair, structural and non-structural (whether or not such portion of the Premises requiring repairs, or the means of repairing the same, are reasonably or readily accessible to Lessee, and whether or not the need for such repairs occurs as a result of Lessee's use, any prior use, the elements or the age of such portion of the Premises), including, without limiting the generality of the foregoing, all equipment or facilities serving the Premises, such as plumbing, heating, air conditioning, ventilating, electrical, lighting facilities, boilers, fired or unfired pressure vessels, fire sprinkler and/or standpipe and hose or other automatic fire extinguishing system, including fire alarm and/or smoke detection systems and equipment, fire hydrants, fixtures, walls (interior and exterior), foundations, ceilings, roofs, floors, windows, doors, plate glass, skylights landscaping, driveways, parking lots, fences, retaining walls, signs, sidewalks and parkways located in, on, about, or adjacent to the Premises. Lessee shall not cause or permit any Hazardous Substance to be spilled or released in, on, under or about the Premises (including through the plumbing or sanitary sewer system) and shall promptly, at Lessee's expense, take all investigatory and/or remedial action reasonably recommended, whether or not formally ordered or required, for the cleanup of any contamination of, and for the maintenance, security and/or monitoring of the Premises, the elements surrounding same, or neighboring properties, that was caused or materially contributed to by Lessee, or pertaining to or involving any Hazardous Substance and/or storage tank brought onto the Premises by or for Lessee or under its control, Lessee, in keeping the Premises in good order, condition and repair, shall exercise and perform good maintenance practices. Lessee's obligations shall include restorations, replacements or renewals when necessary to keep the Premises and all improvements thereon or a part thereof in good order, condition and state of repair. If Lessee occupies the Premises for seven (7) years or more, Lessor may require Lessee to repaint the exterior of the buildings on the Premises as reasonably required, but not more frequently than once every seven (7) years. (b) Lessee shall, at Lessee's sole cost and expense, procure and maintain contracts, with copies to Lessor, in customary form and substance for, and with contractors specializing and experienced in, the inspection, maintenance and service of the following equipment and improvements, if any, located on the Premises: (i) heating, air conditioning and ventilation equipment, (ii) boiler, fired or unfired pressure vessels, (iii) fire sprinkler and/or standpipe and hose or other automatic fire extinguishing systems, including fire alarm and/or smoke detection, (iv) landscaping and irrigation systems, (v) roof covering and drain maintenance and (vi) asphalt and parking lot maintenance. 7.2 LESSOR'S OBLIGATIONS. Except for the warranties and agreements of Lessor contained in Paragraphs 2.2 (relating to condition of the Premises), 2.3 (relating to compliance with covenants, restrictions and building code), 9 (relating to destruction of the Premises) and 14 (relating to condemnation of the Premises), it is intended by the Parties hereto that Lessor have no obligation, in any manner whatsoever, to repair and maintain the Premises, the improvements located thereon, or the equipment therein, whether structural or non structural, all of which obligations are intended to be that of the Lessee under Paragraph 7.1 hereof. It is the intention of the Parties that the terms of this Lease govern the respective obligations of the Parties as to maintenance and repair of the Premises. Lessee and Lessor expressly waive the benefit of any statute now or hereafter in effect to the extent it is inconsistent with the terms of this Lease with respect to, or which affords Lessee the right to make repairs at the expense of Lessor or to terminate this Lease by reason of any needed repairs. 7.3 UTILITY INSTALLATIONS; TRADE FIXTURES; ALTERATIONS. (a) DEFINITIONS; CONSENT REQUIRED. The term "UTILITY INSTALLATIONS" is used in this Lease to refer to all carpeting, window coverings, air lines, power panels, electrical distribution, security, fire protection systems, communication systems, lighting fixtures, heating, ventilating, and air conditioning equipment, plumbing, and fencing in, on or about the Premises. The term "TRADE FIXTURES" shall mean Lessee's machinery and equipment that can be removed without doing material damage to the Premises. The term "ALTERATIONS" shall mean any modification of the improvements on the Premises from that which are provided by Lessor under the terms of this Lease, other than Utility Installations or Trade Fixtures, whether by addition or deletion. "LESSEE OWNED ALTERATIONS AND/OR UTILITY INSTALLATIONS" are defined as Alterations and/or Utility Installations made by lessee that are not yet owned by Lessor as defined in Paragraph 7.4(a). Lessee shall not make any Alterations or Utility Installations in, on, under or about the Premises without Lessor's prior written consent. Lessee may, however, make non-structural Utility Installations to the interior of the Premises (excluding the roof), as long as they are not visible from the outside, do not involve puncturing, relocating or removing the roof or any existing walls, and the cumulative cost thereof during the term of this Lease as extended does not exceed $25,000. (b) CONSENT. Any Alterations or Utility Installations that Lessee shall desire to make and which require the consent of the Lessor shall be presented to Lessor in written form with proposed detailed plans. All consents given by Lessor, whether by virtue of Paragraph 7.3(a) or by subsequent specific consent, shall be deemed conditioned upon: (i) Lessee's acquiring all applicable permits required by governmental authorities, (ii) the furnishing of copies of such permits together with a copy of the plans and specifications for the Alteration or Utility Installation to Lessor prior to commencement of the work thereon, and (iii) the compliance by Lessee with all conditions of said permits in a prompt and expeditious manner. Any Alterations or Utility Installations by Lessee during the term of this Lease shall be done in a good and workmanlike manner, with good and sufficient materials, and in compliance with all Applicable Law. Lessee shall promptly upon completion thereof furnish Lessor with as-built plans and specifications therefor. Lessor may (but without obligation to do so) condition its consent to any requested Alteration or Utility Installation that costs $10,000 or more upon Lessee's providing Lessor with a lien and completion bond in an amount equal to one and one-half times the estimated cost of such Alteration or Utility Installation and/or upon Lessee's posting an additional Security Deposit with Lessor under Paragraph 36 hereof. (c) INDEMNIFICATION. Lessee shall pay, when due, all claims for labor or materials furnished or alleged to have been furnished to or for Lessee at or for use on the Premises, which claims are or may be secured by any mechanics' or materialmen's lien against the Premises or any interest therein. Lessee shall give Lessor not less than ten (10) days' notice prior to the commencement of any work in, on or about the Premises, and Lessor shall have the right to post notices of non-responsibility in or on the Premises as provided by law. If Lessee shall, in good faith, contest the validity of any such lien, claim or demand, then Lessee shall, at its sole expense defend and protect itself, Lessor and the Premises against the same and shall pay and satisfy any such adverse judgment that may be rendered thereon before the enforcement thereof against the Lessor or the Premises. If Lessor shall require, Lessee shall furnish to Lessor a surety bond satisfactory to Lessor in an amount equal to one and one-half times the amount of such contested lien claim or demand, indemnifying Lessor against liability for the same, as required by law for the holding of the Premises free from the effect of such lien or claim. In addition, Lessor may require Lessee to pay Lessor's attorney's fees And costs in participating in such action if Lessor shall decide it is to its best interest to do so. 7.4 OWNERSHIP; REMOVAL; SURRENDER; AND RESTORATION. (a) OWNERSHIP. Subject to Lessor's right to require their removal or become the owner thereof as hereinafter provided in this Paragraph 7.4, all Alterations and Utility Additions made to the Premises by Lessee shall be the property of and owned by Lessee, but considered a part of the Premises. Lessor may, at any time and at its option, elect in writing to Lessee to be the owner of all or any specified part of the Lessee Owned Alterations and Utility Installations. Unless otherwise instructed per subparagraph 7.4(b) hereof, all Lessee Owned Alterations and Utility Installations shall, at the expiration or earlier termination of this Lease, become the property of Lessor and remain upon and be surrendered by Lessee with the Premises. (b) REMOVAL. Unless otherwise agreed in writing, Lessor may require that any or all Lessee Owned Alterations or Utility Installations be removed by the expiration or earlier termination of this Lease, notwithstanding their installation may have been consented to by Lessor. Lessor may require the removal at any time of all or any part of any Lessee Owned Alterations or Utility Installations made without the required consent of Lessor. (c) SURRENDER/RESTORATION. Lessee shall surrender the Premises by the end of the last day of the Lease term or any earlier termination date, with all of the improvements, parts and surfaces thereof clean and free of debris and in good operating order, condition and state of repair, ordinary wear and tear excepted. "ORDINARY WEAR AND TEAR" shall not include any damage or deterioration that would have been prevented by good maintenance practice or by Lessee performing all of its obligations under this Lease. Except as otherwise agreed or specified in writing by Lessor, the Premises, as surrendered, shall include the Utility Installations. The obligation of Lessee shall include the repair of any damage occasioned by the installation, maintenance or removal of Lessee's Trade Fixtures, furnishings, equipment, and Alterations and/or Utility Installations, as well as the removal of any storage tank installed by or for Lessee, and the removal, replacement, or remediation of any soil, material or ground water contaminated by Lessee, all as may then be required by Applicable Law and/or good service practice. Lessee's Trade Fixtures shall remain the property of Lessee and shall be removed by Lessee subject to its obligation to repair and restore the Premises per this Lease. 8. INSURANCE; INDEMNITY. 8.1 PAYMENT FOR INSURANCE. Lessee shall pay for all insurance required under this Paragraph 8 except to the extent of the cost attributable to liability insurance carried by Lessor in excess of $2,000,000 per occurrence. Premiums for policy periods commencing prior to or extending beyond the Lease term shall be prorated to correspond to the Lease term. Payment shall be made by Lessee to Lessor within ten (10) days following receipt of an invoice for any amount due. 8.2 LIABILITY INSURANCE. (a) CARRIED BY LESSEE. Lessee shall obtain and keep in force during the term of this Lease a Commercial General Liability policy of insurance protecting Lessee and Lessor (as an additional insured) against claims for bodily injury, personal injury and property damage based upon, involving or arising out of the ownership, use, occupancy or maintenance of the Premises and all areas appurtenant thereto. Such insurance shall be on an occurrence basis providing single limit coverage in an amount not less than $2,000,000 per occurrence with an "Additional Insured-Managers or Lessors of Premises" Endorsement and contain the "Amendment of the Pollution Exclusion" for damage caused by heat, smoke or fumes from a hostile fire. The policy shall not contain any intra-insured exclusions as between insured persons or organizations, but shall include coverage for liability assumed under this Lease as an "insured contract" for the performance of Lessee's indemnity obligations under this Lease. The limits of said insurance required by this Lease or as carried by Lessee shall not, however, limit the liability of Lessee nor relieve Lessee of any obligation hereunder. All insurance to be carried by Lessee shall be primary to and not contributory with any similar insurance carried by Lessor, whose insurance shall be considered excess insurance only. (b) CARRIED BY LESSOR. In the event Lessor is the Insuring Party, Lessor shall also maintain liability insurance described in Paragraph 8.2(a), above, in addition to, and not in lieu of, the insurance required to be maintained by Lessee. Lessee shall not be named as an additional insured therein. NET PAGE 3 8.3 PROPERTY INSURANCE-BUILDING, IMPROVEMENTS AND RENTAL VALUE. (a) BUILDING AND IMPROVEMENTS. The Insuring Party shall obtain and keep in force during the term of this lease a policy or policies in the name of Lessor, with loss payable to Lessor and to the holders of any mortgages, deeds of trust or ground leases on the Premises ("Lender(s)"), insuring loss or damage to the Premises. The amount of such insurance shall be equal to the full replacement cost of the Premises, as the same shall exist from time to time including any costs necessary to cause the Premises to comply with law or the amount required by Lenders. If the coverage is available and commercially appropriate, such policy or policies shall insure against all risks of direct physical loss or damage (except the perils of flood and/or earthquake unless required by a Lender), including coverage for any additional costs resulting from debris removal and reasonable amounts of coverage for the enforcement of any ordinance or law regulating the reconstruction or replacement of any undamaged sections of the Premises required to be demolished or removed by reason of the enforcement of any building, zoning, safety or land use laws as the result of a covered cause of loss. Said policy or policies shall also contain an agreed valuation provision in lieu of any coinsurance clause, waiver of subrogation, and inflation guard protection causing an increase in the annual property insurance coverage amount by a factor of not less than the adjusted U.S. Department of Labor Consumer Price Index for all Urban Consumers for the city nearest to where the Premises are located. If such insurance coverage has a deductible clause, the deductible amount shall not exceed $1,000 per occurrence, and Lessee shall be liable for such deductible amount in the event of an Insured Loss, as defined in Paragraph 9.1(c). (b) RENTAL VALUE. The Insuring Party shall, in addition, obtain and keep in force during the term of this Lease a policy or policies in the name of Lessor, with loss payable to Lessor and Lender(s), insuring the loss of the full rental and other charges payable by Lessee to Lessor under this Lease for one (1) year (including all real estate taxes, insurance costs, and any scheduled rental increases). Said insurance shall provide that in the event the Lease is terminated by reason of an insured loss, the period of indemnity for such coverage shall be extended beyond the date of the completion of repairs or replacement of the Premises, to provide for one full year's loss of rental revenues from the date of any such loss. Said insurance shall contain an agreed valuation provision in lieu of any coinsurance clause, and the amount of coverage shall be adjusted annually to reflect the projected rental income, property taxes, insurance premium costs and other expenses, if any, otherwise payable by Lessee, for the next twelve (12) month period. Lessee shall be liable for any deductible amount in the event of such loss. (c) ADJACENT PREMISES. If the Premises are part of a larger building, or if the Premises are part of a group of buildings owned by Lessor which are adjacent to the Premises, the Lessee shall pay for any increase in the premiums for the property insurance of such building or buildings if said increase is caused by Lessee's acts, omissions, use or occupancy of the Premises. (d) TENANT'S IMPROVEMENTS. If the Lessor is the Insuring Party, the Lessor shall not be required to insure Lessee Owned Alterations and Utility Installations unless the item in question has become the property of Lessor under the terms of this Lease. If Lessee is the Insuring Party, the policy carried by Lessee under this paragraph 8.3 shall insure Lessee Owned Alterations and Utility Installations. 8.4 LESSEE'S PROPERTY INSURANCE. Subject to the requirements of Paragraph 8.5, Lessee at its cost shall either by separate policy or, at Lessor's option, by endorsement to a policy already carried, maintain insurance coverage on all of Lessee's personal property, Lessee Owned Alterations and Utility Installations in, on, or about the Premises similar in coverage to that carried by the Insuring Party under Paragraph 8.3. Such insurance shall be full replacement cost coverage with a deductible of not to exceed $1,000 per occurrence. The proceeds from any such insurance shall be used by Lessee for the replacement of personal property or the restoration of Lessee Owned Alterations and Utility Installations. Lessee shall be the Insuring Party with respect to the insurance required by this Paragraph 8.4 and shall provide Lessor with written evidence that such insurance is in force. 8.5 INSURANCE POLICIES. Insurance required hereunder shall be in companies duly licensed to transact business in the state where the Premises are located, and maintaining during the policy term a "General Policyholders Rating" of at least B+, V, or such other rating as may be required by a Lender having a lien on the Premises, as set forth in the most current issue of "Best's Insurance Guide." Lessee shall not do or permit to be done anything which shall invalidate the insurance policies referred to in this Paragraph 8. If Lessee is the Insuring Party, Lessee shall cause to be delivered to Lessor certified copies of policies of such insurance or certificates evidencing the existence and amounts of such insurance with the insureds and loss payable clauses as required by this Lease. No such policy shall be cancellable or subject to modification except after thirty (30) days prior written notice to Lessor. Lessee shall at least thirty (30) days prior to the expiration of such policies, furnish Lessor with evidence of renewals or "insurance binders" evidencing renewal thereof, or Lessor may order such insurance and charge the cost thereof to Lessee, which amount shall be payable by Lessee to Lessor upon demand. If the Insuring Party shall fail to procure and maintain the insurance required to be carried by the Insuring Party under this Paragraph 8, the other Party may, but shall not be required to, procure end maintain the same, but at Lessee's expense. 8.6 WAIVER OF SUBROGATION. See Addendum, Paragraph 7 8.7 INDEMNITY. Except for Lessor's negligence and/or breach of express warranties, Lessee shall indemnify, protect, defend and hold harmless the Premises, Lessor and its agents, Lessor's master or ground lessor, partners and Lenders, from and against any and all claims, loss of rents and/or damages, costs, liens, judgments, penalties, permits, attorney's and consultants fees, expenses and/or liabilities arising out of, involving, or in dealing with, the occupancy of the Premises by Lessee, the conduct of Lessee's business, any act, omission or neglect of Lessee, its agents, contractors, employees or invitees, and out of any Default or Breach by Lessee in the performance in a timely manner of any obligation on Lessee's part to be performed under this Lease. The foregoing shall include, but not be limited to, the defense or pursuit of any claim or any action or proceeding involved therein, and whether or not (in the case of claims made against Lessor) litigated and/or reduced to judgment, and whether well founded or not. In case any action or proceeding be brought against Lessor by reason of any of the foregoing matters, Lessee upon notice from Lessor shall defend the same at Lessee's expense by counsel reasonably satisfactory to Lessor and Lessor shall cooperate with Lessee in such defense. Lessor need not have first paid any such claim in order to be so indemnified. 8.8 EXEMPTION OF LESSOR FROM LIABILITY. Lessor shall not be liable for injury or damage to the person or goods, wares, merchandise or other property of Lessee, Lessee's employees, contractors, invitees, customers, or any other person in or about the Premises, whether such damage or injury is caused or results from earthquake, flood, fire, steam, electricity, gas, water or rain, or from the breakage, leakage, obstruction or other defects of pipes, fire sprinklers, wires, appliances, plumbing, air conditioning or lighting fixtures, or from any other cause, whether the said injury or damage results from conditions arising upon the Premises or upon other portions of the building of which the Premises are a part, or from other sources or places, and regardless of whether the cause of such damage or injury or the means of repairing the same is accessible or not. Lessor shall not be liable for any damages arising from any act or neglect of any other tenant of Lessor. Notwithstanding Lessor's negligence or breach of this lease, Lessor shall under no circumstances be liable for injury to Lessee's business or for any loss of income or profit therefrom. 9. DAMAGE OR DESTRUCTION. 9.1 DEFINITIONS. (a) "PREMISES PARTIAL DAMAGE" shall mean damage or destruction to the improvements on the Premises, other than Lessee Owned Alterations and Utility Installations, the repair cost of which damage or destruction is less than 50% of the then Replacement Cost of the Premises immediately prior to such damage or destruction, excluding from such calculation the value of the lend and Lessee Owned Alterations and Utility Installations. (b) "PREMISES TOTAL DESTRUCTION" shall mean damage or destruction to the Premises, other than Lessee Owned Alterations and Utility Installations. The repair cost of which damage or destruction is 50% or more of the then replacement cost of the Premises immediately prior to such damage or destruction, excluding from such calculation the value of the land end Lessee Owned Alterations and Utility Installations. (c) "INSURED LOSS" shall mean damage or destruction to improvements on the Premises, other than Lessee Owned Alterations and Utility Installations, which was caused by an event required to be covered by the insurance described in Paragraph 8.3(a), irrespective of any deductible amounts or coverage limits involved. (d) "REPLACEMENT COST" shall mean the cost to repair or rebuild the improvements owned by Lessor at the time of the occurrence to their condition existing immediately prior thereto, including demolition, debris removal and upgrading required by the operation of applicable building codes, ordinances or laws, and without deduction for depreciation. (e) "HAZARDOUS SUBSTANCE CONDITION" shall mean the occurrence or discovery of a condition involving the presence of, or a contamination by, a Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the Premises. 9.2 PARTIAL DAMAGE-INSURED LOSS. If a Premises Partial Damage that is an Insured Loss occurs, then Lessor shall, at Lessor's expense, repair such damage (but not Lessee's Trade Fixtures or Lessee Owned Alterations and Utility installations) as soon as reasonably possible and this Lease shall continue in full force and effect; provided, however, that Lessee shall, at Lessor's election, make the repair of any damage or destruction the total cost to repair of which is $10,000 or less, and, in such event, Lessor shall make the insurance proceeds available to Lessee on a reasonable basis for that purpose. Notwithstanding the foregoing, if the required insurance was not in force or the insurance proceeds are not sufficient to effect such repair, the Insuring Party shall promptly contribute the shortage in proceeds as and when required to complete said repairs. In the event, however, the shortage in proceeds was due to the fact that, by reason of the unique nature of the improvements, full replacement cost insurance coverage was not commercially reasonable and available, Lessor shall have no obligation to pay for the shortage in insurance proceeds or to fully restore the unique aspects of the Premises unless Lessee provides Lessor with the funds to cover same, or adequate assurance thereof, within ten (10) days following receipt of written notice of such shortage and request therefor. If Lessor receives said funds or adequate assurance hereof within said ten (10) day period, the party responsible for making the repairs shall complete them as soon as reasonably possible and this Lease shall remain in full force and effect. If Lessor does not receive such funds or assurance within said period, Lessor may nevertheless elect by written notice to Lessee within ten (10) days thereafter to make such restoration and repair as is commercially reasonable with Lessor paying any shortage in proceeds, in which case this Lease shall remain in full force and effect. If in such case Lessor does not so elect, then this Lease shall terminate sixty (60) days following the occurrence of the damage or destruction. Unless otherwise agreed, Lessee shall in no event have any right to reimbursement from Lessor for NET PAGE 4 any funds contributed by Lessee to repair any such damage or destruction. Premises Partial Damage due to flood or earthquake shall be subject to Paragraph 9.3 rather than Paragraph 9.2, notwithstanding that there may be some insurance coverage, but the net proceeds of any such insurance shall be made available for the repairs if made by either Party. 9.3 PARTIAL DAMAGE-UNINSURED LOSS. If a Premises Partial Damage that is not an Insured Loss occurs, unless caused by a negligent or willful act of Lessee (in which event Lessee shall make the repairs at Lessee's expense and this Lease shall continue in full force and effect, but subject to Lessor's rights under Paragraph 13), Lessor may at Lessor's option, either: (i) repair such damage as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) give written notice to Lessee within thirty (30) days after receipt by Lessor of knowledge of the occurrence of such damage of Lessor's desire to terminate this Lease as of the date sixty (60) days following the giving of such notice. In the event Lessor elects to give such notice of Lessor's intention to terminate this Lease, Lessee shall have the right within ten (10) days after the receipt of such notice to give written notice to Lessor of Lessee's commitment to pay for the repair of such damage totally at Lessee's expense and without reimbursement from Lessor. Lessee shall provide Lessor with the required funds or satisfactory assurance thereof within thirty (30) days following Lessee's said commitment. In such event this Lease shall continue in full force and effect, and Lessor shall proceed to make such repairs as soon as reasonably possible and the required funds are available. If Lessee does not give such notice and provide the funds or assurance thereof within the times specified above, this Lease shall terminate as of the date specified in Lessor's notice of termination. 9.4 TOTAL DESTRUCTION. Notwithstanding any other provision hereof, if a Premises Total Destruction occurs (including any destruction required by any authorized public authority), this Lease shall terminate sixty (60) days following the date of such Premises Total Destruction, whether or not the damage or destruction is an Insured Loss or was caused by a negligent or willful act of Lessee. In the event, however, that the damage or destruction was caused by Lessee, Lessor shall have the right to recover Lessor's damages from Lessee except as released and waived in Paragraph 8.6. 9.5 DAMAGE NEAR END OF TERM. If at any time during the last six (6) months of the term of this Lease there is damage for which the cost to repair exceeds one (1) month's Base Rent, whether or not an Insured Loss, Lessor may, at Lessor's option, terminate this Lease effective sixty,(60) days following the date of occurrence of such damage by giving written notice to Lessee of Lessor's election to do so within thirty (30) days after the date of occurrence of such damage. Provided, however, if Lessee at that time has an exercisable option to extend this Lease or to purchase the Premises, then Lessee may preserve this Lease by, within twenty (20) days following the occurrence of the damage, or before the expiration of the time provided in such option for its exercise, whichever is earlier ("Exercise Period"), (i) exercising such option and (ii) providing Lessor with any shortage in insurance proceeds (or adequate assurance thereof) needed to make the repairs. If Lessee duly exercises such option during said Exercise Period and provides Lessor with funds (or adequate assurance thereof) to cover any shortage in insurance proceeds, Lessor shall, at Lessor's expense repair such damage as soon as reasonably possible and this Lease shall continue in full force and effect. If Lessee fails to exercise such option and provide such funds or assurance during said Exercise Period, then Lessor may at Lessor's option terminate this Lease as of the expiration of said sixty (60) day period following the occurrence of such damage by giving written notice to Lessee of Lessor's election to do so within ten (10) days after the expiration of the Exercise Period, notwithstanding any term or provision in the grant of option to the contrary. 9.6 ABATEMENT OF RENT; LESSEE'S REMEDIES. (a) In the event of damage described in Paragraph 9.2 (Partial Damage--Insured), whether or not Lessor or Lessee repairs or restores the Premises, the Base Rent, Real Property Taxes, insurance premiums, and other charges, if any, payable by Lessee hereunder for the period during which such damage, its repair or the restoration continues (not to exceed the period for which rental value insurance is required under Paragraph 8.3(b)), shall be abated in proportion to the degree to which Lessee's use of the Premises is impaired. Except for abatement of Base Rent, Real Property Taxes, insurance premiums, and other charges, if any, as aforesaid, all other obligations of Lessee hereunder shall be performed by Lessee, and Lessee shall have no claim against Lessor for any damage suffered by reason of any such repair or restoration. (b) If Lessor shall be obligated to repair or restore the Premises under the provisions of this Paragraph 9 and shall not commence, in a substantial and meaningful way, the repair or restoration of the Premises within ninety (90) days after such obligation shall accrue, Lessee may, at any time prior to the commencement of such repair or restoration, give written notice to Lessor and to any Lenders of which Lessee has actual notice of Lessee's election to terminate this Lease on a date not less than sixty (60) days following the giving of such notice. If Lessee gives such notice to Lessor and such Lenders and such repair or restoration is not commenced within thirty (30) days after receipt of such notice, this Lease shall terminate as of the date specified in said notice. If Lessor or a Lender commences the repair or restoration of the Premises within thirty (30) days after receipt of such notice, this Lease shall continue in full force and effect. "Commence" as used in this Paragraph shall mean either the unconditional authorization of the preparation of the required plans, or the beginning of the actual work on the Premises, whichever first occurs. 9.7 HAZARDOUS SUBSTANCE CONDITIONS. If a Hazardous Substance Condition occurs, ?????? to the provisions of Paragraph 6 of the Addendum, Lessor may at Lessor's option either (i) investigate and remediate such Hazardous Substance Condition, if required, as soon as reasonably possible at Lessor's expense but subject to Lessee's indemnity obligations under Paragraph 6 of the Addendum, in which event this Lease shall continue in full force and effect, or (ii) if the estimated cost to investigate and remediate such condition exceeds twelve times the then monthly Base Rent or $100,000, whichever is greater, give written notice to Lessee within thirty (30) days after receipt by Lessor of knowledge of the occurrence of such Hazardous Substance Condition of Lessor's desire to terminate this Lease as of the date sixty (60) days following the giving of such notice. In the event Lessor elects to give such notice of Lessor's intention to terminate this Lease, Lessee shall have the right within ten (10) days after the receipt of such notice to give written notice to Lessor of Lessee's commitment to pay for the investigation and remediation of such Hazardous Substance Condition totally at Lessee's expense and without reimbursement from Lessor except to the extent of an amount equal to twelve (12) times the then monthly Base Rent or $100,000, whichever is greater. Lessee shall provide Lessor with the fund required of Lessee or satisfactory assurance thereof within thirty (30) days following Lessee's said commitment. In such event this Lease shall continue in full force and effect, and Lessor shall proceed to make such investigation and remediation as soon as reasonably possible and the required funds are available. If Lessee does not give such notice and provide the required funds or assurance thereof within the times specified above, this Lease shall terminate as of the date specified in Lessor's notice of termination. If a Hazardous Substance Condition occurs for which Lessee is not legally responsible, there shall be abatement of Lessee's obligations under this Lease to the same extent as provided in Paragraph 9.6(a) for a period of not to exceed twelve(12) months. 9.8 TERMINATION-ADVANCE PAYMENTS. Upon termination of this Lease pursuant to this Paragraph 9, an equitable adjustment shall be made concerning advance Base Rent and any other advance payments made by Lessee to Lessor. Lessor shall, in addition, return to Lessee so much of Lessee's Security Deposit as has not been, or is not then required to be, used by Lessor under the terms of this Lease. 9.9 WAIVE STATUTES. Lessor and Lessee agree that the terms of this Lease shall govern the effect of any damage to or destruction of the Premises with respect to the termination of this Lease and hereby waive the provisions of any present or future statute to the extent inconsistent herewith. 10. REAL PROPERTY TAXES. 10.1 (a) PAYMENT OF TAXES. Lessee shall pay the Real Property Taxes, as defined in Paragraph 10.2, applicable to the Premises during the term of this Lease. Subject to Paragraph 10.1(b), all such payments shall be made at least ten (10) days prior to the delinquency date of the applicable installment. Lessee shall promptly furnish Lessor with satisfactory evidence that such taxes have been paid. If any such taxes to be paid by Lessee shall cover any period of time prior to or after the expiration or earlier termination of the term hereof, Lessee's share of such taxes shall be equitably prorated to cover only the period of time within the tax fiscal year this Lease is in effect, and Lessor shall reimburse Lessee for any overpayment after such proration. If Lessee shall fail to pay any Real Property Taxes required by this Lease to be paid by Lessee, Lessor shall have the right to pay the same, and Lessee shall reimburse Lessor therefor upon demand. (b) ADVANCE PAYMENT. In order to insure payment when due and before delinquency of any or all Real Property Taxes, Lessor reserves the right, at Lessor's option, to estimate the current Real Property Taxes applicable to the Premises, and to require such current year's Real Property Taxes to be paid in advance to Lessor by Lessee, either: (i) in a lump sum amount equal to the installment due, at least twenty (20) days prior to the applicable delinquency date, or (ii) monthly in advance with the payment of the Base Rent. If Lessor elects to require payment monthly in advance, the monthly payment shall be that equal monthly amount which, over the number of months remaining before the month in which the applicable tax installment would become delinquent (and without interest thereon), would provide a fund large enough to fully discharge before delinquency the estimated installment of taxes to be paid. When the actual amount of the applicable tax bill is known, the amount of such equal monthly advance payment shall be adjusted as required to provide the fund needed to pay the applicable taxes before delinquency. If the amounts paid to Lessor by Lessee under the provisions of this Paragraph are insufficient to discharge the obligations of Lessee to pay such Real Property Taxes as the same become due, Lessee shall pay to Lessor, upon Lessor's demand, such additional sums as are necessary to pay such obligations. All moneys paid to Lessor under this Paragraph may be intermingled with other moneys of Lessor and shall not bear interest. In the event of a Breach by Lessee in the performance of the obligations of Lessee under this Lease, then any balance of funds paid to Lessor under the provisions of this Paragraph may, subject to proration as provided in Paragraph 10.1(a), at the option of Lessor, be treated as an additional Security Deposit under Paragraph 5. 10.2 DEFINITION OF "REAL PROPERTY TAXES." As used herein, the term "REAL PROPERTY TAXES" shall include any form of real estate tax or assessment, general, special, ordinary or extraordinary, and any license fee, commercial rental tax, improvement bond or bonds, levy or tax (other than inheritance, personal income or estate taxes) imposed upon the Premises by any authority having the direct or indirect power to tax, including any city, state or federal government, or any school, agricultural, sanitary, fire, street, drainage or other improvement district thereof, levied against any legal or equitable interest of Lessor in the Premises or in the real property of which the Premises are a part, Lessor's right to rent or other income therefrom, and/or Lessor's business of leasing the Premises. The term "REAL PROPERTY TAXES" shall also include any tax, fee, levy, assessment or charge, or any increase therein, imposed by reason of events occurring, or changes in applicable law taking effect, during the term of this Lease, including but not limited to a change in the ownership of the Premises or in the improvements thereon, the execution of this Lease, or any modification, amendment or transfer thereof, and whether or not contemplated by the Parties. 10.3 JOINT ASSESSMENT. If the Premises are not separately assessed, Lessee's liability shall be an equitable proportion of the Real Property Taxes for all of the land and improvements included within the tax parcel assessed, such proportion to be determined by Lessor from the respective valuations NET PAGE 5 assigned in the assessor's work sheets or such other information as may be reasonably available. Lessor's reasonable determination thereof, in good faith, shall be conclusive. 10.4 PERSONAL PROPERTY TAXES. Lessee shall pay prior to delinquency all taxes assessed against and levied upon Lessee Owned Alterations, Utility Installations, Trade Fixtures, furnishings, equipment and all personal property of Lessee contained in the Premises or elsewhere. When possible, Lessee shall cause its Trade Fixtures, furnishings, equipment and all other personal property to be assessed and billed separately from the real property of Lessor. If any of Lessees said personal property shall be assessed with Lessor's real property, Lessee shall pay Lessor the taxes attributable to Lessee within ten (10) days after receipt of a written statement setting forth the taxes applicable to Lessee's property or, at Lessor's option, as provided in Paragraph 10.1(b). 11. UTILITIES. Lessee shall pay for all water, gas, heat, light, power, telephone, trash disposal and other utilities and services supplied to the Premises, together with any taxes thereon. If any such services are not separately metered to Lessee, Lessee shall pay a reasonable proportion, to be determined by Lessor, of all charges jointly metered with other premises. 12. ASSIGNMENT AND SUBLETTING. 12.1 LESSOR'S CONSENT REQUIRED. (a) Lessee shall not voluntarily or by operation of law assign, transfer, mortgage or otherwise transfer or encumber (collectively, "ASSIGNMENT") or sublet all or any part of Lessee's interest in this Lease or in the Premises without Lessor's prior written consent given under and subject to the terms of Paragraph 36. (b) A change in the control of Lessee shall constitute an assignment requiring Lessor's consent. The transfer, on a cumulative basis, of twenty-five percent (25%) or more of the voting control of Lessee shall constitute a change in control for this purpose. (c) The involvement of Lessee or its assets in any transaction, or series of transactions (by way of merger, sale, acquisition, financing, refinancing, transfer, leveraged buy-out or otherwise), whether or not a formal assignment or hypothecation of this Lease or Lessee's assets occurs, which results or will result in a reduction of the Net Worth of Lessee, as hereinafter defined, by an amount equal to or greater than twenty-five percent (25%) of such Net Worth of Lessee as it was represented to Lessor at the time of the execution by Lessor of this Lease or at the time of the most recent assignment to which Lessor has consented, or as it exists immediately prior to said transaction or transactions constituting such reduction, at whichever time said Net Worth of Lessee was or is greater, shall be considered an assignment of this Lease by Lessee to which Lessor may reasonably withhold its consent. "NET WORTH OF LESSEE" for purposes of this Lease shall be the net worth of Lessee (excluding any guarantors) established under generally accepted accounting principles consistently applied. (d) An assignment or subletting of Lessee's interest in this Lease without Lessor's specific prior written consent shall, at Lessor's option, be a Default curable after notice per Paragraph 13.1(c), or a noncurable Breach without the necessity of any notice and grace period. If Lessor elects to treat such unconsented to assignment or subletting as a noncurable Breach, Lessor shall have the right to either: (i) terminate this Lease, or (ii) upon thirty (30) days written notice ("Lessor's Notice"), increase the monthly Base Rent to fair market rental value or one hundred ten percent (110%) of the Base Rent then in effect, whichever is greater. Pending determination of the new fair market rental value, if disputed by Lessee, Lessee shall pay the amount set forth in Lessor's Notice, with any overpayment credited against the next installment(s) of Base Rent coming due, and any underpayment for the period retroactively to the effective date of the adjustment being due and payable immediately upon the determination thereof. Further, in the event of such Breach and market value adjustment, (i) the purchase price of any option to purchase the Premises held by Lessee shall be subject to similar adjustment to the then fair market value (without the Lease being considered an encumbrance or any deduction for depreciation or obsolescence, and considering the Premises at its highest and best use and in good condition), or one hundred ten percent (110%) of the price previously in effect, whichever is greater, (ii) any index-oriented rental or price adjustment formulas contained in this Lease shall be adjusted to require that the base index be determined with reference to the index applicable to the time of such adjustment, and (iii) any fixed rental adjustments scheduled during the remainder of the Lease term shall be increased in the same ratio as the new market rental bears to the Base Rent in effect immediately prior to the market value adjustment. (e) Lessee's remedy for any breach of this Paragraph 12.1 by Lessor shall be limited to compensatory damages and injunctive relief. 12.2 TERMS AND CONDITIONS APPLICABLE TO ASSIGNMENT AND SUBLETTING. (a) Regardless of Lessor's consent, any assignment or subletting shall not: (i) be effective without the express written assumption by such assignee or sublessee of the obligations of Lessee under this Lease, (ii) release Lessee of any obligations hereunder, or (iii) alter the primary liability of Lessee for the payment of Base Rent and other sums due Lessor hereunder or for the performance of any other obligations to be performed by Lessee under this Lease. (b) Lessor may accept any rent or performance of Lessee's obligations from any person other than Lessee pending approval or disapproval of an assignment. Neither a delay in the approval or disapproval of such assignment nor the acceptance of any rent or performance shall constitute a waiver or estoppel of Lessor's right to exercise its remedies for the Default or Breach by Lessee of any of the terms, covenants or conditions of this Lease. (c) The consent of Lessor to any assignment or subletting shall not constitute a consent to any subsequent assignment or subletting by Lessee or to any subsequent or successive assignment or subletting by the sublessee. However, Lessor may consent to subsequent sublettings and assignments of the sublease or any amendments or modifications thereto without notifying Lessee or anyone else liable on the Lease or sublease and without obtaining their consent, and such action shall not relieve such persons from liability under this Lease or sublease. (d) In the event of any Default or Breach of Lessee's obligations under this Lease, Lessor may proceed directly against Lessee, any Guarantors or any one else responsible for the performance of the Lessee's obligations under this Lease, including the sublessee, without first exhausting Lessor's remedies against any other person or entity responsible therefor to Lessor, or any security held by Lessor or Lessee. (e) Each request for consent to an assignment or subletting shall be in writing, accompanied by information relevant to Lessor's determination as to the financial and operational responsibility and appropriateness of the proposed assignee or sublessee, including but not limited to the intended use and/or required modification of the Premises, if any, together with a non-refundable deposit of $1,000 or ten percent (10%) of the current monthly Base Rent, whichever is greater, as reasonable consideration for Lessor's considering and processing the request for consent. Lessee agrees to provide Lessor with such other or additional information and/or documentation AS may be reasonably requested by Lessor. (f) Any assignee of, or sublessee under, this Lease shall, by reason of accepting such assignment or entering into such sublease, be deemed, for the benefit of Lessor, to have assumed and agreed to conform and comply with each and every term, covenant, condition and obligation herein to be observed or performed by Lessee during the term of said assignment or sublease, other than such obligations as are contrary to or inconsistent with provisions of an assignment or sublease to which Lessor has specifically consented in writing. (g) The occurrence of a transaction described in Paragraph 12.1(c) shall give Lessor the right (but not the obligation) to require that the Security Deposit be increased to an amount equal to six (6) times the then monthly Base Rent, and Lessor may make the actual receipt by Lessor of the amount required to establish such Security Deposit a condition to Lessor's consent to such transaction. (h) Lessor, as a condition to giving its consent to any assignment or subletting, may require that the amount and adjustment structure of the rent payable under this Lease be adjusted to what is then the Market Value and/or adjustment structure for property similar to the Premises as then constituted. 12.3 ADDITIONAL TERMS AND CONDITIONS APPLICABLE TO SUBLETTING. The following terms and conditions shall apply to any subletting by Lessee of all or any part of the Premises and shall be deemed included in all subleases under this Lease whether or not expressly incorporated therein: (a) Lessee hereby assigns and transfers to Lessor all of Lessee's Interest in all rentals and income arising from any sublease of all or a portion of the Premises heretofore or hereafter made by Lessee, and Lessor may collect such rent and income and apply same toward Lessee's obligations under this Lease; provided, however, that until a Breach (as defined in Paragraph 13.1) shall occur in the performance of Lessee's obligations under this Lease, Lessee may, except as otherwise provided in this Lease, receive, collect and enjoy the rents accruing under such sublease. Lessor shall not, by reason of this or any other assignment of such sublease to Lessor, nor by reason of the collection of the rents from a sublessee, be deemed liable to the sublessee for any failure of Lessee to perform and comply with any of Lessee's obligations to such sublessee under such sublease. Lessee hereby irrevocably authorizes and directs any such sublessee, upon receipt of a written notice from Lessor stating that a Breach exists in the performance of Lessee's obligations under this Lease, to pay to Lessor the rents and other charges due and to become due under the sublease. Sublessee shall rely upon any such statement and request from Lessor and shall pay such rents and other charges to Lessor without any obligation or right to inquire as to whether such Breach exists and notwithstanding any notice from or claim from Lessee to the contrary. Lessee shall have no right or claim against said sublessee, or, until the Breach has been cured, against Lessor, for any such rents and other charges so paid by said sublessee to Lessor. (b) In the event of a Breach by Lessee in the performance of its obligations under this Lease, Lessor, at its option and without any obligation to do so, may require any sublessee to attorn to Lessor, in which event Lessor shall undertake the obligations of the sublessor under such sublease from the time of the exercise of said option to the expiration of such sublease; provided, however, Lessor shall not be liable for any prepaid rents or security deposit paid by such sublessee to such sublessor or for any other prior Defaults or Breaches of such sublessor under such sublease. (c) Any matter or thing requiring the consent of the sublessor under a sublease shall also require the consent of Lessor herein. (d) No sublessee shall further assign or sublet all or any part of the Premises without Lessor's prior written consent. (e) Lessor shall deliver a copy of any notice of Default or Breach by Lessee to the sublessee, who shall have the right to cure the Default of Lessee within the grace period, if any, specified in such notice. The sublessee shall have a right of reimbursement and offset from and against Lessee for any such Defaults cured by the sublessee. 3. DEFAULT; BREACH; REMEDIES. 13.1 DEFAULT; BREACH. Lessor and Lessee agree that if an attorney is consulted by Lessor in connection with a Lessee Default or Breach (as hereinafter defined), $350.00 is a reasonable minimum sum per such occurrence for legal services and costs in the preparation and service of a notice of Default, and that Lessor may include the cost of such services and costs in said notice as rent due and payable to cure said Default. A "Default" is defined as failure by the Lessee to observe, comply with or perform any of the terms, covenants, conditions or rules applicable to Lessee under this Lease. A "Breach" NET PAGE 6 is defined as the occurrence of any one or more of the following Defaults, and, where a grace period for cure after notice is specified herein, the failure by Lessee to cure such Default prior to the expiration of the applicable grace period, shall entitle Lessor to pursue the remedies set forth in Paragraphs 13.2 and/or 13.3: (a) The vacating of the premises without the intention to reoccupy same, or the abandonment of the Premises. (b) Except as expressly otherwise provided in this Lease, the failure by Lessee to make any payment of Base Rent or any other monetary payment required to be made by Lessee hereunder, whether to Lessor or to a third party, as and when due, the failure by Lessee to provide Lessor with reasonable evidence of insurance or surety bond required under this Lease, or the failure of Lessee to fulfill any obligation under this Lease which endangers or threatens life or property, where such failure continues for a period of three (3) days following written notice thereof by or on behalf of Lessor to Lessee. (c) Except as expressly otherwise provided in this Lease, the failure by Lessee to provide Lessor with reasonable written evidence (in duly executed original form, if applicable) of (i) compliance with Applicable Law per Paragraph 6.3, (ii) the inspection, maintenance and service contracts required under Paragraph 7.1(b), (iii) the rescission of an unauthorized assignment or subletting per Paragraph 12.1(b), (iv) a Tenancy Statement Per Paragraphs 16 or 37, (v) the subordination or non-subordination of this Lease per Paragraph 30, (vi) the guaranty of the performance of Lessee's obligations under this Lease if required under Paragraphs 1.11 and 37, (vii) The execution of any document requested under Paragraph 42 (easements), or (viii) any other documentation or information which Lessor may reasonably require of Lessee under the terms of this Lease, where any such failure continues for a period of ten (10) days following written notice by or on behalf of Lessor to Lessee. (d) A Default by Lessee as to the terms, covenants, conditions or provisions of this Lease, or of the rules adopted under Paragraph 40 hereof that are to be observed, complied with or performed by Lessee, other than those described in subparagraphs (a), (b) or (c), above, where such Default continues for a period of thirty (30) days after written notice thereof by or on behalf of Lessor to Lessee; provided, however, that if the nature of Lessee's Default is such that more than thirty (30) days are reasonably required for its cure, then it shall not be deemed to be a Breach of this Lease by Lessee if Lessee commences such cure within said thirty (30) day period and thereafter diligently prosecutes such cure to completion. (e) The occurrence of any of the following events: (i) The making by Lessee of any general arrangement or assignment for the benefit of creditors: (II) Lessee's becoming a "debtor" as defined in 11 U.S.C. Section 101 or any successor statute thereto (unless, in the case of a petition filed against Lessee, the same is dismissed within sixty (60) days); (iii) the appointment of a trustee or receiver to take possession of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where possession is not restored to Lessee within thirty (30) days; or (iv) the attachment, execution or other judicial seizure of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where such seizure is not discharged within thirty (30) days; provided, however, in the event that any provision of this subparagraph (e) is contrary to any applicable law, such provision shall be of no force or effect, and not affect the validity of the remaining provisions. (f) The discovery by Lessor that any financial statement given to Lessor by Lessee or any Guarantor of Lessee's obligations hereunder was materially false. (g) If the performance of Lessee's obligations under this Lease is guaranteed: (i) the death of a guarantor, (ii) the termination of a guarantor's liability with respect to this Lease other than in accordance with the terms of such guaranty, (iii) a guarantor becoming insolvent or the subject of a bankruptcy filing, (iv) a guarantor's refusal to honor the guaranty, or (v) a guarantor's breach of its guaranty obligation on an anticipatory breach basis, and Lessee's failure, within sixty (60) days following written notice by or on behalf of Lessor to Lessee of any such event, to provide Lessor with written alternative assurance or security, which, when coupled with the then existing resources of Lessee, equals or exceeds the combined financial resources of Lessee and the guarantors that existed at the time of execution of this Lease. 13.2 REMEDIES. If lessee fails to perform any affirmative duty or obligation of Lessee under this Lease, within ten (10) days after written notice to Lessee (or in case of an emergency, without notice), Lessor may at its option (but without obligation to do so), perform such duty or obligation on Lessee's behalf, including but not limited to the obtaining of reasonably required bonds, insurance policies, or governmental licenses, permits or approvals. The costs and expenses of any such performance by Lessor shall be due and payable by Lessee to Lessor upon invoice therefor. If any check given to Lessor by Lessee shall not be honored by the bank upon which it is drawn, Lessor, at its option, may require all future payments to be made under this Lease by Lessee to be made only by cashier's check In the event of a Breach of this Lease by Lessee, as defined in Paragraph 13.1, with or without further notice or demand, and without limiting Lessor in the exercise of any right or remedy which Lessor may have by reason of such Breach, Lessor may: (a) Terminate Lessee's right to possession of the Premises by any lawful means, in which case this Lease and the term hereof shall terminate and Lessee shall immediately surrender possession of the Premises to Lessor. In such event Lessor shall be entitled to recover from Lessee: (i) the worth at the time of the award of the unpaid rent which had been earned at the time of termination; (ii) the worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that the Lessee proves could have been reasonably avoided; (iii) the worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of such rental loss that the Lessee proves could be reasonably avoided; and (iv) any other amount necessary to compensate Lessor for all the detriment proximately caused by the Lessee's failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom, including but not limited to the cost of recovering possession of the Premises, expenses of reletting, including necessary renovation and alteration of the Premises, reasonable attorneys' fees, and that portion of the leasing commission paid by Lessor applicable to the unexpired term of this Lease. The worth at the time of award of the amount referred to in provision (iii) of the prior sentence shall be computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent (1%). Efforts by Lessor to mitigate damages caused by Lessee's Default or Breach of this Lease shall not waive Lessor's right to recover damages under this Paragraph. If termination of this Lease is obtained through the provisional remedy of unlawful detainer, Lessor shall have the right to recover in such proceeding the unpaid rent and damages as are recoverable therein, or Lessor may reserve therein the right to recover all or any part thereof in a separate suit for such rent and/or damages. If a notice and grace period required under subparagraphs 13.1(b), (c) or (d) was not previously given, a notice to pay rent or quit, or to perform or quit, as the case may be, given to Lessee under any statute authorizing the forfeiture of leases for unlawful detainer shall also constitute the applicable notice for grace period purposes required by subparagraphs 13.1(b), (c) or (d). In such case, the applicable grace period under subparagraphs 13.1(b), (c) or (d) and under the unlawful detainer statute shall run concurrently after the one such statutory notice, and the failure of Lessee to cure the Default within the greater of the two such grace periods shall constitute both an unlawful detainer and a Breach of this Lease entitling Lessor to the remedies provided for in this Lease and/or by said statute. (b) Continue the Lease and Lessee's right to possession in effect (in California under California Civil Code Section 1951.4) after Lessee's Breach and abandonment and recover the rent as it becomes due, provided Lessee has the right to sublet or assign, subject only to reasonable limitations. See Paragraphs 12 and 36 for the limitations on assignment and subletting which limitations Lessee and Lessor agree are reasonable. Acts of maintenance or preservation, efforts to relet the Premises, or the appointment of a receiver to protect the Lessor's interest under the Lease, shall not constitute a termination of the Lessee's right to possession. (c) Pursue any other remedy now or hereafter available to Lessor under the laws or Judicial decisions of the state wherein the Premises are located. (d) The expiration or termination of this Lease and/or the termination of Lessee's right to possession shall not relieve Lessee from liability under any indemnity provisions of this Lease as to matters occurring or accruing during the term hereof or by reason of Lessee's occupancy of the Premises. 13.3 INDUCEMENT RECAPTURE IN EVENT OF BREACH. Any agreement by Lessor for free or abated rent or other charges applicable to the Premises, or for the giving or paying by Lessor to or for Lessee of any cash or other bonus, inducement or consideration for Lessee's entering into this Lease, all of which concessions are hereinafter referred to as "Inducement Provisions," shall be deemed conditioned upon Lessee's full and faithful performance of all of the terms, covenants and conditions of this Lease to be performed or observed by Lessee during the term hereof as the same may be extended. Upon the occurrence of a Breach of this Lease by Lessee, as defined in Paragraph 13.1, any such inducement Provision shall automatically be deemed deleted from this Lease and of no further force or effect, and any rent, other charge, bonus, inducement or consideration theretofore abated, given or paid by Lessor under such an Inducement Provision shall be immediately due and payable by Lessee to Lessor, and recoverable by Lessor as additional rent due under this Lease, notwithstanding any subsequent cure of said Breach by Lessee. The acceptance by Lessor of rent or the cure of the Breach which initiated the operation of this Paragraph shall not be deemed a waiver by Lessor of the provisions of this Paragraph unless specifically so stated in writing by Lessor at the time of such acceptance. 13.4 LATE CHARGES. Lessee hereby acknowledges that late payment by Lessee to Lessor of rent and other sums due hereunder will cause Lessor to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges, and late charges which may be imposed upon Lessor by the terms of any ground lease, mortgage or trust deed covering the Premises. Accordingly, if any installment of rent or any other sum due from Lessee shall not be received by Lessor or Lessor's designee within five (5) days after such amount shall be due, then, without any requirement for notice to Lessee, Lessee shall pay to Lessor a late charge equal to six percent (6%) of such overdue amount. The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Lessor will incur by reason of late payment by Lessee. Acceptance of such late charge by Lessor shall in no event constitute a waiver of Lessee's Default or Breach with respect to such overdue amount, nor prevent Lessor from exercising any of the other rights and remedies granted hereunder. In the event that a late charge is payable hereunder, whether or not collected, for three (3) consecutive installments of Base Rent, then notwithstanding Paragraph 4.1 or any other provision of this Lease to the contrary, Base Rent shall, at Lessor's option, become due and payable quarterly in advance. 13.5 BREACH BY LESSOR. Lessor shall not be deemed in breach of this Lease unless Lessor fails within a reasonable time to perform an obligation required to be performed by Lessor. For purposes of this Paragraph 13.5, a reasonable time shall in no event be less than thirty (30) days after receipt by Lessor, and by the holders of any ground lease, mortgage or deed of trust covering the Premises whose name and address shall have been furnished Lessee in writing for such purpose, of written notice specifying wherein such obligation of Lessor has not been performed; provided, however, that it the nature of Lessor's obligation is such that more than thirty (30) days after such notice are reasonably required for its performance, then Lessor shall not be in breach of this Lease if performance is commenced within such thirty (30) day period and thereafter diligently pursued to completion. 14. CONDEMNATION. If the Premises or any portion thereof are taken under the power of eminent domain or sold under the threat of the exercise of said power (all of which are herein called "CONDEMNATION"), this Lease shall terminate as to the part so taken as of the date the condemning authority takes NET PAGE 7 title or possession, whichever first occurs. If more than ten percent (10%) of the floor area of the Premises, or more than twenty-five percent (25%) of the land area not occupied by any building, is taken by condemnation, Lessee may, at Lessees option, to be exercised in writing within ten (10) days after Lessor shall have given Lessee written notice of such taking (or in the absence of such notice, within ten (10) days after the condemning authority shall have taken possession) terminate this Lease as of the date the condemning authority takes such possession. If Lessee does not terminate this Lease in accordance with the foregoing, this Lease shall remain in full force and effect as to the portion of the Premises remaining, except that the Base Rent shall be reduced in the same proportion as the rentable floor area of the Premises taken bears to the total rentable floor area of the building located on the Premises. No reduction of Base Rent shall occur if the only portion of the Premises taken is land on which there is no building. Any award for the taking of all or any part of the Premises under the power of eminent domain or any payment made under threat of the exercise of such power shall be the property of Lessor, whether such award shall be made as compensation for diminution in value of the leasehold or for the taking of the fee, or as severance damages; provided, however, that Lessee shall be entitled to any compensation separately awarded to Lessee for Lessee's relocation expenses and/or loss of Lessee's Trade Fixtures. In the event that this Lease is not terminated by reason of such condemnation, Lessor shall to the extent of its net severance damages received, over and above the legal and other expenses incurred by Lessor in the condemnation matter, repair any damage to the Premises caused by such condemnation, except to the extent that Lessee has been reimbursed therefor by the condemning authority. Lessee shall be responsible for the payment of any amount in excess of such net severance damages required to complete such repair. 15. BROKER'S FEE. 15.5 Lessee and Lessor each represent and warrant to the other that it has had no dealings with any person, firm, broker or finder in connection with the negotiation of this Lease and/or the consummation of the transaction contemplated hereby, and that no broker or other person, firm or entity is entitled to any commission or finder's fee in connection with said transaction. Lessee and Lessor do each hereby agree to indemnify, protect, defend and hold the other harmless from and against liability for compensation or charges which may be claimed by any broker, finder or other similar party by reason of any dealings or actions of the indemnifying Party, including any costs, expenses, attorneys' fees reasonably incurred with respect thereto. 16. TENANCY STATEMENT. 16.1 Each Party (as "Responding Party") shall within ten (10) days after written notice from the other Party (The "Requesting Party") execute, acknowledge and deliver to the Requesting Party a statement in writing in form similar to the then most current "Tenancy Statement" form published by the American Industrial Real Estate Association, plus such additional information, confirmation and/or statements as may be reasonably requested by the Requesting Party. 16.2 If Lessor desires to finance, refinance, or sell the Premises, any part thereof, or the building of which the Premises are a part, Lessee and all Guarantors of Lessee's performance hereunder shall deliver to any potential lender or purchaser designated by Lessor such financial statements of Lessee and such Guarantors as may be reasonably required by such lender or purchaser, including but not limited to Lessee's financial statements for the past three (3) years. All such financial statements shall be received by Lessor and such lender or purchaser in confidence and shall be used only for the purposes herein set forth. 17. LESSOR'S LIABILITY. The term "LESSOR" as used herein shall mean the owner or owners at the time in question of the fee title to the Premises, or, if this is a sublease, of the Lessee's interest in the prior Lease. In the event of a transfer of Lessor's title or interest in the Premises or in this Lease, Lessor shall deliver to the transferee or assignee (in cash or by credit) any unused Security Deposit held by Lessor at the time of such transfer or assignment. Except as provided in Paragraph 15, upon such transfer or assignment and delivery of the Security Deposit, as aforesaid, the prior Lessor shall be relieved of all liability with respect to the obligations and/or covenants under this Lease thereafter to be performed by the Lessor. Subject to the foregoing, the obligations and/or covenants in this Lease to be performed by the Lessor shall be binding only upon the Lessor as hereinabove defined. 18. SEVERABILITY. The invalidity of any provision of this Lease, as determined by a court of competent jurisdiction, shall in no way affect the validity of any other provision hereof. 19. INTEREST ON PAST-DUE OBLIGATIONS. Any monetary payment due Lessor hereunder, other than late charges, not received by Lessor within thirty (30) days following the date on which it was due, shall bear interest from the thirty-first (31st) day after it was due at the rate of 12% per annum, but not exceeding the maximum rate allowed by law, in addition to the late charge provided for in Paragraph 13.4. 20. TIME OF ESSENCE. Time is of the essence with respect to the performance of all obligations to be performed or observed by the Parties under this Lease. 21. RENT DEFINED. All monetary obligations of Lessee to Lessor under the terms of this Lease are deemed to be rent. 22. NO PRIOR OR OTHER AGREEMENTS; BROKER DISCLAIMER. This Lease contains all agreements between the Parties with respect to any matter mentioned herein, and no other prior or contemporaneous agreement or understanding shall be effective. Lessor and Lessee each represents and warrants to the Brokers that it has made, and is relying solely upon, its own investigation as to the nature, quality, character and financial responsibility of the other Party to this Lease and as to the nature, quality and character of the Premises. Brokers have no responsibility with respect thereto or with respect to any default or breach hereof by either Party. 23. NOTICES. 23.1 All notices required or permitted by this Lease shall be in writing and may be delivered in person (by hand or by messenger or courier service) or may be sent by regular, certified or registered mail or U.S. Postal Service Express Mail, with postage prepaid, or by facsimile transmission, and shall be deemed sufficiently given if served in a manner specified in this Paragraph 23. The addresses noted adjacent to a Party's signature on this Lease shall be that Party's address for delivery or mailing of notice purposes. Either Party may by written notice to the other specify a different address for notice purposes, except that upon Lessee's taking possession of the Premises, the Premises shall constitute Lessee's address for the purpose of mailing or delivering notices to Lessee. A copy of all notices required or permitted to be given to Lessor hereunder shall be concurrently transmitted to such party or parties at such addresses as Lessor may from time to time hereafter designate by written notice to Lessee. 23.2 Any notice sent by registered or certified mail, return receipt requested, shall be deemed given on the date of delivery shown on the receipt card, or if no delivery date is shown, the postmark thereon. IF sent by regular mail the notice shall be deemed given forty-eight (48) hours after the same is addressed as required herein and mailed with postage prepaid. Notices delivered by United States Express Mail or overnight courier that guarantees next day delivery shall be deemed given twenty-four (24) hours after delivery of the same to the United States Postal Service or courier. If any notice is transmitted by facsimile transmission or similar means, the same shall be deemed served or delivered upon telephone confirmation of receipt of the transmission thereof, provided A copy is also delivered via delivery or mail. IF notice is received on A Sunday or legal holiday, it shall be deemed received on the next business day. 24. WAIVERS. No waiver by Lessor of the Default or Breach of any term, covenant or condition hereof by Lessee, shall be deemed a waiver of any other term, covenant or condition hereof, or of any subsequent Default or Breach by Lessee of the same or of any other term, covenant or condition hereof. Lessor's consent to, or approval of, any act shall not be deemed to render unnecessary the obtaining of Lessor's consent to, or approval of, any subsequent or similar act by Lessee, or be construed as the basis of an estoppel to enforce the provision or provisions of this Lease requiring such consent. Regardless of Lessor's knowledge of a Default or Breach at the time of accepting rent, the acceptance of rent by Lessor shall not be a waiver of any preceding Default or Breach by Lessee of any provision hereof, other than the failure of Lessee to pay the particular rent so accepted. Any payment given Lessor by Lessee may be accepted by Lessor on account of moneys or damages due Lessor, notwithstanding any qualifying statements or conditions made by Lessee in connection therewith, which such statements and/or conditions shall be of no force or effect whatsoever unless specifically agreed to in writing by Lessor at or before the time of deposit of such payment. 25. RECORDING. Either Lessor or Lessee shall, upon request of the other, execute, acknowledge and deliver to the other a short form memorandum of this Lease for recording purposes. The Party requesting recordation shall be responsible for payment of any fees or taxes applicable thereto. 26. NO RIGHT TO HOLDOVER. Lessee has no right to retain possession of the Premises or any part thereof beyond the expiration or earlier termination of this Lease. NET PAGE 8 27. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed exclusive but shall, wherever possible, be cumulative with all other remedies at law or in equity. 28. COVENANTS AND CONDITIONS. All provisions of This Lease to be observed or performed by Lessee are both covenants and conditions. 29. BINDING EFFECT; CHOICE OF LAW. This Lease shall be binding upon the parties, their personal representatives, successors and assigns and be governed by the laws of the state in which the Premises are located. Any litigation between the Parties hereto concerning this Lease shall be initiated in the county in which the Premises are located. 30. SUBORDINATION; ATTORNMENT; NON-DISTURBANCE. 30.1 SUBORDINATION. This Lease and any Option granted hereby shall be subject and subordinate to any ground lease, mortgage, deed of trust, or other hypothecation or security device (collectively, "SECURITY DEVICE"), now or hereafter placed by Lessor upon the real property of which the Premises are a part, to any and all advances made on the security thereof, and to all renewals, modifications, consolidations, replacements and extensions thereof. Lessee agrees that the Lenders holding any such Security Device shall have no duty, liability or obligation to perform any of the obligations of Lessor under this Lease, but that in the event of Lessor's default with respect to any such obligation, Lessee will give any Lender whose name and address have been furnished Lessee in writing for such purpose notice of Lessor's default and allow such Lender thirty (30) days following receipt of such notice for the cure of said default before invoking any remedies Lessee may have by reason thereof. If any Lender shall elect to have this Lease and/or any Option granted hereby superior to the lien of its Security Device and shall give written notice thereof to Lessee, this Lease and such Options shall be deemed prior to such Security Device, notwithstanding the relative dates of the documentation or recordation thereof. 30.2 ATTORNMENT. Subject to the nondisturbance provisions of Paragraph 30.3, Lessee agrees to attorn to a Lender or any other party who acquires ownership of the Premises by reason of a foreclosure of a Security Device, and that in the event of such foreclosure, such new owner shall not: (i) be liable for any act or omission of any prior lessor or with respect to events occurring prior to acquisition of ownership, (ii) be subject to any offsets or defenses which Lessee might have against any prior lessor, or (iii) be bound by prepayment of more than one (1) month's rent. 30.3 NON-DISTURBANCE. With respect to Security Devices entered into by Lessor after the execution of this Lease, Lessee's subordination of this Lease shall be subject to receiving assurance (a "NON-DISTURBANCE AGREEMENT") from the Lender that Lessee's possession and this Lease, including any options to extend the term hereof, will not be disturbed so long as Lessee is not in Breach hereof and attorns to the record owner of the Premises. 30.4 SELF-EXECUTING. The agreements contained in this Paragraph 30 shall be effective without the execution of any further documents; provided, however, that, upon written request from Lessor or a Lender in connection with a sale, financing or refinancing of the Premises. Lessee and Lessor shall execute such further writings as may be reasonably required to separately document any such subordination or non-subordination, attornment and/or non-disturbance agreement as is provided for herein. 31. ATTORNEY'S FEES. If any Party or Broker brings an action or proceeding to enforce the terms hereof or declare rights hereunder, the Prevailing Party (as hereafter defined) or Broker in any such proceeding, action, or appeal thereon, shall be entitled to reasonable attorney's fees. Such fees may be awarded in the same suit or recovered in A separate suit, whether or not such action or proceeding is pursued to decision or judgment. The term, "PREVAILING PARTY" shall include, without limitation, a Party or Broker who substantially obtains or defeats the relief sought, as the case may be, whether by compromise, settlement, judgment, or the abandonment by the other Party or Broker of its claim or defense. The attorney's fees award shall not be computed in accordance with any court fee schedule, but shall be such as to fully reimburse all attorney's fees reasonably incurred. Lessor shall be entitled to attorney's fees, costs and expenses incurred in the preparation and service of notices of Default and consultations in connection therewith, whether or not a legal action is subsequently commenced in connection with such Default or resulting Breach. 32. LESSOR'S ACCESS; SHOWING PREMISES; REPAIRS. Lessor and Lessor's agents shall have the right to enter the Premises at any time, in the case of an emergency, and otherwise at reasonable times for the purpose of showing the same to prospective purchasers, lenders, or lessees, and making such alterations; repairs, improvements or additions to the Premises or to the building of which they are a part, as Lessor may reasonably deem necessary. Lessor may at any time place on or about the Premises or building any ordinary "For Sale" signs and Lessor may at any time during the last one hundred twenty (120) days of the term hereof place on or about the Premises any ordinary "For Lease" signs. All such activities of Lessor shall be without abatement of rent or liability to Lessee. 33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted, either voluntarily or involuntarily, any auction upon the Premises without first having obtained Lessor's prior written consent. Notwithstanding anything to the contrary in this Lease, Lessor shall not be obligated to exercise any standard of reasonableness in determining whether to grant such consent. 34. SIGNS. Lessee shall not place any sign upon the Premises, except that Lessee may, with Lessor's prior written consent, install (but not on the roof) such signs as are reasonably required to advertise Lessee's own business. The installation of any sign on the Premises by or for Lessee shall be subject to the provisions of Paragraph 7 (Maintenance, Repairs, Utility Installations, Trade Fixtures and Alterations). Unless otherwise expressly agreed herein, Lessor reserves all rights to the use of the roof and the right to install, and all revenues from the installation of, such advertising signs on the Premises, including the root, as do not unreasonably interfere with the conduct of Lessee's business. 35. TERMINATION; MERGER. Unless specifically stated otherwise in writing by Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual termination or cancellation hereof, or a termination hereof by Lessor for Breach by Lessee, shall automatically terminate any sublease or lesser estate in the Premises; provided, however, Lessor shall, in the event of any such surrender. termination or cancellation, have the option to continue any one or all of any existing subtenancies. Lessor's failure within ten (10) days following any such event to make a written election to the contrary by written notice to the holder of any such lesser interest, shall constitute Lessor's election to have such event constitute the termination of such interest. 36. CONSENTS. (a) Except for Paragraph 33 hereof (Auctions) or as otherwise provided herein, wherever in this Lease the consent of a Party is required to an act by or for the other Party, such consent shall not be unreasonably withheld or delayed. Lessor's actual reasonable costs and expenses (including but not limited to architects', attorneys', engineers' or other consultants' fees) incurred in the consideration of, or response to, a request by Lessee for any Lessor consent pertaining to this Lease or the Premises, including but not limited to consents to an assignment, a subletting or the presence or use of a Hazardous Substance, practice or storage tank, shall be paid by Lessee to Lessor upon receipt of an invoice and supporting documentation therefor. Subject to Paragraph 12.2(e) (applicable to assignment or subletting), Lessor may, as a condition to considering any such request by Lessee, require that Lessee deposit with Lessor an amount of money (in addition to the Security Deposit held under Paragraph 5) reasonably calculated by Lessor to represent the cost Lessor will incur in considering and responding to Lessee's request. Except as otherwise provided, any unused portion of said deposit shall be refunded to Lessee without interest. Lessor's consent to any act, assignment of this Lease or subletting of the Premises by Lessee shall not constitute an acknowledgment that no Default or Breach by Lessee of this Lease exists, nor shall such consent be deemed a waiver of any then existing Default or Breach, except as may be otherwise specifically stated in writing by Lessor at the time of such consent. (b) All conditions to Lessor's consent authorized by this Lease are acknowledged by Lessee as being reasonable. The failure to specify herein any particular condition to Lessor's consent shall not preclude the imposition by Lessor at the time of consent of such further or other conditions as are then reasonable with reference to the particular matter for which consent is being given. 38. QUIET POSSESSION. Upon payment by Lessee of the rent for the Premises and the observance and performance of all of the covenants, conditions and provisions on Lessee's part to be observed and performed under this Lease, Lessee shall have quiet possession of the Premises for the entire term hereof subject to all of the provisions of this Lease. 39. OPTIONS. 39.1 Definition. As used in this Paragraph 39 the word "Option" has the following meaning: (a) the right to extend the term of this Lease or to renew this Lease or to extend or renew any Lease that Lessee has on other property of Lessor; See Addendum, Paragraph 5 39.2 OPTIONS PERSONAL TO ORIGINAL LESSEE. Each Option granted to Lessee in this Lease is personal to the original Lessee named in Paragraph 1.1 hereof, and cannot be voluntarily or involuntarily assigned or exercised by any person or entity other than said original Lessee while the original Lessee is in full and actual possession of the Premises and without the intention of thereafter assigning or subletting. The Options, if any, herein granted to Lessee are not assignable. either as a part of an assignment of this Lease or separately or apart therefrom, and no Option may be separated from this Lease in any manner, by reservation or otherwise. NET PAGE 9 39.3 MULTIPLE OPTIONS. In the event that Lessee has any Multiple Options to extend or renew this Lease, a later Option cannot be exercised unless the prior Options to extend or renew this Lease have been validly exercised. 39.4 EFFECT OF DEFAULT ON OPTIONS. (a) Lessee shall have no right to exercise an Option, notwithstanding any provision in the grant of Option to the contrary: (i) during the period commencing with the giving of any notice of Default under Paragraph 13.1 and continuing until the noticed Default is cured, or (ii) during the period of time any monetary obligation due Lessor from Lessee is unpaid (without regard to whether notice thereof is given Lessee), or (iii) during the time Lessee is in Breach of this Lease, or (iv) in the event that Lessor has given to Lessee three (3) or more notices of Default under Paragraph 13.1, whether or not the Defaults are cured, during the twelve (12) month period immediately preceding the exercise of the Option. (b) The period of time within which an Option may be exercised shall not be extended or enlarged by reason of Lessee's inability to exercise an Option because of the provisions of Paragraph 39.4(a). (c) All rights of Lessee under the provisions of an Option shall terminate and be of no further force or effect, notwithstanding Lessee's due and timely exercise of the Option, if, after such exercise and during the term of this Lease, (i) Lessee fails to pay to Lessor a monetary obligation of Lessee for a period of thirty (30) days after such obligation becomes due (without any necessity of Lessor to give notice thereof to Lessee), or (ii) Lessor gives to Lessee three (3) or more notices of Default under Paragraph 13.1 during any twelve (12) month period, whether or not the Defaults are cured, or (iii) if Lessee commits a Breach of this Lease. 40. MULTIPLE BUILDINGS. If the Premises are part of a group of buildings controlled by Lessor, Lessee agrees that it will abide by, keep and observe all reasonable rules and regulations which Lessor may make from time to time for the management, safety, care, and cleanliness of the grounds, the parking and unloading of vehicles and the' preservation of good order, as well as for the convenience of other occupants or tenants of such other buildings and their invitees, and that Lessee will pay its fair share of common expenses incurred in connection therewith. 41. SECURITY MEASURES. Lessee hereby acknowledges that the rental payable to Lessor hereunder does not include the cost of guard service or other security measures, and that Lessor shall have no obligation whatsoever to provide same. Lessee assumes all responsibility for the protection of the Premises, Lessee, its agents and invitees and their property from the acts of third parties. 42. RESERVATIONS. Lessor reserves to itself the right, from time to time, to grant, without the consent or joinder of Lessee, such easements, rights and dedications that Lessor deems necessary, and to cause the recordation of parcel maps and restrictions, so long as such easements, rights, dedications, maps and restrictions do not unreasonably interfere with the use of the Premises by Lessee. Lessee agrees to sign any documents reasonably requested by Lessor to effectuate any such easement rights, dedication, map or restrictions 43. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to any amount or sum of money to be paid by one Party to the other under the provisions hereof, the Party against whom the obligation to pay the money is asserted shall have the right to make payment "under protest" and such payment shall not be regarded as a voluntary payment and there shall survive the right on the part of said Party to institute suit for recovery of such sum. If it shall be adjudged that there was no legal obligation on the part of said Party to pay such sum or any part thereof, said Party shall be entitled to recover such sum or so much thereof as it was not legally required to pay under the provisions of this Lease. 44. AUTHORITY. If either Party hereto is a corporation, trust, or general or limited partnership, each individual executing this Lease on behalf of such entity represents and warrants that he or she is duly authorized to execute and deliver this Lease on its behalf. If Lessee is a corporation, trust or partnership, Lessee shall, within thirty (30) days after request by Lessor, deliver to Lessor evidence satisfactory to Lessor of such authority. 45. CONFLICT. Any conflict between the printed provisions of this Lease and the typewritten or handwritten provisions shall be controlled by the typewritten or handwritten provisions. 46. OFFER. Preparation of this Lease by Lessor or Lessor's agent and submission of same to Lessee shall not be deemed an offer to lease to Lessee. This Lease is not intended to be binding until executed by all Parties hereto. 47. AMENDMENTS. This Lease may be modified only in writing, signed by the Parties in interest at the time of the modification. The parties shall amend this Lease from time to time to reflect any adjustments that are made to the Base Rent or other rent payable under this Lease. As long as they do not materially change Lessee's obligations hereunder, Lessee agrees to make such reasonable non-monetary modifications to this Lease as may be reasonably required by an institutional, insurance company, or pension plan Lender in connection with the obtaining of normal financing or refinancing of the property of which the Premises are a part. 48. MULTIPLE PARTIES. Except as otherwise expressly provided herein, if more than one person or entity is named herein as either Lessor or Lessee, the obligations of such Multiple Parties shall be the joint and several responsibility of all persons or entities named herein as such Lessor or Lessee. LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE PREMISES. IF THIS LEASE HAS BEEN FILLED IN, IT HAS BEEN PREPARED FOR SUBMISSION TO YOUR ATTORNEY FOR HIS APPROVAL FURTHER, EXPERTS SHOULD BE CONSULTED TO EVALUATE THE CONDITION OF THE PROPERTY AS TO THE POSSIBLE PRESENCE OF ASBESTOS, STORAGE TANKS OR HAZARDOUS SUBSTANCES. NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY THE REAL ESTATE BROKER(S) OR THEIR AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH IT RELATES; THE PARTIES SHALL RELY SOLELY UPON THE ADVICE OF THEIR OWN COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE. IF THE SUBJECT PROPERTY IS LOCATED IN A STATE OTHER THAN CALIFORNIA, AN ATTORNEY FROM THE STATE WHERE THE PROPERTY IS LOCATED SHOULD BE CONSULTED. The parties hereto have executed this Lease at the place on the dates specified above to their respective signatures Executed at SAN JOSE, CALIFORNIA Executed at on 4-18-97 on by LESSOR: by LESSEE: SENTER PROPERTIES, LLC, BURKE INDUSTRIES, INC., a California limited liability company a California corporation By /s/ Daniel P. Flamen By /s/ Rocky Genovese Name Printed: DANIEL P. FLAMEN Name Printed: ROCKY GENOVESE Title: Title: PRESIDENT By /s/ Timothy E. Howard By Name Printed: TIMOTHY E. HOWARD Name Printed: Title: Title: Address: c/o Daniel P. Flamen Address: 2250 South Tenth Street, San Jose. 485 Ramona Street, Suite 200, Palo Alto, CA 95112 Att: Rocco Genovese CA 94301 Tel. No. (415) 328-8300 Fax No. (415) 328-8301 Tel. No. (408) 297-3500 Fax No. (408) 280-0699
NET PAGE 10 NOTICE: These forms are often modified to meet changing requirements of law and industry needs. Always write or call to make sure you are utilizing the most current form: American Industrial Real Estate Association, 345 South Figueroa Street, Suite M-1, L Angeles, CA 90071. (213) 687-8777. Fax. No. (213) 687-8616. ADDENDUM TO STANDARD INDUSTRIAL LEASE This ADDENDUM TO STANDARD INDUSTRIAL LEASE (this "Addendum") is made and entered into by and between SENTER PROPERTIES, LLC, a California limited liability company ("Lessor") and BURKE INDUSTRIES, INC., a California corporation ("Lessee"), as of the date set forth on the first page of that certain Standard Industrial/Commercial Single-Lessee Lease - Net (the "Lease ) between Lessor and Lessee to which this Addendum is attached and incorporated. The terms, covenants and conditions set forth herein are intended to and shall have the same force and effect as if set forth at length in the body of the Lease. To the extent there are any inconsistencies between this Addendum and the terms and provisions of the Lease to which this Addendum is attached, the terms and provisions of this Addendum shall control. 1. LESSEE PRIOR OCCUPANT/ACCEPTANCE OF PREMISES "AS IS". Notwithstanding anything contained in the Lease to the contrary, the provisions of this Paragraph 1 shall control and prevail. 1.1 LESSEE PRIOR OCCUPANT. Lessor and Lessee acknowledge and agree that immediately prior to the Commencement Date of this Lease, Lessee was the occupant of the Premises pursuant to that certain Lease ("Prior Lease"), dated August 1, 1971, originally by and between Senter Associates ("Original Lessor") and Burke Rubber Company, Inc. ("Original Lessee"), which Prior Lease was for a twenty-five (25) year term expiring immediately prior to the Commencement Date of this Lease. Prior to the date hereof, Lessee acquired all of Original Lessee's right, title and interest in and to the Prior Lease, and is currently the "Lessee" under the Prior Lease. 1.2 ACCEPTANCE OF PREMISES "AS IS". Lessee acknowledges receipt and delivery of possession of the Premises and further acknowledges that Lessee currently occupies the Premises, is familiar with the Premises, has fully inspected and otherwise has knowledge of the condition of the Premises prior to the execution and delivery of this Lease, and has found the same to be in good order and repair and satisfactory for it purposes hereunder. Lessee is leasing the Premises "AS-IS" in its present condition. Lessee waives any claim or action against Lessor in respect of the condition of the Premises. LESSOR MAKES NO WARRANTY OR REPRESENTATIONS, EXPRESS OR IMPLIED, IN RESPECT OF THE PREMISES OR ANY PART THEREOF, EITHER AS TO ITS FITNESS FOR USE, ITS DESIGN OR CONDITION, OR THE MATERIAL OR WORKMANSHIP THEREIN, LATENT OR PATENT, IT BEING AGREED THAT ALL SUCH RISKS ARE TO BE BORNE BY LESSEE. LESSEE ACKNOWLEDGES THAT THE PREMISES HAS BEEN INSPECTED BY LESSEE AND IS SATISFACTORY TO IT. 2. LESSOR'S ACQUISITION OF THE PREMISES. Lessor and Lessee acknowledge and agree that at the time of executing this Lease, Lessor might not own the Premises. Accordingly, this Lease, and all obligations hereunder of either party, are contingent upon Lessor's acquisition of the fee simple interest in the Premises pursuant to that certain Real Estate Sales Agreement ("Sales Agreement") to be entered into between Lessor and Original Lessor or Original Lessor's successor in interest. 3. COMMENCEMENT DATE. The "Original Term" shall commence on the date of the close of escrow under the Purchase Agreement ("Commencement Date") and shall expire on December 31, 2008 ("Expiration Date") unless earlier terminated pursuant to the provisions of this Lease. Lessee has the right to extend the term of this Lease, at Lessee's option, as provided under Paragraph 5 of this Addendum. (The Original Term plus all validly exercised options to extend, if any, shall be referred to herein as the "Term"). 4. BASE RENT. 4.1 BASE RENT. Lessee will pay to Lessor, without deduction or offset, in lawful money of the United States and Lessor's address set forth in this Lease, Base Rent (as defined below) during the Term as follows: -1- LEASE YEAR BASE RENT 1 $.28 per square foot per month 2 $.30 per square foot per month 3 the higher of: Fair Market Rent, as determined below; or $.30 per square foot per month, adjusted by the C.P.I. Annual Multiplier (as defined below) 4 through Expiration Date Base Rent at the rate paid during the immediately prior Lease Year, adjusted by the C.P.I. Annual Multiplier (as defined below) For purposes of calculating the amount of Base Rent payable during the Term (including without limitation payable during any Extended Term as provided under Paragraph 5 below), the square footage of the Premises shall be 82,000 square feet. Base Rent shall be paid in advance on or before the first day of each calendar month during the Term. Base Rent shall be prorated for any partial month at the beginning or end of the Term. Base Rent during the Extended Terms shall be as stated in Paragraph 5.2 below. 4.2 LEASE YEAR. As used herein, "Lease Year" shall mean any twelve (12) month period from January 1 to December 31 in each calendar year during the Term. In the case of the beginning of the Original Term, the provisions "Lease Year" shall mean the period from the Commencement Date to December 31, 1997; in the case of the end of the Term, the provision Lease Year shall mean the period from the last January 1 to occur during the Term to the Expiration Date. 4.3 FAIR MARKET RENT. (i) If Lessor and Lessee cannot agree on the Fair Market Rent within thirty (30) days prior to the commencement of the Lease Year for which Fair Market Rent applies, each party shall, by notice to the other, appoint a disinterested and licensed M.A.I. Real Estate Appraiser to determine the Fair Market Rent. If any party should fail to appoint an appraiser, the appraiser selected by the other party shall determine the Fair Market Rent. In determining the Fair Market Rent, each appraiser shall give appropriate consideration to, among other things, generally applicable terms and conditions of tenancies for property comparable to the Premises in the general vicinity of the Premises. (ii) If the two appraisers selected pursuant to Paragraph 4.3(i) above cannot agree upon the Fair Market Rent within forty-five (45) days, they shall immediately give written notice of such inability ("Notice of Disagreement") to both Lessor and Lessee setting forth the Fair Market Rent determinations of each of the appraisers. If the determinations of each of the two appraisers differ by less than ten percent (10%) of the lower determination, the Fair Market Rent shall be fixed at an amount equal to the average of the two determinations. (iii) If the determinations of each of the two appraisers selected pursuant to Paragraph 4.3(i) above, differ by ten percent (10%) or more of the lower determination, then within thirty (30) days after the giving of the Notice of Disagreement, the two appraisers shall appoint a third disinterested and licensed M.A.I. Real Estate Appraiser. If the parties cannot then agree on the Fair Market Rent, the third appraiser shall determine the Fair Market Rent, and in so doing, shall give appropriate consideration to those items described in Paragraph 4.3(i). The third appraiser shall not select a Fair Market Rent either (a) higher than the higher of the two appraisals made pursuant to Paragraph 4.3(i); or (b) lower than the lower of the two appraisals made pursuant to Paragraph 4.3(i) above. If the first two appraisers cannot agree on the selection of a third appraiser within such thirty (30) days, or if the first two appraisers fail to provide a Notice of Disagreement (as stated above in Paragraph 4.3(ii)), then the Fair Market Rent shall be determined by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association. -2- (iv) During the time before the determination of the Fair Market Rent, as specified above, Lessee shall continue to pay Base Rent at the same rate as paid during the immediately preceding Lease Year; provided, however, that, once the Fair Market Rent is determined, the Base Rent owed by Lessee at the Fair Market Rent shall be effective retroactively as of the first day of such Lease Year. If, after the Base Rent is adjusted and applied retroactively as of the first day of such Lease Year, it is determined that additional rent is due Lessor, the amount of any such additional rent shall be paid by Lessee promptly after determination of the Fair Market Rent for such Lease Year (but not later than the date of the next monthly installment of Base Rent, unless the next installment falls due within five (5) days after determination of Fair Market Rent, in which case not later than the date of the second next monthly installment of Base Rent). (v) Each of the parties shall pay the fees of the appraiser that it selects pursuant to Paragraph 4.3(i) above, and shall equally share the cost of the third appraiser, if necessary, and shall equally share the cost of arbitration (excluding attorneys' fees), if necessary. 4.4 C.P.I. ANNUAL MULTIPLIER. The "C.P.I. Annual Multiplier" shall be the fraction, the numerator of which shall be the C.P.I. (defined below) for January of the Lease Year then in effect, and the denominator of which shall be the C.P.I. for January of the immediately preceding Lease Year. "C.P.I." shall mean and refer to the Consumer Price Index published as the "CPI-U" index by the Bureau of Labor Statistics of the Department of Labor, U.S. Cities Average, All Items (1982-84=100); provided that if compilation of the C.P.I. is discontinued or transferred to any other governmental department or bureau, then the index most nearly the same as the C.P.I. shall be used. If Lessor is unable to determine the C.P.I. by January 1 of any Lease Year, Lessee shall continue to pay the Base Rent at the rate paid for the immediately prior Lease Year, and once the C.P.I. for January 1 of such Lease Year is published, the new Base Rent (as increased by the C.P.I. Annual Multiplier) shall be effective retroactively as of the first day of such Lease Year and the aggregate amount of any additional Base Rent shall be paid by Lessee promptly after written notice thereof from Lessor (but not later than the date of the next monthly installment of Base Rent, unless the next installment falls due within five (5) days after Lessor's notice, in which case not later than the date of the second next monthly installment of Base Rent). No delay by Lessor in providing notice of any such increase in Base Rent shall be deemed a waiver of Lessor's right to increase the Base Rent as provided hereunder. 5. OPTIONS TO EXTEND. 5.1 OPTIONS TO EXTEND. Lessee shall have two (2) options to extend the Original Term of the Lease (each, an "Option") for a period of five (5) years each (each such additional term shall be referred to herein as an "Extended Term") for the entire Premises, commencing immediately following the end of the Original Term or the immediately preceding Extended Term as the case may be. The Lease during any Extended Term shall be on the same terms and conditions as during the Original Term, except that the Base Rent shall be determined as set forth in Paragraph 5.2 below. In the event Lessee desires to exercise any option to extend granted in this Paragraph 5.1, Lessee shall give Lessor written notice ("Notice to Extend") not less than three hundred sixty (360) days prior to the expiration of the Original Term or the immediately preceding Extended Term, as the case may be. If Lessee fails to give Lessor any such notice, then such option to extend and all future options to extend granted in this Paragraph 5.1 shall be null and void. 5.2 BASE RENT DURING EXTENDED TERMS. The Base Rent for the first Lease Year in each Extended Term shall be the higher of: Fair Market Rent (as determined in Paragraph 4.3 above); or the Base Rent at the rate paid immediately preceding such Extended Term, adjusted by the C.P.I. Annual Multiplier (as defined in Paragraph 4.4 above). The Base Rent for each subsequent Lease Year in each Extended Term shall be the Base Rent at the rate paid during the immediately prior Lease Year, adjusted by the C.P.I. Annual Multiplier. -3- 6. HAZARDOUS SUBSTANCES. 6.1 LESSEE'S OBLIGATIONS FOR HAZARDOUS SUBSTANCES. Lessee shall, at its sole cost and expense, take all actions as may be required to cause the Premises including, but not limited to, the real property described in Exhibit "A" attached hereto and all improvements located thereon, to be in compliance with the applicable requirements under any federal, state and/or local law, any judicial order and/or any governmental entity, relating to any Hazardous Substances released, arising or discovered prior to, at, or after the Commencement Date and during the Term. 6.2 INDEMNIFICATION. Lessee hereby agrees to fully indemnify, protect, defend and hold harmless Lessor from any costs, damages, claims, liability or loss of any kind or nature that arise during or after the Term of this Lease directly or indirectly from or in connection with the presence, suspected presence, release or suspected release, removal or remediation of Hazardous Substances in, on, under or about the Premises, or any part thereof, whether or not such injury or damage has been caused in whole or in part by the act, negligence, fault or omission of Tenant, its agents, servants, contractors, employees, representatives, licensees or invitees. Lessee's obligations hereunder shall apply to all Hazardous Substances, irrespective of when they arose or were discovered and therefore will include any Hazardous Substances that existed prior to, at, or after the Commencement Date and during the Term. 6.3 REMEDIAL WORK. In the event any investigation or monitoring of site conditions or any clean-up, containment, restoration, removal or other remedial work (collectively, "Remedial Work") is required under any applicable federal, state or local law, by any judicial order, or by any governmental entity, Lessee shall perform or cause to be performed the Remedial Work in compliance with such law or order. All Remedial Work shall be performed by one or more contractors, selected by Lessee and approved in advance in writing by Lessor, and under the supervision of a consulting engineer selected by Lessee and approved in advance in writing by Lessor. All costs and expenses of such Remedial Work shall be paid by Lessee, including without limitation the charges of such contractor(s), the consulting engineer and Lessor's reasonable attorneys' fees and costs incurred in connection with monitoring or review of such Remedial Work. 6.4 ARBITRATION. In the event that Lessor and Lessee are unable to resolve any dispute concerning Hazardous Substances, or the provisions of this Paragraph 6 or Paragraphs 6.2 or 9.7 of the Lease, then either party may request that resolution of the dispute be determined pursuant to binding arbitration under the Commercial Arbitration Rules of the American Arbitration Association. In the event that the parties' dispute is resolved pursuant to arbitration, the prevailing party shall be entitled to recover its reasonable attorneys' fees and other costs and expenses incurred in connection with such arbitration. 6.5 SURVIVAL. Each of the covenants and agreements of Lessee set forth in this Paragraph 6, and in Paragraph 6 of the Lease, shall survive the expiration or earlier termination of this Lease. 7. WAIVER OF SUBROGATION. In the event that Lessor's insurance policies with respect to the Premises permit a waiver of subrogation, Lessor hereby waives any and all rights of recovery against Lessee for loss of or damages to the Premises arising out of or incident to the perils required to be insured against under Paragraph 8 of the Lease; provided however that such waiver of subrogation shall be limited exclusively to insurance proceeds actually received by Lessor for such damage or destruction. In the event Lessee's insurance policies with respect to the Premises permit a waiver of subrogation, Lessee hereby waives any and all rights of recovery against Lessor for loss of or damage to any property of Lessee arising out of or incident to the perils required to be insured against under Paragraph 8 of the Lease. 8. SEISMIC UPGRADE. No later than December 31,1998, Lessee shall, at Lessee's sole cost and expense, perform or cause to be performed all repairs and other actions as may be necessary or appropriate to cause the Premises to be in compliance with all applicable laws, -4- ordinances, rules and regulations relating to earthquake or seismic safety to the satisfaction of the appropriate governmental entities or as otherwise required by Lessor. 9. LESSOR EXCULPATION. It is expressly understood and agreed that notwithstanding anything to the contrary in the Lease, and notwithstanding any applicable law to the contrary, the liability of Lessor hereunder (including any successor landlord) and any recourse by Lessee against Lessor shall be limited solely and exclusively to the interests of Lessor in and to the Premises, and neither Lessor, nor any of its constituent members or partners, shall have any personal liability therefor, and Lessee hereby expressly waives and releases such personal liability on behalf of itself and all persons claiming by, through or under Lessee. LESSOR: SENTER PROPERTIES, LLC, a California limited liability company By: /s/ DANIEL P. FLAMEN ------------------------------------------- Name: DANIEL P. FLAMEN -------------------------------------- Title: -------------------------------------- By: /s/ TIMOTHY E. HOWARD ------------------------------------------- Name: TIMOTHY E. HOWARD -------------------------------------- Title: -------------------------------------- LESSEE: BURKE INDUSTRIES, INC., a California corporation By: /s/ ROCKY GENOVESE ------------------------------------------- Name: Rocky Genovese -------------------------------------- Title: President -------------------------------------- -5- EXHIBIT "A" THE PREMISES -6- Order No. 512306 Page No. 8 LEGAL DESCRIPTION REAL PROPERTY in the City of San Jose, County of Santa Clara, State of California, described as follows: PARCEL ONE: Parcel Two, as shown on that certain Parcel Map, being a portion of Lot 2 of the Chaboya Partition, which Map was filed for record in the office of the Recorder of the County of Santa Clara, State of California on October 30, 1978, in Book 429 of Maps page(s) 18 and 19. PARCEL TWO: A perpetual easement for light and air over the Southeasterly 30 feet of Parcel One, as said Parcel One is shown on that certain Parcel Map filed for record on October 30, 1978 in Book 429 of Maps, page(s) 18 and 19, Santa Clara County Records; and as granted in the Deeds executed by Burke Rubber Company, Inc., a corporation and recorded August 15, 1968 in Book 8228, page 216, Official Records, and recorded September 27, '1971 in Book 9518, page 216, Official Records. APN: 477-50-005 ARB: 477-21-49, 64 RECORDING REQUESTED BY AND WHEN RECORDED RETURN TO Stern, Neubauer, Greenwald & Pauly A Professional Corporation 1299 Ocean Avenue, Tenth Floor Santa Monica, California 90401-1007 Attention: Dennis L. Greenwald, Esq. - ------------------------------------------------------------------------------- LEASE AMENDMENT AGREEMENT This Lease Amendment Agreement (this "Agreement") is entered into as of the 18th day of April, 1997, by and among SENTER PROPERTIES, LLC, a California limited liability company ("Landlord"), and B INDUSTRIES, INC., a California corporation, successor in interest to Burke Rubber Company, Inc. ("Tenant"). RECITALS: A. Tenant and Senter Associates ("Original Landlord") entered into that certain Lease ("Lease") dated August 1, 1971, and disclosed by that certain Memorandum of Assignment of Lease, recorded March 4, 1988 in Book K462, page 220, Official Records of Santa Clara County, California, whereby Original Landlord leased to Tenant, and Tenant leased from Original Landlord, those certain premises located at 2049 Senter Road, San Jose, California (the "Premises"). B. Substantially concurrently herewith, Landlord is acquiring from National Industrial Investors, Inc., a California corporation, successor in interest to Original Landlord ("Seller") all of Seller's right, title and interest in, to and under the Premises and the Lease. C. Tenant and Landlord desire to amend the Lease subject to the terms and conditions and as otherwise provided below. AGREEMENT NOW, THEREFORE, in consideration of the foregoing recitals and the conditions and the covenants hereinafter contained, and for other consideration hereinafter set forth, the receipt and sufficiency of which are hereby acknowledged, Landlord and Tenant hereby agree as follows: -1- 1. TERM OF THE LEASE. Notwithstanding any provision in the Lease to the contrary, the Lease is hereby amended to provide that the term of the Lease shall expire at the earlier to occur of the following: (a) 11:59 p.m. Pacific Daylight Savings Time on May 9, 1997; or (b) the close of "Escrow" and the recordation of the Grant Deed in the Official Records of Santa Clara County, California, as and when contemplated under that certain Real Estate Sales Agreement, by and between Seller, as "Seller", and Landlord, as "Purchaser", relating to the Premises. 2. EFFECT OF EXPIRATION OF TERM. Upon expiration of the term of the Lease, as and when provided herein, the Lease and all of the parties' rights and obligations thereunder shall immediately terminate and be of no further force and effect. 3. COUNTERPARTS. This Agreement may be executed in counterparts, each of which shall be deemed an original, but such counterparts, when taken together, shall constitute one agreement. IN WITNESS WHEREOF, Landlord and Tenant have executed this Agreement as of the day and year first above written. SENTER PROPERTIES, LLC, a California limited liability company By: /s/ Daniel P. Flamen ----------------------------------------- Name: Daniel P. Flamen ----------------------------------------- Title: ----------------------------------------- By: /s/ Timothy E. Howard ----------------------------------------- Name: Timothy E. Howard ----------------------------------------- Title: ----------------------------------------- BURKE INDUSTRIES, INC., a California corporation By: /s/ Rocky Genovese ----------------------------------------- Name: Rocky Genovese ----------------------------------------- Title: President ----------------------------------------- -2- ACKNOWLEDGMENT STATE OF CALIFORNIA ) ) SS. COUNTY OF ) On ___________ before me, _______________ Notary Public, personally appeared _____________________________________________________________________________ ________________________________________ personally known to me (or proved to me on the basis of satisfactory evidence) to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument person(s), or the entity upon behalf of which the person(s) acted, executed the instrument. WITNESS my hand and official seal. -------------------------------------- NOTARY PUBLIC State of California STATE OF CALIFORNIA ) ) SS. COUNTY OF ) On APRIL 29, 1997 before me, ROSEANN DYBAS, Notary Public, personally appeared ROCKY GENOVESE personally known to me (or proved to me on the basis of satisfactory evidence) to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument person(s), or the entity upon behalf of which the person(s) acted, executed the instrument. WITNESS my hand and official seal. /s/ Roseann Dybas [SEAL] --------------------------------------- NOTARY PUBLIC State of California EX-10.19 15 EXH 10.19 SERVICING AGMT W/ WESTLAND TECH EXHIBIT 10.19 SERVICE AGREEMENT This SERVICE AGREEMENT (this "Agreement") is entered into as of June 27, 1996 between WESTLAND TECHNOLOGIES, INC., a California corporation, ("Buyer"), BURKE RUBBER COMPANY, INC., a California corporation ("Seller"), and BURKE INDUSTRIES, INC., a California corporation ("Burke Industries"). RECITALS A. Pursuant to that certain Asset Sale Agreement ("Sale Agreement") dated as of March 15, 1996, Seller agreed to sell, and Westland Technologies, LLC, a California limited liability company ("Westland LLC"), agreed to buy, those certain "Assets' used in connection with the "Business" of Seller, as such terms are more specifically described therein. Except as otherwise specifically described herein, initially capitalized terms used herein shall have the same meaning as set forth. in the Sale Agreement. B. Buyer is the owner and holder of all of Westland LLC's rights and obligations under the Sale Agreement. C. In connection therewith, and in order to promote Buyer's ability to continue the operation of the Business after the Closing, the parties desire that for a temporary period of time the parties take certain actions and provide certain goods and services in connection with the Business, subject to the terms and conditions and as otherwise provided for herein. NOW, THEREFORE, in consideration of the mutual conditions and provisions herein after set forth, and the provisions of the Sale Agreement, the parties hereto agree as follows: 1. TRANSACTIONS RELATING TO THE BUSINESS. 1.1 BUYER'S RIGHT TO PURSUE CERTAIN TRANSACTIONS. The parties acknowledge and agree that Buyer shall have the right, at its sole cost and expense, to take any and all actions as, in the reasonable opinion of Buyer, may be necessary to complete the transactions described in Paragraphs l (a), (b), (c) and (d) below, to the extent and during the periods described therein. (a) the transfer from Seller to Buyer of those military contracts described on EXHIBIT 1 attached hereto ("Contracts"), subject to the condition that Buyer assume all liabilities of and claims against Seller. under the Contracts, that Buyer obtain the consent of the applicable governmental agency of such transfer, and that the documents evidencing such transfer and consent be satisfactory to Seller in its reasonable discretion, and further provided that any such transfer and consent be completed no later than one year after the date hereof; (b) the transfer from Seller to Buyer of the tooling and equipment used to manufacture "large o-rings" (and the fixtures related thereto) described on EXHIBIT 2 attached hereto ("Tooling"), subject to the condition that Buyer assume all liabilities of and claims against Seller under the Contracts, that Buyer obtain the consent of the owner of such Tooling of such transfer, and that the documents evidencing such transfer and consent be satisfactory to Seller in its reasonable discretion, and further provided that any such transfer and consent be completed no later than one-year after the date hereof; (c) the consent of the owner of all tooling and equipment located in or used in connection with the Business and not wholly owned by Seller or Buyer ("Other Party Owned Tooling") , subject to the condition that if such consent is not obtained within one year after the date hereof, Buyer shall at its sole cost and expense return such Other Party Owned Tooling to the owner thereof or, at the election of Burke Industries, to Burke Industries; and (d) the obtaining of funding from the U.S. Department of Defense and/or relevant shipyards relative to the continuation of the "acid etch" operations as conducted by Burke Industries at its San Jose facility, provided that such funding be obtained no later than the two-year anniversary of the date hereof. 1.2 SELLER'S AND BURKE INDUSTRIES' COOPERATION. During the one-year period commencing on the date hereof (or longer period indicated below), each of Seller and Burke Industries agrees that: (i) Seller and/or Burke Industries will take such actions and properly execute and deliver to Buyer such further instruments of assignment, conveyance and transfer as, in the reasonable opinion of Buyer, may be necessary to assure, complete and evidence the full and effective completion of those transactions described in Paragraph 1.1 above; (ii) Burke Industries shall, in all material respects, use its best efforts to keep available to Buyer the Tooling substantially at the same location and in the same condition as existing as of the date hereof and, promptly. upon any transfer of such Tooling to Buyer, Burke Industries shall furnish the facilities and the labor for loading the Tooling onto trucks furnished by Buyer; and (iii) Burke Industries shall, in all material respects, use its best efforts to conduct the "acid-etch" operations in the usual, regular and ordinary course, substantially in the same manner as theretofore conducted, and to keep available said operations to Buyer for two (2) years after the date hereof. 2. GOODS AND SERVICES. 2.1 DELIVERY OF GOODS AND SERVICES. Burke Industries shall manufacture and deliver upon Buyer's written request, and Buyer shall pay for and accept, the following goods and services, at the prices and subject to the terms and conditions, set forth below: (a) during the one-year period commencing on the date hereof and expiring on the one-year anniversary of the date hereof, on those approximately thirty-three (33) different types of compounds and those certain processing services and materials listed on EXHIBIT 3 attached hereto, shall be at the prices and otherwise subject to the terms and conditions set forth on EXBIBIT 3; provided, however, that the acid 2 etching pricing in effect as of the date hereof will remain effective as to the AD 79 shipset now in progress until its completion on or about July, 1996; (b) during the period commencing on the one-year anniversary of the date hereof and expiring on the two-year anniversary of the date hereof, those approximately thirty-three (33) different types of compounds listed on EXHIBIT 3 attached hereto, at the prices set forth on EXHIBIT 3 subject to two semi-annual increases (on said one-year anniversary, and six months thereafter) as follows: (i) 70% of the stated price being adjusted by an index that measures the increase, if any, in Burke Industries' formula costs from January 26, 1996; and (ii) 30% of the stated price being adjusted by the Producer Price Index (or, if discontinued, by a comparable index acceptable to Burke Industries and Buyer); (c) during the six-month period commencing on the date hereof and expiring on the date which is six months from the date hereof, those certain technical and laboratory services necessary or appropriate to complete the development of the products described on EXHIBIT 4 attached hereto, at the prices and otherwise subject to the terms and conditions set forth on EXHIBIT 4; (d) during the one-year period commencing on the date hereof and expiring on the one-year anniversary of the date hereof, to the extent that the Tooling described in Paragraph 1.1(b) has not been transferred to Buyer as contemplated therein, those certain "large o-rings" described in EXHIBIT 5 attached hereto, at the prices and subject to the terms and conditions set forth on EXHIBIT 5; and (e) during the nine-month period commencing on the date hereof and expiring on the date which is nine months from the date hereof, the use of Burke Industries' "INFIMACS" computer software system, at the prices and subject to the terms and conditions set forth on EXHIBIT 6 attached hereto. 2.2 DELIVERY; RISK OF LOSS. All goods shall be delivered F.O.B. at Burke Industries' facility located at 2250 South Tenth Street, San Jose, California. Burke Industries shall furnish the facilities and labor for loading the goods onto the trucks or other carrier famished by Buyer. The cost of transportation beyond Burke Industries' facility shall be paid by Buyer. The risk of loss of the goods shall pass to Buyer as soon as the goods are loaded onto the carrier. 2.3 BUYER'S INSPECTION. Buyer shall have the right to inspect the goods for ten (10) days after delivery. This inspection shall be fully and finally determinative of whether the goods conform to the terms of this Agreement. Defects that are not noted and brought to the attention of Burke Industries within ten (10) days after delivery shall not constitute the basis of any claim or defense against Burke Industries under this Agreement or otherwise. Failure to notify Burke Industries of the results of any inspection within ten (10) days after delivery shall constitute a waiver of Buyer's rights of inspection and shall be deemed an acceptance of the goods. 3 2.4 TERMS AND CONDITIONS. Seller's and Burke Industries' obligation to deliver the goods and services described in Paragraph 2.1 above shall be subject to the following conditions precedent, and Buyer hereby agrees to the following: (a) that all such goods and services shall be used only for Buyer's direct use in Buyer's Modesto, California facility (or, if manufactured by Buyer in a location other than Buyer's Modesto, California facility such goods and services shall be used only for the manufacture of those products manufactured by the Business as of the date hereof); (b) that delivery of such products or services shall be provided by Seller or Burke Industries solely on a best efforts basis, subject to the availability of any products or service required by Seller or Burke Industries; and (c) that Buyer shall notify Burke Industries in writing of its requirements at least ten (10) business days in advance of any requested shipment. The parties hereto acknowledge and agree that any of Seller or Burke Industries may buy or sell the goods described in Paragraph 2.1 from or to any other party. 2.5 PAYMENT. Buyer shall make payment for the goods or services provided hereunder at the time of delivery by cash, certified check or by means of the "Line of Credit" (as defined in, and subject to the terms and conditions of, Paragraph 3 below). 2.6 TERMINATION. As to the goods and/or services described in each of Paragraphs 2.1(a), (b), (c), (d) and (e) above, the pricing, terms and conditions set forth thereunder shall apply only to the extent that orders are placed and shipped for delivery within the prevailing delivery cycle for such products or services, or are in such quantities where such orders do not exceed 100% of the highest monthly usage within the most recent twelve (12) months (or, as to Paragraph 2.1(c), that services are requested and scheduled) during the periods described in said Paragraphs 2.1(a), (b), (c), (d) and (e). Immediately upon expiration of the periods described in said Paragraphs 2.1(a), (b), (c), (d) and (e), Burke Industries' and Seller's obligations and the prices, terms and conditions set forth thereunder shall terminate and be of no further force and effect. 3. LINE OF CREDIT. Subject to the provisions of this Paragraph 3, for the three-year period commencing as of the date hereof, Burke Industries agrees to make available to Buyer a temporary purchase money line of credit ("Line of Credit"), in an amount not to exceed Three Hundred Fifty Thousand Dollars ($350,000.00), which Line of Credit shall be available solely for the purchase of products or services from Seller or Burke Industries for Buyer's direct use in Buyer's Modesto, California facility (or, if manufactured by Buyer in a location other than Buyer's Modesto, California facility such goods and services shall be used only for the manufacture of those products manufactured by the Business as of the date hereof), and provided that payment in full must be made no later than sixty (60) days after Burke Industries' presentment of invoice. Among other conditions, the Line of Credit, and Burke Industries' obligation to extend credit to Buyer, shall be subject to the following conditions: (i) Buyer not being in default under any credit or lending agreements with any other creditors or lenders relating to the Business or the Assets; (ii) Buyer remaining in full satisfaction of the terms of the Note (as defined in the Sale Agreement); and (iii) Buyer remaining in compliance with the sixty (60) day payment terms and the other terms and conditions of said Line of Credit. 4 4. BLACK TILE AGREEMENT. 4.1 COMMISSIONS PAYABLE. Subject to the provisions of Paragraph 4.3 below, Burke Industries shall pay to Buyer a commission of five percent (5.00%) of the net invoice value (exclusive of freight and transportation costs, trade discounts, and sales and other taxes) of all shipments of the product commonly known as "Black Tile, " Stock No. FXA 3624 ("Black Tile") from Burke Industries' San Jose, California facility to Unified Defense, L.P. to the extent such shipments are made and invoices are rendered during the three-year period commencing on the date hereof and expiring on the three-year anniversary hereof ("Commission Period") . All commissions payable to Buyer shall be due and payable reasonably promptly upon Burke Industries' receipt of payment from Unified Defense, L.P. 4.2 RIGHT OF FIRST OFFER. Subject to the provisions of Paragraph 4.3 below, in the event Burke Industries elects in its sole discretion not to directly manufacture Black Tile at any time during the Commission Period, Burke Industries shall first offer to Buyer the right for the contract manufacturing of Black Tile by giving Buyer written notice to that effect ("First Offer Notice"). The First Offer Notice shall specify the economic and other terms upon which Burke Industries in its sole discretion would be willing to contract for the manufacture of Black Tile with Buyer or any other party (which terms may be based upon bids solicited and received by Burke Industries from other third parties). Buyer shall have five (5) business days after receipt of the First Offer Notice to exercise its first offer right with respect to the terms and conditions described in the First Offer Notice, by delivery to Burke Industries of written notice evidencing such exercise. Within ten (10) business days following delivery of such notice of exercise, Burke Industries and Buyer shall prepare and deliver all documents and instruments necessary or appropriate to contract for Buyer's manufacture of Black Tile in accordance with the First Offer Notice and otherwise on terms acceptable to Burke Industries. If Buyer does not exercise its first offer right within said five-day period, or if the documents and instruments are not delivered within said ten-day period, Buyer's first offer right shall immediately terminate and Burke Industries shall be free to contract for the manufacture of Black Tile with any party desired by Burke Industries on economic terms and conditions no more favorable to such party than the most favorable terms and conditions offered to Buyer by Burke Industries. 4.3 CONDITIONS AND LIMITATIONS. In consideration of the covenants and agreements of this Paragraph 4, Buyer and Burke Industries acknowledge and agree to the following: (a) that Burke Industries' obligations under this Paragraph 4 shall be subject to Buyer not being in default under this Agreement, the Note or any other agreements relating to the Business or the Assets; (b) that no representation or warranty is made, express or implied, as to the quantity, price or timing of the Black Tile to be shipped by Burke Industries during the Commission Period; and (c) as between Buyer and Burke Industries, their successors and assigns, Burke Industries is the owner of and has the sole exclusive right to the ownership, possession and use of all contracts, processes, products, production knowledge, machinery, tooling, equipment or other assets, tangible or intangible or held in connection with the Black Tile. 5 5. RIGHT TO INFORMATION. Buyer acknowledges that all existing documents, papers, files and other written materials relating to the financial history, transaction data, accounts and production cost data of the Business to the extent the same was prepared or relates to the period prior to the date hereof ("Financial Information") shall be and remain the property of Seller and/or Burke Industries. Within ninety (90) days after Seller's or Burke Industries' request therefor, Buyer shall deliver to Seller or Burke Industries, as applicable, all Financial Information to the extent in Buyer's possession or otherwise located in the Modesto, California facility. During the one year period commencing on the date hereof and expiring on the one-year anniversary hereof, Buyer shall have the one-time right to request that Burke Industries make available all Financial Information (other than customer proprietary information) to the extent in Burke Industries' possession or otherwise located in the San Jose, California facility for review by Buyer and Buyer's representatives at the San Jose, California facility and for duplication by Buyer at Buyer's sole cost and expense. 6. FINANCIAL STATEMENTS. Buyer will furnish or cause to be furnished to Burke Industries a current financial statement of Buyer, in form and substance acceptable to Burke Industries, consisting of a balance sheet, an income statement and a schedule of covenant compliance, as follows: (a) so long as Buyer is not in default hereunder or under any other agreement with Seller or Burke Industries, on a quarterly basis no later than thirty (30) days after the end of each quarter, and (b) upon the occurrence of any default hereunder or under any other agreement with Seller or Burke Industries (and regardless of whether Buyer cures any such default), on a monthly basis no later than thirty (30) days after the end of each calendar month. 7. COMMERCIAL CODE. Except as otherwise provided herein, this Agreement shall be governed by the Uniform Commercial Code as adopted in the State of California as effective and in force as of the date hereof. 8. NO DUTY OF SELLER OR BURKE INDUSTRIES. The parties acknowledge and agree that, except to the extent specifically provided herein, neither Seller nor Burke Industries owes any duty whatsoever to Buyer, express or implied, with respect to the transport, installation, start-up or continued operation of the Business, the condition of the Assets, or otherwise with respect to the Assets or the Business. 9. TERMINATION. This Agreement may be terminated at any time by mutual written consent of the Buyer and Seller (or Burke Industries) or by either party upon written notice delivered to the other party in the event such party has determined that there has been an assignment prohibited under Paragraph 11 below or that there has otherwise been a material breach of any covenant of the other party contained herein. In the event of termination of this Agreement by either Buyer or Seller as provided above, except for breach, such termination shall be without liability of either party and all of the parties' respective obligations hereunder shall cease. 10. LIMITATION ON DAMAGES. If Seller or Burke Industries breaches or repudiates this Agreement, Buyer's sole right to damages shall be the difference between the contract and the market price. In no circumstances shall Buyer have any right, under any theory of law, to any 6 incidental damages, lost profits, "benefit of the bargain," business opportunities or any form of consequential damages in connection with this Agreement. 11. NO ASSIGNMENT OR DELEGATION. No right or interest in this Agreement may be assigned by any of Buyer, Seller or Burke Industries without the prior written permission of the other party, and no delegation of any obligation owed, or of the performance of any obligation, by Buyer, Seller or Burke Industries, may be made without the written permission of the other party. For purposes of this Paragraph 11, "assignment" shall include without limitation any transfer, assignment or hypothecation, directly or indirectly, of any ownership or voting interest in Buyer, or of any power to direct or cause the direction of the management and policies of Buyer, all of which shall be prohibited under this Paragraph 11. Any attempted assignment or delegation shall be wholly void and totally ineffective for all purposes unless made in conformity with this paragraph. 12. FORCE MAJEURE. Neither Seller nor Burke Industries shall be held responsible for any delivery, any failure to make a delivery or any failure to provide services under this Agreement if that failure is due to any cause, contingency, or circumstance not subject to its control that impairs, prevents or hinders the availability of raw materials or the manufacture or delivery of merchandise or services, including but not limited to federal, state or municipal action, statute, ordinance or regulation; strike or other labor trouble; fire damage to or destruction in whole or in part of merchandise, manufacturing plant or other facility; or the lack or inability to obtain raw materials, labor, fuel or supplies. Seller shall be released from its obligations under this Agreement under any of the circumstances specified in this Paragraph 12. 13. NOTICES. All notices or demands required or permitted under this Agreement shall be in writing, and shall be addressed as follows- If to Buyer: Westland Technologies, Inc. 107 South Riverside Drive Modesto, California 95354 Attn: Thomas Halyburton Telecopier No.: (209) 571-6411 If to Seller or Burke Industries, Inc. Burke Industries: 2550 South Tenth Street San Jose, California 95112 Attn.: Rocco Genovese Telecopier No.: (408) 995-5163 or to such other address as either party may designate from time to time by notice in the manner provided herein. All such communications shall be deemed effective (a) upon delivery to the specified address, if hand-delivered or sent by mail, (b) on the next business day after proper deposit with an overnight air courier with request for next business day delivery, or (c) on the date shown on the telecopier transmittal sheet for transmittal of the documents, if sent by telecopier. 7 14. ARBITRATION. Any controversy or claim arising out of this Agreement, or any breach thereof, shall be settled by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association. 15. TIME IS OF THE ESSENCE. Time is of the essence in the performance of each and every obligation of the parties hereunder. 16. EXHIBITS; RECITALS. All Exhibits attached to this Agreement are incorporated herein by this reference as though set forth in full herein. The parties acknowledge that the Recitals set forth herein are true and correct and are incorporated herein by this reference. 17. GOVERNING LAW. This contract shall be governed by and shall be interpreted and enforced in accordance with the internal laws of the State of California applicable to agreements to be performed entirely within such state. 18. INTEGRATION CLAUSE. This instrument is the entire contract and exclusively determines the rights and obligations of the parties, any prior course of dealing, custom or usage of trade, or course of performance notwithstanding. 19. MODIFICATION. This Agreement can be modified or rescinded only by a writing signed by both of the parties or their duly authorized representatives. 20. COUNTERPARTS. This Agreement may be executed in any number of counterparts each of which shall be an original but all of which shall together constitute but one and the same instrument. 21. WAIVER OF TRIAL BY JURY. EACH OF THE PARTIES HERETO HEREBY WAIVES THE RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, ARISING OUT OF, OR IN ANY WAY RELATING TO: (I) THIS AGREEMENT; OR (II) ANY CONDUCT, ACTS OR OMISSIONS OF ANY OF THE PARTIES HERETO OR ANY OF THEIR DIRECTORS, OFFICERS, EMPLOYEES, AGENTS, ATTORNEYS OR ANY OTHER PERSONS AFFILIATED WITH THEM; IN EACH OF THE FOREGOING CASES, WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. BUYER: WESTLAND TECHNOLOGIES, INC., a California corporation By: /s/ THOMAS HALYBURTON ---------------------- Its: ----------------- SELLER: BURKE RUBBER COMPANY, INC., a California corporation 8 By: /s/ ROCCO C. GENOVESE ---------------------- Its: President ----------------- BURKE INDUSTRIES: BURKE INDUSTRIES, INC., a California corporation By: /s/ ROCCO C. GENOVESE ---------------------- Its: President ----------------- 9 SCHEDULE OF EXHIBITS 1 - List of Military Contracts 2 - Tooling Re: Large O-Rings 3 - Items and Pricing Re: Compounds and Select Products 4 - Servicing and Pricing Re: Selective Services 5 - Items and. Pricing Re: Large O-Rings 6 - Terms and Conditions Re: Data Processing and Accounting Services 10 EXHIBIT 1 Burke Industries, Inc., BRC Agreement List of Military Contracts BURKE ORDER NO. CONTRACT NO. CUSTOMER NAME - --------------------------- ----------------------- ----------------------- #38625 SP043096M4516 DFAS-Columbus Ctr Van Nuys Division P.O. Box 182157 Columbus, OH 43218-2157 #38954 N0060496C0012 DFAS-Columbus Ctr. Van Nuys Division #38456 N6660495MKG90 Naval Undersea Warfare Ctr. Det Supply Officer Building 1176 Newport, RI 02841-1708 EXHIBIT 2 Burke Industries, Inc., BRC Agreement Tooling Re: Large O-Rings Subject to the Service Agreement attached hereto, the following customer-owned tooling is located in Seller's San Jose facility. CUSTOMER CUSTOMER TOOL# BURKE PART # DESCRIPTION - ------------ ----------------- ----------- ---------------------- UTC 64972-00 8817-0020 Mold - 10 ft. O-Ring ROHR 7516644 7427-0008 Mold - 5 ft. O-Ring ROHR Al8534-05-01 7427-0015 Mold - 2-cavity (7ft.) Al8534-07-01 7427-0016 The following Burke-owned fixtures are related to the above customer-owned tooling: 5 ft. fixture 7 ft. fixture 10 ft. fixture EXHIBIT 3 Burke Industries, Inc., BRC Agreement Terms and Pricing Re: Compounds and Select Products Subject to the Service Agreement attached hereto, the pricing for the mixed compounds s as follows: STOCK # MINIMUM ORDER PRICE PER LB. - ----------------- -------------------------- ---------------------- 1021 2,000 lbs. $1.358 1033 2,000 lbs. $1.363 1120 2,000 lbs. $1.630 1125 2,000 lbs. $1.326 1150 700 lbs. $1.526 1152 2,000 lbs. $1.286 1155 2,000 lbs. $0.940 1156 2,000 lbs. $1.456 1174 2,000 lbs. $1.399 3020 2,000 lbs. $0.631 3050 2,000 lbs. $1.292 3056 2,000 lbs. $0.766 3110 2,000 lbs. $1.243 3112 2,000 lbs. $1.225 3112 - slab only 700 lbs. $1.470 4086 2,000 lbs. $1.172 5001 2,000 lbs. $1.604 5035 700 lbs. $2.068 5079 700 lbs. $2.083 5109 2,000 lbs. $1.951 5156 2,000 lbs. $1.644 6012 2,000 lbs. $0.920 6100 AA-1 8 tiles; will be sold as calendared material 6116 2,000 lbs. $0.573 6129 700 lbs. $0.596 8002 1,000 lbs. $1.207 8004 1,000 lbs. $0.921 8005 1,000 lbs. $1.133 8054 1,000 lbs. $0.875 BXA2697 2,000 lbs. $0.928 EXA2945 2,000 lbs. $1.331 HXA3472 2,000 lbs. $1.459 Lot charge of $100 for orders below minimum quantity, in addition to the price per pound. 1 EXHIBIT 3 (CONTINUED) Burke Industries, Inc., BRC Agreement Terms and Pricing Re: Compounds and Select Products Subject to the Service Agreement attached hereto, the pricing for the processed materials listed below are as follows:
MINIMUM ORDER Wilden Pump Materials $3.363 /lb. 2,000 lb. (fabric to be supplied by Buyer) Track Shrouds $85.04 ea. 150 ea. (cured part only; finishing is the responsibility of the Buyer) (fabric to be supplied by Buyer) Extruded viton for Intel $27.50 /lb. 132 lb. Calendared stock for AA-18 tiles Stock 6100 $3.50 /lb. 132 lb. Stock 5112 $4.60 /lb. 132 lb. Acid etching (1) Set up $600.00 shift (2) Plus hourly charge $85.00 hour (i.e. $940.00 for four hours; $1,280.00 per shift) It is estimated that approximately the following units can be processed in one shift: AD-79 400 pieces per shift AA-18 400 pieces per shift Fairing Strips 100 pieces per shift AD-2 500 pieces per shift Grinding of AD-79 tiles Buyer acknowledges responsibility for $0.49 /lb. disposal.
Buyer will receive from Burke Industries a $40,000.00 rebate 30 days following the end of each of the first twelve full calendar quarters (commencing the quarter ending June 30, 1996) during which Buyer has purchased from Seller of Burke Industries at least $350,000.00 of mixed compounds and processed materials included above or otherwise negotiated and purchased by Buyer from Seller and Burke Industries. During the single quarter ending June 30, 1996, Buyer will be required to purchase only $300,000.00 of product or services to earn the $40,000.00 quarterly rebate. This rebate is payable subject to Buyer being in compliance with its outstanding credit arrangements with Seller and Burke Industries. 2 EXHIBIT 4 Burke Industries, Inc. BRC Agreement Servicing & Pricing re: Selective Services Subject to the Service Agreement attached hereto, the following technical assistance will be provided by Burke Industries Technical staff. Pellerin Milnor Dryer Gasket -Technical staff support for four first article parts of varying design selected by Buyer. -Total support, paid by Seller, shall not exceed 40 manhours. -Materials and tools to be provided by Buyer. -Technical support is on a "best effort" basis and Burke carries no responsibility for the successful completion of this project. Dresser Industries NSF Certification -Chief Chemist to monitor progress of on-going compound evaluation by Dresser/NSF and provide formulating assistance. -Total support, paid by Seller, shall not exceed 24 manhours. -Fees and costs related to materials, testing, listing and auditing activities from Dresser, NSF or other outside parties shall be paid by Buyer. -Technical support is on a 'best effort" basis and Burke carries no responsibility for the successful completion of this project. Sheave Liner Performance Upgrade -Attendance by two technical staff people, at Seller's expense, at a one-day meeting (at Buyee's Modesto facility) to evaluate condition of all returned field samples. -Technical support is on a "best effort" basis and Burke carries no responsibility for the successful completion of this project. -Project meeting must be held within one year of the date of the Service Agreement. 1 EXHIBIT 4 (CONTINUED) Burke Industries, Inc. BRC Agreement Servicing & Pricing re: Selective Services Subject to the Service Agreement attached hereto, the pricing and conditions for additional technical services listed below shall be as follows: HOURLY RATE FOR TECHNICAL SUPPORT $75.00/Hr. SENIOR TECHNICIAN Frank Cote Mark Sorensen $50.00/Hr. Mat Wachter Jerry Jackson Conditions: 1) Hourly rate will be charged 'portal to portal' (i.e., charge for travel) also charge for out of pocket expenses. 2) Total maximum availability of 40 hours per person; within six months of date of close. 3) 72 hours notice required. 2 EXHIBIT 5 Burke Industries, Inc. BRC Agreement Items and Pricing Re: Large O-Rings Subject to the Service Agreement attached hereto, the pricing for large O-Rings is as follows: (1) Setup charge per order $2,750.00 (2) Plus a charge per O-Ring equal to $575.50 Rejected parts must be returned within 10 days of delivery, and will be accepted only to the extent of manufacturing defects by the Seller. EXHIBIT 6 Burke Industries, Inc. BRC Agreement Terms and Conditions Re: Data Processing and Accounting Services Subject to the Service Agreement attached hereto, the pricing and conditions for the use of Seller's or Burke Industries' financial, accounting and data processing systems and services will be as follows: For a period of 90 days from the date of the Service Agreement: Use of the IBM RS/6000 Model 320 and attendant peripheral devices (listed below), and access to the INFIMACS program and data base, at no charge. Peripheral devices: 6 ea. Wyse model 370 color terminals 3 ea. IBM model 3164 mono terminals 2 ea. IBM model 2381 printers 1 ea. IBM model 4226 printer Various communication interface devices For an additional period of six months Use of the IBM RS/6000 Model 320 and attendant peripheral devices (listed above), and access to the INFIMACS program and data base, at a charge of $3,000 per month, payable in advance, cancelable at any time by Buyer with 14 days' notice. Within 9 months of the date of the Service Agreement or at the cessation of the above payments, Buyer will return to Seller the IBM RS/6000 Model 320 and attendant peripherals. If, however, the Buyer executes a site license for INFIMACS in that time, then access to Seller's data base will be terminated, and the equipment will become the property of the buyer. ACCOUNTING RECORDS All accounts a able, payroll, billing, and general ledger records are the property of the Seller, and are to be physically returned to the Seller's primary place of business within 90 days after the date of the Service Agreement. EX-10.20 16 EXHBIT 10.20 STOCK PURCHASE AGREEMENT BY AND AMONG BURKE INDUSTRIES, INC., ("BUYER") MERCER PRODUCTS COMPANY, INC. ("MERCER") AND SOVEREIGN SPECIALTY CHEMICALS, INC. ("SELLER") DATED AS OF MARCH 5, 1998
TABLE OF CONTENTS PAGE 1. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2. Purchase and Sale of the Mercer Shares . . . . . . . . . . . . . . 6 (a) Basic Transaction . . . . . . . . . . . . . . . . . . . . . . 6 (b) Purchase Price . . . . . . . . . . . . . . . . . . . . . . . 6 (c) Working Capital Adjustment. . . . . . . . . . . . . . . . . . 6 (d) The Closing . . . . . . . . . . . . . . . . . . . . . . . . . 6 (e) Deliveries at the Closing . . . . . . . . . . . . . . . . . . 6 (f) Closing Review. . . . . . . . . . . . . . . . . . . . . . . . 7 (g) Post-Closing Purchase Price Adjustment. . . . . . . . . . . . 7 3. Representations and Warranties Concerning the Transaction . . . . . 8 (a) Representations and Warranties of Seller. . . . . . . . . . . 8 (i) Organization of the Seller . . . . . . . . . . . . . . . 8 (ii) Authorization of Transaction. . . . . . . . . . . . . . 8 (iii) Noncontravention . . . . . . . . . . . . . . . . . . . 8 (iv) Broker's Fees . . . . . . . . . . . . . . . . . . . . . 8 (v) Mercer Shares. . . . . . . . . . . . . . . . . . . . . . 9 (b) Representations and Warranties of the Buyer . . . . . . . . . 9 (i) Organization of the Buyer. . . . . . . . . . . . . . . . 9 (ii) Authorization of Transaction. . . . . . . . . . . . . . 9 (iii) Noncontravention . . . . . . . . . . . . . . . . . . . 9 (iv) Brokers' Fees . . . . . . . . . . . . . . . . . . . . . 10 (v) Investment . . . . . . . . . . . . . . . . . . . . . . . 10 4. Representations and Warranties Concerning Mercer. . . . . . . . . . 10 (a) Organization, Qualification and Corporate Power . . . . . . . 10 (b) Capitalization . . . . . . . . . . . . . . . . . . . . . . . 10 (c) Noncontravention. . . . . . . . . . . . . . . . . . . . . . . 11 (d) Subsidiaries. . . . . . . . . . . . . . . . . . . . . . . . . 11 (e) Financial Statements. . . . . . . . . . . . . . . . . . . . . 11 (f) Events Subsequent to the Most Recent Financial Statements . . 11 (g) Undisclosed Liabilities . . . . . . . . . . . . . . . . . . . 13 (h) Tax Matters . . . . . . . . . . . . . . . . . . . . . . . . . 13 (i) Tangible Assets . . . . . . . . . . . . . . . . . . . . . . . 14 (j) Real Property . . . . . . . . . . . . . . . . . . . . . . . . 15 (k) Intellectual Property . . . . . . . . . . . . . . . . . . . . 15 (l) Warranties. . . . . . . . . . . . . . . . . . . . . . . . . . 16 (m) Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . 17 (n) Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . 17 (o) Litigation. . . . . . . . . . . . . . . . . . . . . . . . . . 18 i PAGE (p) Employees . . . . . . . . . . . . . . . . . . . . . . . . . . 18 (q) Employee Benefits . . . . . . . . . . . . . . . . . . . . . . 18 (r) Environment, Health and Safety. . . . . . . . . . . . . . . . 19 (s) Legal Compliance. . . . . . . . . . . . . . . . . . . . . . . 20 (t) Certain Business Relationships with Mercer. . . . . . . . . . 21 (u) Brokers' Fees . . . . . . . . . . . . . . . . . . . . . . . . 21 (v) Disclosure. . . . . . . . . . . . . . . . . . . . . . . . . . 21 (w) Accounts Receivable . . . . . . . . . . . . . . . . . . . . . 21 (x) Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . 21 (y) Customers and Suppliers . . . . . . . . . . . . . . . . . . . 21 (z) Certain Business Practices. . . . . . . . . . . . . . . . . . 22 5. Pre-Closing Covenants . . . . . . . . . . . . . . . . . . . . . . . 22 (a) General . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 (b) Notices and Consents. . . . . . . . . . . . . . . . . . . . . 22 (c) Operation of Business . . . . . . . . . . . . . . . . . . . . 22 (d) Preservation of Business. . . . . . . . . . . . . . . . . . . 23 (e) Access. . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 (f) Notice of Developments. . . . . . . . . . . . . . . . . . . . 23 (g) Exclusivity . . . . . . . . . . . . . . . . . . . . . . . . . 23 (h) HSR Act Filing. . . . . . . . . . . . . . . . . . . . . . . . 23 (i) Plant Closing Notification. . . . . . . . . . . . . . . . . . 24 (j) Intercompany Items. . . . . . . . . . . . . . . . . . . . . . 24 (k) 1996 Audit. . . . . . . . . . . . . . . . . . . . . . . . . . 24 (l) Transitional Services . . . . . . . . . . . . . . . . . . . . 24 6. Additional Covenants. . . . . . . . . . . . . . . . . . . . . . . . 25 (a) General . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 (b) Litigation Support. . . . . . . . . . . . . . . . . . . . . . 25 (c) Transition. . . . . . . . . . . . . . . . . . . . . . . . . . 25 (d) Confidentiality . . . . . . . . . . . . . . . . . . . . . . . 25 (e) Additional Tax Matters. . . . . . . . . . . . . . . . . . . . 26 (f) Covenant Not to Compete . . . . . . . . . . . . . . . . . . . 28 (g) Employee Benefit Plans. . . . . . . . . . . . . . . . . . . . 28 (i) Pension Benefits Provided by the Seller. . . . . . . . . 28 (ii) Welfare Benefits Provided by the Seller . . . . . . . . 29 (iii) Back Service Credit. . . . . . . . . . . . . . . . . . 29 (h) Disability Workers' Compensation. . . . . . . . . . . . . . . 29 (i) Severance Policy. . . . . . . . . . . . . . . . . . . . . . . 29 (j) Collective Bargaining Agreement . . . . . . . . . . . . . . . 30 7. Conditions to Obligations to Closing. . . . . . . . . . . . . . . . 30 (a) Conditions to Obligation of the Buyer . . . . . . . . . . . . 30 (b) Conditions to Obligations of the Seller . . . . . . . . . . . 31 8. Remedies for Breach of This Agreement . . . . . . . . . . . . . . . 32 ii PAGE (a) Survival. . . . . . . . . . . . . . . . . . . . . . . . . . . 32 (b) Indemnification Provisions for Benefit of the Buyer . . . . . 33 (c) Indemnification Provisions for Benefit of the Seller. . . . . 34 (d) Matters Involving Third Parties . . . . . . . . . . . . . . . 35 (e) Determination of Loss . . . . . . . . . . . . . . . . . . . . 36 (f) Exclusive Remedy. . . . . . . . . . . . . . . . . . . . . . . 36 (g) Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 (h) Reservation and Nonwaiver of Rights and Remedies. . . . . . . 36 (i) Arbitration with Respect to Certain Indemnification Matters . 36 (j) Adjustment to Purchase Price. . . . . . . . . . . . . . . . . 37 9. Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 (a) Termination of Agreement. . . . . . . . . . . . . . . . . . . 37 (b) Effect of Termination . . . . . . . . . . . . . . . . . . . . 38 10. Miscellaneous. . . . . . . . . . . . . . . . . . . . . . . . . . . 38 (a) Press Releases and Announcements. . . . . . . . . . . . . . . 38 (b) No Third-Party Beneficiaries. . . . . . . . . . . . . . . . . 38 (c) Entire Agreement. . . . . . . . . . . . . . . . . . . . . . . 38 (d) Succession and Assignment . . . . . . . . . . . . . . . . . . 38 (e) Facsimile/Counterparts. . . . . . . . . . . . . . . . . . . . 38 (f) Headings. . . . . . . . . . . . . . . . . . . . . . . . . . . 39 (g) Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 (h) Submission to Jurisdiction. . . . . . . . . . . . . . . . . . 40 (i) Amendments and Waivers. . . . . . . . . . . . . . . . . . . . 41 (j) Severability. . . . . . . . . . . . . . . . . . . . . . . . . 41 (k) Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . 41 (1) Construction. . . . . . . . . . . . . . . . . . . . . . . . . 41 (m) Incorporation of Exhibits, Annexes and Schedules. . . . . . . 42 (n) Specific Performance. . . . . . . . . . . . . . . . . . . . . 42
iii LIST OF EXHIBITS, ANNEXES AND SCHEDULES EXHIBITS Exhibit A Financial Statements Exhibit B Form of Opinion of Buyer's Legal Counsel Exhibit C Form of Opinion of Seller's Legal Counsel ANNEXES Annex I List of Stay-on Bonuses SCHEDULES Disclosure Schedule iv STOCK PURCHASE AGREEMENT This STOCK PURCHASE AGREEMENT (the "AGREEMENT") is entered into as of the 5th day of March, 1998, by and among BURKE INDUSTRIES, INC., a California corporation (the "BUYER"), MERCER PRODUCTS COMPANY, INC., a New Jersey corporation ("MERCER"), and SOVEREIGN SPECIALTY CHEMICALS, INC., a Delaware corporation (the "SELLER"). The Buyer and the Seller are referred to herein individually as a "PARTY" and collectively as the "PARTIES." RECITALS WHEREAS, the Seller owns all of the outstanding capital stock of Mercer; and, WHEREAS, this Agreement contemplates a transaction in which the Buyer will purchase from the Seller, and the Seller will sell to the Buyer, all of the outstanding capital stock of Mercer. AGREEMENT Now, therefore, in consideration of the premises and the mutual promises herein made, and in consideration of the representations, warranties and covenants herein contained, the Parties agree as follows: 1. DEFINITIONS. "ADVERSE CONSEQUENCES" means all actual damages from complaints, actions, suits, proceedings, hearings, investigations, claims, demands, judgments, orders, decrees, stipulations, injunctions, damages, dues, penalties, fines, costs, amounts paid in settlement, liabilities, obligations, taxes, liens, losses, expenses and fees, including all reasonable attorneys' fees and court costs. "AFFILIATE" has the meaning set forth in Rule 12b-2 of the regulations promulgated under the Securities Exchange Act of 1934, as amended. "BASIS" means any past or present fact, situation, circumstance, status, condition, activity, practice, plan, occurrence, event, incident, action, failure to act or transaction that forms the basis for any specified consequence. "BUSINESS" means the business of manufacturing extruded PVC into flooring profiles sold to the construction industry. "BUSINESS DAY" means any day except a Saturday, Sunday or other day in which commercial banks in the State of New York are authorized by law to close. "BUYER" has the meaning set forth in the preface above. "CLOSING" has the meaning set forth in SECTION 2(d) below. "CLOSING DATE" has the meaning set forth in SECTION 2(d) below. "CODE" means the Internal Revenue Code of 1986, as amended. "CONFIDENTIAL INFORMATION" means all confidential information and trade secrets of Mercer including, without limitation, the identity, lists or descriptions of any customers, referral sources or organizations, Financial Statements, cost reports or other Financial Information, contract proposals, or bidding information, business plans and training and operations methods and manuals, personnel records, fee structure and management systems, policies or procedures, including related forms and manuals. "CONTROLLED GROUP OF CORPORATIONS" has the meaning set forth in Code Sec. 1563. "CURRENT EMPLOYEES" has the meaning set forth in SECTION 4(p)(i) below. "DISCLOSURE SCHEDULE" has the meaning set forth in SECTION 4 below. "DOJ" means the Antitrust Division of the United States Department of Justice or any successor Governmental Body. "EMPLOYEE BENEFIT PLAN" means any (a) nonqualified deferred compensation or retirement plan or arrangement which is an Employee Pension Benefit Plan, (b) qualified defined contribution retirement plan or arrangement which is an Employee Pension Benefit Plan, (c) qualified defined benefit retirement plan or arrangement which is an Employee Pension Benefit Plan (including any Multiemployer Plan) or (d) Employee Welfare Benefit Plan or Material fringe benefit plan or program. "EMPLOYEE PENSION BENEFIT PLAN" has the meaning set forth in ERISA Sec. 3(2). "EMPLOYEE WELFARE BENEFIT PLAN" has the meaning set forth in ERISA Sec. 3(1). "EQUITABLE EXCEPTIONS" has the meaning set forth in SECTION 3(a)(i) below. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "EXTREMELY HAZARDOUS SUBSTANCE" has the meaning set forth in Sec. 302 of the Emergency Planning and Community Right-to-Know Act of 1986, as amended. "FIDUCIARY" has the meaning set forth in ERISA Sec. 3(21). "FINANCIAL STATEMENTS" has the meaning set forth in SECTION 4(e) below. "FTC" means the United States Federal Trade Commission or any successor Governmental Body. "GAAP" means generally accepted accounting principles as in effect from time to time. 2 "GOVERNMENTAL BODY" means any federal, state, county, city, town, village, municipal or other governmental department, commission, board, bureau, agency, authority, court or related judicial authority or instrumentality of any of the foregoing. "HSR ACT" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. "INDEMNIFIED PARTY" has the meaning set forth in SECTION 8(d) below. "INDEMNIFYING PARTY" has the meaning set forth in SECTION 8(d) below. "INDEPENDENT ACCOUNTANTS" has the meaning set forth in Section 2(f) below. "INTELLECTUAL PROPERTY" means all (a) trademarks, service marks, trade dress, logos, trade names and corporate names and registrations and applications for registration thereof, (b) copyrights and registrations and applications for registration thereof, (c) computer software, data and documentation and (d) trade secrets and confidential business information (including formulas, compositions, inventions (whether patentable or unpatentable and whether or not reduced to practice), know-how, manufacturing and production processes and techniques, research and development information, drawings, specifications, designs, plans, proposals, technical data, copyrightable works, financial, marketing and business data, pricing and cost information, business and marketing plans, and customer and supplier lists and information). "IRS" has the meaning set forth in SECTION 4(q). "KNOWLEDGE" means, with respect to Mercer or the Seller, actual knowledge after reasonable investigation and inquiry by the Seller, which inquiry shall an inquiry of the following persons: Michael Prude, Robert Covalt, Louis Pace, Stephen Zavodny, Kevin Johnston, William Celentano, Thomas Keup, Kelly Bost and Phil Riggins. "LAWS" means all laws, including the common law, statutes, codes, rules, regulations, ordinances or Orders of any Governmental Body. "LIABILITY" means any liability, debt, obligation, amount or sum due (whether known or unknown, whether absolute or contingent, whether liquidated or unliquidated, and whether due or to become due) including any liability for Taxes. "MATERIAL," "MATERIAL ADVERSE CHANGE" or "MATERIAL ADVERSE EFFECT" means a material adverse effect on the assets, financial condition or results of operations of Mercer. "MERCER" has the meaning set forth in the preface above. "MERCER'S BUSINESS" means the manufacture and distribution of extruded plastic and vinyl products. "MERCER SHARES" means all outstanding shares of the Common Stock, $.10 par value per share, of Mercer. 3 "MOST RECENT BALANCE SHEET" means the balance sheet contained within the Most Recent Financial Statements. "MOST RECENT FINANCIAL STATEMENTS" has the meaning set forth in SECTION 4(e) below. "MOST RECENT FISCAL YEAR END" has the meaning set forth in SECTION (e) below. "MULTIEMPLOYER PLAN" has the meaning set forth in ERISA Sec. 3(37). "NET WORKING CAPITAL OF MERCER" means an amount equal to (a) total current assets of Mercer (other than cash and cash equivalents, intercompany indebtedness (other than trade receivables), prepayments of any Taxes for which Seller is liable pursuant to SECTION 6(e) and prepaid premiums for insurance maintained for Mercer by Seller and/or its Affiliates), MINUS (b) total current liabilities of Mercer (excluding intercompany indebtedness (other than intercompany trade payables), premiums payable for insurance maintained for Mercer by Seller and/or its Affiliates, accruals on account of stay-on bonuses listed on ANNEX I hereto and Taxes for which Seller is liable pursuant to SECTION 6(e), PLUS (c) the amount of Retained Cash Balances, in each case calculated in accordance with GAAP, consistently applied on a basis consistent with the application of accounting principles utilized in the preparation of the Financial Statements. "ORDER" means any order, writ, injunction, decree, judgment, award, determination or written direction of any court, arbitrator or Governmental Body. "ORDINARY COURSE OF BUSINESS" means the ordinary course of business consistent with past custom and practice (including with respect to quantity and frequency). "PARTY" has the meaning set forth in the preface above. "PBGC" means the Pension Benefit Guaranty Corporation. "PERMITTED LIEN" means (a) mechanic's, materialmen's and similar liens, (b) liens for Taxes not yet due and payable (or for Taxes that the taxpayer is contesting in good faith through appropriate proceedings), (c) liens arising under workers' compensation, unemployment insurance, social security, retirement and similar legislation, (d) liens arising in connection with sales of foreign receivables, (e) liens on goods in transit incurred pursuant to documentary letters of credit and (f) purchase money liens and liens securing rental payments under capital lease arrangements. "PERSON" means an individual, corporation, partnership, association, trust or other entity or organization, including a Governmental Body or an agency or instrumentality thereof. "POST-CLOSING TAX PERIOD" means any Tax period that commences after the Closing Date. "PRE-CLOSING TAX PERIOD" means any Tax period that ends prior to the Closing Date. "PRELIMINARY CLOSING BALANCE SHEET" has the meaning set forth in SECTION 2(c) below. 4 "PRODUCTS" means that group of products which has been designed, developed and/or produced or which is presently sold or offered for sale by the Business. "PROHIBITED TRANSACTION" has the meaning set forth in ERISA Sec. 406 and Code Sec. 4975. "PURCHASE PRICE" has the meaning set forth in SECTION 2(b) below. "REAL PROPERTY" has the meaning set forth in SECTION 4(j) below. "REPORTABLE EVENT" has the meaning set forth in ERISA Sec. 4043. "RETAINED CASH BALANCES" means the balances of all cash, deposit, money market and the like accounts of Mercer immediately following the Closing. "SECTION 338 DELTA" has the meaning set forth in Section 6(e)(xi). "SECTION 338 ELECTIONS" has the meaning set forth in Section 6(e)(ix). "SECTION 338 TAXES" has the meaning set forth in Section 6(e)(xi). "SECURITIES ACT" means the Securities Act of 1933, as amended. "SECURITY INTEREST" means any mortgage, pledge, security interest, encumbrance, charge, or other lien, other than (a) mechanic's, materialmen's and similar liens, (b) liens for Taxes not yet due and payable (or for Taxes that the taxpayer is contesting in good faith through appropriate proceedings), (c) liens arising under workers' compensation, unemployment insurance, social security, retirement and similar legislation, (d) liens arising in connection with sales of foreign receivables, (e) liens on goods in transit incurred pursuant to documentary letters of credit, (f) purchase money liens and liens securing rental payments under capital lease arrangements and (g) other liens arising in the Ordinary Course of Business and not incurred in connection with the borrowing of money. "SELLER" has the meaning set forth in the preface above. "STRADDLE PERIOD" shall mean any Tax period that begins before and ends after the Closing Date. "SUBSIDIARY" means any corporation with respect to which another specified corporation has the power to vote or direct the voting of sufficient securities to elect a majority of the directors. "TAX" means any federal, state, local or foreign income, gross receipts, license, payroll, employment, excise, severance, stamp, occupation, premium, windfall profits, environmental, customs duties, capital stock, franchise, profits, withholding, social security (or similar), unemployment, disability, real property, personal property, sales, use, transfer, registration, value 5 added, alternative or add-on minimum, estimated, or other tax of any kind whatsoever, including any interest, penalty or addition thereto. "TAX RETURN" means any return, declaration, report, claim for refund, or information return or statement relating to Taxes, including any schedule or attachment thereto, and including any amendment thereof. "WORKING CAPITAL TARGET" means $3,500,000. 2. PURCHASE AND SALE OF THE MERCER SHARES. (A) BASIC TRANSACTION. On and subject to the terms and conditions of this Agreement, the Buyer agrees to purchase from the Seller, and the Seller agrees to sell to the Buyer, all of the Mercer Shares for the consideration specified below in this SECTION 2. (B) PURCHASE PRICE. The purchase price for the Mercer Shares to be purchased by the Buyer from the Seller pursuant to the terms hereof shall be the sum of $35,750,000, subject to adjustments as provided in Section 2(g) herein, which shall be paid in cash (the "PURCHASE PRICE"). The Purchase Price shall be paid by the Buyer to the Seller at the Closing by wire transfer or delivery of other immediately available funds to an account or accounts designated by the Seller not less than three (3) business days prior to the Closing Date. (C) WORKING CAPITAL ADJUSTMENT. At the Closing, the Purchase Price shall be adjusted upward on a dollar-for-dollar basis by the amount by which the Net Working Capital of Mercer at Closing is more than $3,600,000, and the Purchase Price shall be adjusted downward on a dollar-for-dollar basis by the amount by which the Net Working Capital of Mercer at Closing is less than $3,400,000. The Net Working Capital of Mercer at Closing shall be preliminarily determined by the Seller not less than five (5) days prior to the Closing Date in good faith by preparation of an estimated balance sheet of Mercer as of the Closing Date (the "PRELIMINARY CLOSING BALANCE SHEET"). (D) THE CLOSING. The closing of the transactions contemplated by this Agreement (the "CLOSING") shall take place at the offices of Gibson, Dunn & Crutcher LLP, 200 Park Avenue, in New York, New York, commencing at 8:00 a.m. local time on a Business Day to be designated by the Buyer (the "CLOSING DATE"); PROVIDED, HOWEVER, that the Closing Date shall be no earlier than the third Business Day following the satisfaction or waiver of all conditions to the obligations of the Parties to consummate the transactions contemplated hereby and no later than April 30, 1998, and PROVIDED, FURTHER, that the Buyer shall give the Seller at least two Business Days advance notice of the Closing. (E) DELIVERIES AT THE CLOSING. At the Closing, (i) the Seller will deliver to the Buyer the various certificates, instruments, and documents referred to in SECTION 7(a) below, (ii) the Buyer will deliver to the Seller the various certificates, instruments and documents referred to in SECTION 7(b) below, (iii) the Seller will deliver to the Buyer stock certificates representing all of the Mercer Shares, endorsed in blank or accompanied by duly executed assignment documents and (iv) the Buyer will deliver to the Seller the consideration specified in SECTION 2(b) above as 6 may be adjusted at the Closing pursuant to SECTION 2(c) above and subject to further adjustment after the Closing pursuant to SECTION 2(g). (F) CLOSING AUDIT. Within 120 days following the Closing Date, Ernst & Young LLP shall prepare and deliver to the Seller and Buyer an audit of the balance sheet of the Company (the "AUDITED CLOSING BALANCE SHEET") at and as of the Closing Date. The cost to prepare the Audited Closing Balance Sheet shall be borne by Buyer. In the event that either Buyer or Seller disputes any item(s) on the Audited Closing Balance Sheet within ten days after such party's receipt thereof, the parties agree that another "Big Five" accounting firm acceptable to Buyer and Seller (the "INDEPENDENT ACCOUNTANTS") will review the disputed item(s) on the Audited Closing Balance Sheet. In conducting such review, the Independent Accountants shall be given access to the workpapers of Ernst & Young, LLP and Buyer shall make available on a reasonable basis those employees and representatives (including employees of Ernst & Young, LLP) who participated in the preparation of the Audited Closing Balance Sheet and the determination of Net Working Capital of Mercer contained therein. The final determination of such disputed item(s) by the Independent Accountants shall be reflected on the Audited Closing Balance Sheet and shall be final and binding on the parties for all purposes and all references to "Audited Closing Balance Sheet" elsewhere in this Agreement shall be deemed to refer to the Audited Closing Balance Sheet as modified by the Independent Accountants. The cost of retaining the Independent Accountants shall be borne by the disputing party; provided however, that the non-disputing party shall reimburse the disputing party for 50% of the cost of the Independent Accountants in the event that such review results in an increase (if Seller is the disputing party) or decrease (if Buyer is the disputing party) of more than $25,000 in the Net Working Capital of Mercer as reflected on the Audited Closing Balance Sheet audited by Ernst & Young LLP. (G) POST-CLOSING PURCHASE PRICE ADJUSTMENT. In the event that the Net Working Capital of Mercer as reflected on the Audited Closing Balance Sheet as finally determined ("FINAL WORKING CAPITAL") is less than the Net Working Capital of Mercer as reflected on the Preliminary Closing Balance Sheet ("PRELIMINARY WORKING CAPITAL"), then the Purchase Price will be adjusted downward, on a dollar-for-dollar basis, to reflect the lesser of (i) the decrease in Final Working Capital from Preliminary Working Capital and (ii) the sum of (A) the amount, if any, by which Final Working Capital is less than $3,400,000 and (B) the amount, if any, by which Preliminary Working Capital exceeded $3,600,000. Conversely, in the event that the Final Working Capital is more than the Preliminary Working Capital, then the Purchase Price will be adjusted upward, on a dollar-for-dollar basis, to reflect the lesser of (i) the increase, if any, in Final Working Capital from Preliminary Working Capital and (ii) the sum of (A) the amount, if any, by which Final Working Capital exceeds $3,600,000 and (B) the amount, if any, by which Preliminary Working Capital was less than $3,400,000. The post-closing adjustment to the Purchase Price, if any, shall be paid by Seller to Buyer or by Buyer to Seller, as the case may be, in immediately available funds within fifteen (15) days of delivery of the Audited Closing Balance Sheet as finally determined. 3. REPRESENTATIONS AND WARRANTIES CONCERNING THE TRANSACTION. 7 (A) REPRESENTATIONS AND WARRANTIES OF SELLER. The Seller represents and Warrants to the Buyer that, subject to the specific qualifications and limitations set forth below, the statements contained in this SECTION 3(a) are correct and complete as of the date of this Agreement and will be correct and complete as of the Closing Date (as though made then and as though the Closing Date were substituted for the date of this Agreement throughout this SECTION 3(a) with respect to itself. (I) ORGANIZATION OF THE SELLER. The Seller is a corporation duly organized, validly existing, and in good standing under the laws of the State of Delaware. (II) AUTHORIZATION OF TRANSACTION. The Seller has full corporate power and authority to execute and deliver this Agreement and to perform its obligations hereunder and this Agreement has been duly executed and delivered by the Seller. This Agreement constitutes the valid and legally binding obligation of the Seller, enforceable in accordance with its terms and conditions, except that (A) such enforceability may be subject to bankruptcy, insolvency, reorganization, moratorium or other laws, decisions or equitable principles now or hereafter in effect relating to or affecting the enforcement of creditors' rights or debtors' obligations generally, and to general equity principles and (B) the remedy of specific performance and injunctive and other forms of equitable relief may be subject to equitable defenses and to the discretion of the court before which any proceeding therefore may be brought (the terms of clause (A) and (B) are sometimes collectively referred to as the "EQUITABLE EXCEPTIONS"). Except for filings required by the HSR Act, the Seller need not give any notice to, make any filing with, or obtain any authorization, consent or approval of any Governmental Body in order to consummate the transactions contemplated by this Agreement. (III) NONCONTRAVENTION. Except for approvals required under the HSR Act, neither the execution and the delivery of this Agreement by the Seller, nor the consummation of the transactions contemplated hereby by the Seller, will (A) violate any Law or Order or other restriction of any Governmental Body to which the Seller is subject or (B) conflict with, result in a breach of, constitute a default under, result in the acceleration of, create in any part the right to accelerate, terminate, modify or cancel, or require any notice under any contract, lease, sublease, license, sublicense, franchise, permit, indenture, agreement or mortgage for borrowed money, instrument of indebtedness, Security Interest or other arrangement to which the Seller is a party or by which it is bound or to which any of its assets is subject. (IV) BROKER'S FEES. The Seller has no Liability or obligation to pay any fees or commissions to any broker, finder or agent with respect to the transactions contemplated by this Agreement for which the Buyer could become liable or obligated. (V) MERCER SHARES. The Seller holds of record and owns beneficially all of the Mercer Shares, free and clear of any restrictions on transfer (other than any restrictions under the Securities Act and state securities laws), claims, Taxes, Security Interests (other than those to be removed prior to or concurrently with the Closing pursuant to SECTION 7(a)(xi)), options, warrants, rights, contracts, calls, commitments, 8 equities, preemptive rights and demands. The Seller is not a party to any option, warrant, right, contract, call, put or other agreement or commitment providing for the disposition by the Seller of any capital stock of Mercer (other than this Agreement). The Seller is not a party to any voting trust, proxy agreement, stockholders' agreement or other understanding (written or oral) with respect to the voting of any capital stock of Mercer. (B) REPRESENTATIONS AND WARRANTIES OF THE BUYER. The Buyer represents and warrants to the Seller that the statements contained in this SECTION 3(b) are correct and complete In all material respects as of the date of this agreement and will be correct and complete as of the Closing Date (as though made then and as though the Closing Date were substituted for the date of this Agreement throughout this SECTION 3(b). (I) ORGANIZATION OF THE BUYER. The Buyer is a corporation duly organized, validly existing, and in good standing under the laws of the State of California. (II) AUTHORIZATION OF TRANSACTION. The Buyer has full corporate power and authority (including full corporate power and authority) to execute and deliver this Agreement and to perform its obligations hereunder and this Agreement has been duly executed and delivered by the Buyer. This Agreement constitutes the valid and legally binding obligation of the Buyer, enforceable in accordance with its terms and conditions except for the Equitable Exceptions. Except for filings made under the HSR Act, the Buyer need not give any notice to, make any filing with, or obtain any authorization, consent, or approval of any Governmental Body in order to consummate the transactions contemplated by this Agreement. (III) NONCONTRAVENTION. Except for approvals required under the HSR Act and as set forth on Schedule 3(a)(iii), neither the execution and the delivery of this Agreement by the Buyer, nor the consummation of the transactions contemplated hereby by the Buyer, will (A) violate any Law or Order or other restriction of any Governmental Body to which the Buyer is subject or any provision of its charter or bylaws or (B) conflict with, result in a breach of, constitute a default under, result in the acceleration of, create in any party the right to accelerate, terminate, modify or cancel, or require any notice under any contract, lease, sublease, license, sublicense, franchise, permit, indenture, agreement or mortgage for borrowed money, instrument of indebtedness, Security Interest or other arrangement to which the Buyer is a party or by which it is bound or to which any of its assets is subject and which has a Material Adverse Effect on the Buyer. (IV) BROKERS' FEES. The Buyer has no Liability or obligation to pay any fees or commissions to any broker, finder or agent with respect to the transactions contemplated by this Agreement for which the Seller could become liable or obligated. (V) INVESTMENT. The Buyer is not acquiring the Mercer Shares with a view to or for sale in connection with any distribution thereof within the meaning of the Securities Act. 9 4. REPRESENTATIONS AND WARRANTIES CONCERNING MERCER. The Seller represents and warrants to the Buyer that, subject to the specific qualifications and limitations set forth herein, the statements contained in this SECTION 4 are correct and complete as of the date of this Agreement and will be correct and complete as of the Closing Date (as though made then and as though the Closing Date were substituted for the date of this Agreement throughout this SECTION 4), except to the extent that such representations and warranties are expressed, made as of another specified date, and as to such representation, the same shall be true as of such date and except as set forth in the Disclosure Schedule delivered by the Seller to the Buyer on the date hereof (the "DISCLOSURE SCHEDULE"). The Disclosure Schedule may be updated one or more times prior to the Closing Date; provided that except as otherwise provided in Section 4(p)(i) any such updated Disclosure Schedule containing any material changes must be delivered to the Buyer not less than two business days prior to the date on which the filings required under the HSR Act are to be made pursuant to SECTION 5(h). (a) ORGANIZATION, QUALIFICATION AND CORPORATE POWER. Mercer is a corporation duly organized, validly existing and in good standing under the laws of the State of New Jersey. Mercer is duly authorized to conduct business and is in good standing under the laws of the State of Florida and each other jurisdiction listed on SCHEDULE 4(a) of the Disclosure Schedule, which jurisdictions constitute all of the jurisdictions in which the nature of its businesses or the ownership or leasing of its properties requires such qualification, except where any such failure would not have a Material Adverse Effect. Mercer has full corporate power and authority to carry on the businesses in which it is engaged and to own and use the properties owned and used by it. (b) CAPITALIZATION. The entire authorized capital stock of Mercer consists of 1,000 shares of common stock, 10 of which are issued and outstanding and held by the Seller. None of the Mercer Shares is held in treasury. The Mercer Shares have been duly authorized, are validly issued, fully paid, and nonassessable, and are held of record by the Seller. There are no outstanding or authorized options, warrants, rights, contracts, calls, puts, rights to subscribe, conversion rights or other agreements or commitments to which Mercer is a party or which are binding upon Mercer providing for the issuance, disposition or acquisition of any of its capital stock. There are no outstanding or authorized stock appreciation, phantom stock, or similar rights with respect to Mercer. (c) NONCONTRAVENTION. Except as set forth on SCHEDULE 4(c) of the Disclosure Schedule, neither the execution and the delivery of this Agreement, nor the consummation of the transactions contemplated hereby, will (i) violate any Law or Order or other restriction of any Governmental Body to which Mercer is subject or any provision of the charter or bylaws of Mercer or (ii) conflict with, result in a breach of, constitute a default under, result in the acceleration of, create in any party the right to accelerate, terminate, modify or cancel, or require any notice under any contract, lease, sublease, license, sublicense, franchise, permit, indenture, agreement or mortgage for borrowed money, instrument of indebtedness, Security Interest or other arrangement to which Mercer is a party or by which it is bound or to which any of its assets is subject (or result in the imposition of any Security Interest upon any of its assets). Except for the filing under the HSR Act, Mercer does not need to give any notice to, make any filing with, or 10 obtain any authorization, consent or approval of any Governmental Body in order for the Parties to consummate the transactions contemplated by this Agreement. (d) SUBSIDIARIES. Except as disclosed on SCHEDULE 4(D) of the Disclosure Schedule, Mercer has no Subsidiaries and does not control, directly or indirectly, or have any direct or indirect equity participation in any Person. (e) FINANCIAL STATEMENTS. Attached hereto as EXHIBIT A are the following financial statements (collectively, the "FINANCIAL STATEMENTS") of Mercer: (i) unaudited statement of operations and cash flows for the fiscal years ended December 3l, 1995 and 1996, (ii) unaudited balance sheet as of December 31, 1994, 1995 and 1996 (collectively, the Financial Statements contained in (i) and (ii) are collectively referred to herein as the "UNAUDITED FINANCIAL STATEMENTS"), (iii) an audited balance sheet and statement of operations, changes in stockholders' equity and cash flows as of and for the period commencing January 1, 1997 and ending August 4, 1997 (prior to the acquisition by Seller) and (iv) a draft audited balance sheet and statement of operations, changes in stockholders' equity and cash flows as of and for the period commencing August 5, 1997 and ending December 31, 1997 (the "Draft Statements," and collectively with the financial statements set forth in part (iii), the "MOST RECENT FINANCIAL STATEMENTS"). Except as set forth on Schedule 4(e) of the Disclosure Schedule, the Most Recent Financial Statements have been prepared in accordance with GAAP applied on a consistent basis throughout the periods covered thereby, are correct and complete in all material respects, fairly present the financial condition of Mercer as of such dates, and are consistent with the books and records of Mercer (which books and records are correct and complete in all material respects). Except as set forth on Schedule 4(e) of the Disclosure Schedule, the Financial Statements for the fiscal years ended December 31, 1995 and 1996 fairly present the financial condition of Mercer as of such dates, and are consistent with the books and records of Mercer (which books and records are correct and complete in all material respects). (f) EVENTS SUBSEQUENT TO THE MOST RECENT FINANCIAL STATEMENTS. Except as set forth on SCHEDULE 4(F) of the Disclosure Schedule, since December 31, 1997, there has not been any adverse change in the assets, Liabilities, business, financial condition, operations or results of operations of Mercer. Without limiting the generality of the foregoing since that date: (i) Mercer has not sold, leased, transferred or assigned any of its assets, tangible or intangible, other than for a fair consideration in the Ordinary Course of Business; (ii) Mercer has not entered into any contract, lease, sublease, license or sublicense (or series or related contracts, leases, subleases, licenses and sublicenses) either involving more than $100,000 or outside the Ordinary Course of Business; (iii) Mercer has not accelerated, terminated, modified or canceled any contract, lease, sublease, license or sublicense (or series of related contracts, leases, subleases, licenses and sublicenses) involving more than $100,000 to which Mercer is a party or by which it is bound; 11 (iv) no party has notified Mercer of any acceleration, termination, modification or cancellation of any Material customer contract or any contract, agreement, lease, sublease, license or sublicense (or series of related contracts, leases, subleases, licenses and sublicenses), involving more than $100,000 to which Mercer is a party or by which it is bound; (v) Mercer has not made any capital expenditure (or series of related capital expenditures) either involving more than $62,500 individually or $162,500 in the aggregate, or outside the Ordinary Course of Business; (vi) Mercer has not made any capital investment in, any loan to, or any acquisition of the securities or assets of any other person (or series of related capital investments, loans, and acquisitions) either involving more than $50,000 individually or $162,500 in the aggregate; (vii) Mercer has not delayed or postponed (beyond its normal practice) the payment of accounts payable and other Liabilities; (viii) there has been no change made or authorized in the charter or bylaws of Mercer; (ix) Mercer has not experienced any damage, destruction or loss involving more than $100,000 (whether or not covered by insurance) to its Property; (x) Mercer has not made any loan to, or entered into any other transaction with, any of its directors, officers and employees outside the Ordinary Course of Business or involving more than $50,000, giving rise to any claim or right on its part against the person or on the part of the person against it; (xi) Mercer has not entered into any employment contract or collective bargaining agreement, written or oral, or modified the terms of any existing such contract or agreement with any of its full-time staff employees; (xii) Mercer has not granted an increase in the base compensation of any of its directors, officers and employees outside the Ordinary Course of Business and as set forth on SCHEDULE 4(F) of the Disclosure Schedule; (xiii) Mercer has not adopted any (A) bonus, (B) profit- sharing, (C) incentive compensation, (D) pension, (E) retirement, (F) medical, hospitalization, life, or other insurance, (G) severance or (H) other plan, contract or commitment for any of its directors, officers and employees, or modified or terminated any existing such plan, contract or commitment; (xiv) Mercer has not lost and does not have notice of any potential loss of any significant customer or supplier; (xv) Mercer has not changed its accounting, methods or principles; 12 (xvi) Mercer has not suffered any material shortages of raw materials used in the production of the Products; (xvii) Mercer has not made any material provisions for inventory markdowns or inventory shrinkage; (xviii) Mercer has not made or paid any non-cash dividends or distributions to Seller whether or not upon or in respect of its capital stock; (xix) Mercer has not redeemed or otherwise acquired any shares of its capital stock or issued any capital stock or any option, warrant or right relating thereto or any securities convertible or exchangeable for any shares of its capital stock; and (xx) Mercer has not agreed to do any of the foregoing. (g) UNDISCLOSED LIABILITIES. Mercer does not have any Liability which is individually in excess of $100,000, except for (i) Liabilities set forth on the face of the Most Recent Financial Statements and (ii) Liabilities which have arisen after the Most Recent Financial Statements in the Ordinary Course of Business. (h) TAX MATTERS. Except as set forth on Schedule 4(h) of the Disclosure Schedule: (i) Mercer has filed all Tax Returns that it was required to file. All such Tax Returns were correct and complete in all material respects. All Taxes owed by Mercer (whether or not shown on any Tax Return) have been paid. Mercer currently is not the beneficiary of any extension of time within which to file any Tax Return. To Seller's Knowledge, no claim is currently pending by an authority in a jurisdiction where Mercer does not file Tax Returns that it is or may be subject to taxation by that jurisdiction. There are no Security Interests on any of the assets of Mercer that arose in connection with any failure (or alleged failure) to pay any Tax. (ii) Neither the Seller nor any of the officers (or employees responsible for Tax matters) of Mercer has received any notice that any authority intends to assess any additional Taxes for any period for which Tax Returns have been filed. There is no dispute or claim concerning any Tax Liability of Mercer either (A) claimed or raised by any authority in writing or (B) as to which the Seller or Mercer has Knowledge based upon personal contact with any agent of such authority. SCHEDULE 4(H) of the Disclosure Schedule lists all federal, state and local income Tax Returns filed with respect to Mercer for taxable periods ended on or after December 31, 1993 that currently are the subject of an audit. (iii) Mercer has not filed a consent under Code Sec. 341(f) concerning collapsible corporations. Mercer has not made any payments, is not obligated to make any payments, nor is a party to any agreement that under certain circumstances could obligate it to make any payments that will not be deductible to Mercer under Code Sec. 280G. Mercer has not been a United States real property holding corporation within the meaning 13 of Code Sec. 897(c)(2) during the applicable period specified in Code Sec. 897(c)(1)(A)(ii). Mercer has disclosed on its federal income Tax Returns all positions taken therein that could give rise to a substantial understatement of federal income Tax within the meaning of Code Sec. 6662. Mercer is not a party to any Tax allocation or sharing agreement. (iv) Mercer has no liability for Taxes for any Tax period ending prior to the Closing Date other than Taxes for which there is an accrual for current taxes reflected on the Most Recent Balance Sheet. (v) Mercer has no liability for Taxes of any other person or entity, has no Tax liability as a successor or transferee, and has no Tax liability pursuant to Section 1.1502-6 of the Treasury Regulations or similar provisions of state, local or foreign Tax laws. (vi) Mercer has no liability pursuant to any agreement to share, allocate or reimburse Taxes or Tax benefits. (vii) There are no "excess loss accounts" or "intercompany items," within the meaning of Section 1-1502 of the Treasury Regulations, between Mercer and any member of the Seller affiliated group. (i) TANGIBLE ASSETS. SCHEDULE 4(I) of the Disclosure Schedule includes a true and correct copy of the appraisal of the fixed assets of Mercer obtained by the Seller at the time it acquired Mercer, which covers all of the significant fixed assets of Mercer owned at such time. Mercer owns or leases all tangible assets necessary for the conduct of its businesses as presently conducted. To the Knowledge of the Seller, each such tangible asset is free from Security Interests (other than Permitted Liens or the Security Interests to be removed prior to or concurrently with the Closing pursuant to Section 7(a)(xi)) free from material defects (patent and latent), has been maintained in accordance with normal industry practice, is in good operating condition and repair (subject to normal wear and tear), and is suitable for the purposes for which it presently is used. (j) REAL PROPERTY. SCHEDULE 4(J) of the Disclosure Schedule sets forth all real property owned or leased by Mercer (the "REAL PROPERTY"). Subject to the Permitted Liens and any Security Interests disclosed on SCHEDULE 4(J), Mercer has good and marketable title to, or in the case of leased Real Property has a valid leasehold interest in, the Real Property. All leases of Real Property are valid, binding and enforceable in accordance with their respective terms. Mercer is not in material default under any such leases, and to the Seller's Knowledge, there does not exist under any such lease any material default of any other party or any event which with notice or lapse of time or both would constitute a material default. To the Seller's Knowledge, the Real Property is in good operating condition and repair, normal wear and tear excepted, and is free from any defects that have, or reasonably could have, a Material Adverse Effect. Except as set forth on SCHEDULE 4(J) of the Disclosure Schedule, to the Seller's Knowledge, there are no existing structural defects in any of the Real Property. 14 (k) INTELLECTUAL PROPERTY. (i) Except as set forth on Schedule 4(k) of the Disclosure Schedule, Mercer owns or has the right to use pursuant to license, sublicense, agreement or permission all Intellectual Property necessary for the operation of the business of Mercer as presently conducted. Each item of Intellectual Property owned or used by Mercer immediately prior to the Closing hereunder will be owned or available for use by Mercer on identical terms and conditions immediately subsequent to the Closing hereunder. (ii) To the Knowledge of the Seller, Mercer has not interfered with, infringed upon, misappropriated or otherwise come into conflict with any Intellectual Property rights of third parties, and neither the Seller nor any of the officers (or employees with responsibility for Intellectual Property matters) of Mercer has received within the past year any charge, complaint, claim or notice alleging any such interference, infringement, misappropriation or violation. (iii) SCHEDULE 4(K) of the Disclosure Schedule identifies each patent or trademark, tradename or copyright registration which has been issued to Mercer with respect to any of its Intellectual Property, identifies each pending patent application or application for trademark, tradename or copyright registration which Mercer has made with respect to any of its Intellectual Property, and identifies each license, agreement or other permission which Mercer has granted to any third party with respect to any of its Intellectual Property (together with any exceptions). Except as identified in Schedule 4(k) of the Disclosure Schedule, with respect to each item of Intellectual Property that Mercer owns: (A) the identified owner possesses all right, title and interest in and to the item; (B) the item is not subject to any outstanding Order; and (C) no charge, complaint, action, suit, proceedings, hearing, investigation, claim or demand is pending or, to the Knowledge of the Seller and the officers (and employees with responsibility for Intellectual Property matters) of Mercer, is threatened which challenges the legality, validity, enforceability, use or ownership of the item. (iv) SCHEDULE 4(K) of the Disclosure Schedule also identifies each item of Intellectual Property that any third party owns and that Mercer uses pursuant to license, sublicense, agreement or permission (other than general commercial software). Except as identified in SCHEDULE 4(K) of the Disclosure Schedule, with respect to each such item of used Intellectual Property: (A) to the Knowledge of Seller, the license, sublicense, agreement or permission covering the item is legal, valid, binding, enforceable and in full force and effect, subject to the Equitable Exceptions; 15 (B) to the Knowledge of Seller, the license, sublicense, agreement or permission will continue to be legal, valid, binding, enforceable and in full force and effect on identical terms following the Closing; (C) Mercer is not, and to the Knowledge of the Seller and officers (and employees with responsibility for Intellectual Property matters) of Mercer, no other party to the license, sublicense, agreement, or permission is in breach or default, and no event has occurred which with notice or lapse of time would constitute a breach or default or permit termination, modification or acceleration thereunder; and (D) to the Knowledge of the Seller and officers (and employees with responsibility for Intellectual Property matters) of Mercer, no charge, complaint, action, suit, proceedings, hearing, investigation, claim or demand is pending or is threatened which challenges the legality, validity or enforceability of the underling item of Intellectual Property. (l) WARRANTIES. Except as disclosed on SCHEDULE 4(L) of the Disclosure Schedule, there is no outstanding action, suit, arbitration or other proceeding, or claim, demand, demand letter, lien or notice of noncompliance or violation has been asserted in writing against Mercer and, to the Knowledge of the Seller and Mercer, no event or circumstance has occurred that could reasonably be expected to constitute the basis of any claim against Mercer for injury to any person or any property suffered as a result of the manufacture, distribution or sale of any product or material by Mercer, including any claim arising out of the defective or unsafe nature, or allegedly defective or unsafe nature, of any such product or material, which individually or in the aggregate exceeds $162,500. Due to the historically low warranty claims against the Business, Mercer has expensed such claims and has not set aside reserves on its balance sheet included as part of the Most Recent Financial Statements for all warranty and product liability claims. (m) CONTRACTS. SCHEDULE 4(M) of the Disclosure Schedule lists the following contracts, agreements, customer contracts or agreements and other arrangements (oral or written) to which Mercer is a party: (i) any arrangement (or group of related written arrangements) for the lease of personal property from or to third parties providing lease payments in excess of $100,000 per annum; (ii) any arrangement (or group of related written arrangements) for the purchase or sale of Products, raw materials, commodities, supplies or other personal property or for the furnishing or receipt of services which either calls for performance over a period of more than one year after the Closing Date or involves more than the sum of $100,000; (iii) any arrangement concerning a partnership or joint venture; 16 (iv) any arrangement requiring noncompetition; (v) any arrangement involving the Seller and its Affiliates; or (vi) any other arrangement (or group of related written arrangements) either involving or remaining outstanding one year after the Closing Date of more than $100,000 or not entered into in the Ordinary Course of Business. The Seller has delivered to the Buyer a correct and complete copy of each written arrangement (as amended to date) listed in SCHEDULE 4(M) of the Disclosure Schedule. With respect to each arrangement so listed: (A) the arrangement is legal, valid, binding, enforceable and in full force and effect, subject to the Equitable Exceptions; (B) to the Seller's Knowledge, the arrangement will continue to be legal, valid, binding, enforceable and in full force and effect, subject to Equitable Exceptions, on identical terms following the Closing; (C) Mercer is not, nor to the Knowledge of the Seller, any other party in breach or default, and no event has occurred which with notice or lapse of time would constitute a breach or default or permit termination, modification, or acceleration, under the arrangements; and (D) Mercer has not, nor to the Knowledge of the Seller, has any other party, repudiated any provision of any arrangement. (n) INSURANCE. SCHEDULE 4(N) of the Disclosure Schedule sets forth an accurate and complete list of all policies of fire, liability, keyman life insurance, worker's compensation, products liability and other forms of insurance owned or held by or beneficially for Mercer. All such policies are in full force and effect, no premiums with respect thereto are past due and no notice of cancellation or termination has been received by the Seller or Mercer with respect to any such policy. Neither the Seller nor Mercer has received any notification that material changes are required in the conduct of the Business as a condition to the continuation of coverage under or renewal of any such policy. True, correct and complete copies of such insurance policies have been made available to the Buyer. (o) LITIGATION. SCHEDULE 4(O) of the Disclosure Schedule sets forth each instance in which Mercer (i) is subject to any unsatisfied judgment, order, decree, stipulation, injunction or charge or (ii) is a party or, to the Knowledge of the Seller and Mercer, is threatened to be made a party, to any charge, complaint, action, suit, proceeding, hearing or investigation of or in any court or quasi-judicial or administrative agency of any federal, state, local or foreign jurisdiction or before any arbitrator. (p) EMPLOYEES. (i) SCHEDULE 4(P)(I) of the Disclosure Schedule lists all of the employees of Mercer currently on the Mercer payroll as of the date of this Agreement (including those on leaves of absence), which schedule will be updated at and as of the Closing Date to reflect any employees hired or terminated prior to the Closing Date ("CURRENT EMPLOYEES"). (ii) To the Knowledge of the Seller, no key employee or full- time group of employees has any plans to terminate employment with Mercer (other than 17 Michael Prude). Except as set forth on SCHEDULE 4(P)(II) of the Disclosure Schedule, Mercer is not a party to or bound by any collective bargaining agreement, nor has it experienced any strikes, grievances, claims of unfair labor practices or other collective bargaining disputes. To the Knowledge of the Seller, Mercer has not committed any unfair labor practice. (q) EMPLOYEE BENEFITS. SCHEDULE 4(Q) of the Disclosure Schedule lists all Employee Benefit Plans in which any current or former employee of Mercer participates, whether sponsored by Mercer or an affiliate of Mercer. Copies of each such plan and related trust agreements, service agreements and insurance policies and the three (3) most recent annual reports on Internal Revenue Service ("IRS") Form 5500 for each plan shall be provided to Buyer. (i) Each Employee Benefit Plan (and each related trust or insurance contract) substantially complies in form and in operation with its terms and the applicable requirements of ERISA and the Code. (ii) To the Knowledge of Seller, all contributions (including all employer contributions and employee salary reduction contributions) which are due have been paid to each Employee Pension Benefit Plan and all contributions for any period ending on or before the Closing Date which are not yet due have been paid to each Employee Pension Benefit Plan or accrued in accordance with the past custom and practice of Mercer. All premiums or other payments which are due for all periods ending on or before the Closing Date have been paid with respect to each Employee Welfare Benefit Plan. (iii) Each Employee Benefit Plan which is an Employee Pension Benefit Plan intended to be a qualified plan in fact meets the requirements of a "qualified plan" under Code Sec. 401(a), and Seller shall provide to Buyer a copy of the most recent IRS determination letter respecting such plan's qualification. (iv) No Employee Pension Benefit Plan (other than any Multiemployer Plan) has been completely or partially terminated or been the subject of a Reportable Event as to which notices would be required to be filed with the PBGC. No proceeding by the PBGC to terminate any Employee Pension Benefit Plan (other than any Multiemployer Plan) has been instituted or, to the Knowledge of the Seller and officers (and employees with responsibility for employee benefits matters) of Mercer, threatened. (v) There have been no Prohibited Transactions with respect to any Employee Benefit Plan. No Fiduciary has any Liability for breach of fiduciary duty or any other failure to act or comply in connection with the administration or investment of the assets of any Employee Benefit Plans. No charge, complaint, action, suit, proceeding, hearing, investigation, claim or demand with respect to the administration or the investment of the assets of any Employee Benefit Plan (other than routine claims for benefits) is pending or, to the Knowledge of the Seller and the officers (and employees with responsibility for employee benefits matters) of Mercer, threatened. Neither the Seller nor any of the officers (or employees with responsibility for litigation matters) of 18 Mercer has any Knowledge of any Basis for any such charge, complaint, action, suit, proceeding, hearing, investigation, claim or demand. Mercer has not incurred, and neither the Seller nor any of the officers (or employees with responsibility for litigation matters) of Mercer has any reason to expect that Mercer will incur, any Liability to the PBGC (other than PBGC premium payments) or otherwise under Title IV of ERISA (including any withdrawal Liability) or under the Code with respect to any Employee Pension Benefit Plan that Mercer and the Controlled Group of Corporations which includes Mercer maintains or ever has maintained or to which any of them contributes, ever has contributed, or ever has been required to contribute. Mercer does not maintain, nor has it ever maintained or contributed to, or ever has been required to contribute to any Employee Welfare Benefit Plan providing health, accident, or life insurance benefits to former employees, their spouses or their dependents (other than in accordance with Code Sec. 4980B). (r) ENVIRONMENT, HEALTH AND SAFETY. Except as disclosed on SCHEDULE 4(R) of the Disclosure Schedule: (i) Mercer has been and is in compliance with all Laws concerning the environment, public health and safety, and employee health and safety, and no charge, complaint, action, suit, proceeding, hearing, investigation, claim, demand or notice has been filed or commenced against it or, to the Knowledge of the Seller, is threatened alleging any failure to comply with any such Laws. (ii) Mercer has no Liability (and there is no Basis related to the past or present operations, properties or facilities of Mercer and its respective predecessors and Affiliates for any present or future charge, complaint, action, suit, proceeding, hearing, investigation, claim or demand against Mercer giving rise to any Liability) under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, the Resource Conservation and Recovery Act of 1976, the Federal Water Pollution Control Act of 1972, the Clean Air Act of 1970, the Safe Drinking Water Act of 1974, the Toxic Substances Control Act of 1976, the Refuse Act of 1899, or the Emergency Planning and Community Right-to-Know Act of 1986 (each as amended), or any other Law or Order of any Governmental Body, concerning release or threatened release of hazardous substances, public health and safety, or pollution or protection of the environment. (iii) Mercer has no Liability (and Mercer and its predecessors have not handled or disposed of any substance, arranged for the disposal of any substance, or owned or operated any property or facility in any manner that could form the Basis for any present or future charge, complaint, action, suit, proceeding, hearing, investigation, claim, or demand (under any Law) against Mercer giving rise to any Liability) for damage to any site (including the Real Property), location, or body of water (surface or subsurface) or for illness or personal injury. (iv) Mercer has no Liability under the Occupational Safety and Health Act, as amended, or any other Law concerning employee health and safety. 19 (v) Mercer has obtained and been in compliance with all of the terms and conditions of all permits, licenses and other authorizations which are required under, and has complied with all other, Laws and Orders of any Governmental Body relating to public health and safety, worker health and safety, and pollution or protection of the environment, including laws relating to emissions, discharge, releases or threatened releases of pollutants, contaminants or chemical, industrial, hazardous or toxic materials or wastes into ambient air, surface water, ground water or lands or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of pollutants, contaminants or chemical, industrial, hazardous or toxic materials or wastes. (vi) Mercer has delivered or caused to be delivered to the Buyer all environmental assessments, reports, audits and other documents in its possession or under its control that relate to Real Property that Mercer or any predecessor entity currently occupies or has occupied at any time in the past in connection with the Business. (s) LEGAL COMPLIANCE. Mercer has: (i) complied with all non-environmental Laws. No charge, complaint, action, suit, proceeding, hearing, investigation, claim, demand or notice has been filed or commenced against Mercer which is currently pending and alleges any failure to comply with any such non-environmental Law. (ii) not violated in any respect or received a notice or charge asserting any violation of the Sherman Act, the Clayton Act, the Robinson- Patman Act or the Federal Trade Act, each as amended. (iii) filed in a timely manner all reports, documents, and other materials it was required to file (and the information contained therein was correct and complete in all material respects) under all applicable Laws. (t) CERTAIN BUSINESS RELATIONSHIPS WITH MERCER. Except as set forth on SCHEDULE 4(T) of the Disclosure Schedule, neither the Seller nor its Affiliates has been involved in any business arrangement or relationship with Mercer within the past twelve (12) months, and neither the Seller nor Affiliates owns any property or right, tangible or intangible, which is used in Mercer's Business. (u) BROKERS' FEES. Mercer does not have any Liability or obligation to pay any fees or commissions to any broker, finder or similar representative with respect to the transactions contemplated by this Agreement. (v) DISCLOSURE. To the Knowledge of the Seller and the directors and officers of Mercer, the representations and warranties contained in this SECTION 4 as amended, modified and/or supplemented by the Disclosure Schedules do not contain any untrue statement of a Material fact or omit to state any Material fact necessary in order to make the statements and information contained in this SECTION 4 not misleading. 20 (w) ACCOUNTS RECEIVABLE. The accounts receivable of Mercer reflected in the Most Recent Balance Sheet represent sales actually made in the Ordinary Course of Business, represent valid and enforceable claims, and have been properly accrued in accordance with GAAP, net of any reserves reflected in the Most Recent Balance Sheet. Schedule 4(w) of the Disclosure Schedule sets forth an accurate aging schedule of all accounts receivable reflected in the Most Recent Balance Sheet. (x) INVENTORY. As of the date of the Most Recent Financial Statements, all inventory of Mercer consisted of a quality and quantity consistent with the past practices of Mercer, net of any reserves reflected in the Most Recent Balance Sheet. The values reflected on the Most Recent Balance Sheet of obsolete or substandard items of inventory, as determined by Mercer in consultation with their accountants, have been written down to realizable market values or written off, or adequate reserves therefor have been established, all in accordance with GAAP. There are no claims against Mercer to return in excess of an aggregate of $50,000 of merchandise by reason of alleged overshipments, defective merchandise or otherwise, or of merchandise in the possession of customers under an understanding that such merchandise would be returnable. (y) CUSTOMERS AND SUPPLIERS. Schedule 4(y) lists the ten largest customers of Mercer and the ten largest suppliers of Mercer for the most recent fiscal year. To the Knowledge of Seller and Mercer, since January 1, 1997, there has been no material adverse change in the business relationship of Mercer with any customer or supplier named on Schedule 4(y). To the Knowledge of Seller and Mercer and other than in the Ordinary Course of Business, no customer or supplier named on Schedule 4(y) has threatened or expressed an intention to reduce materially the volume of its purchases from or sales to Mercer or otherwise materially modify its business relationship with Mercer. Notwithstanding the foregoing, no representation or warranty is made by Seller that Mercer's relationship with any customer or supplier will not be affected by the purchase of Mercer by Buyer. (z) CERTAIN BUSINESS PRACTICES. To Seller's Knowledge, neither Mercer nor any of its directors, officers, agents or employees has (i) used any funds for unlawful contributions, gifts, entertainment or other unlawful expenses related to political activity, (ii) made any unlawful payment to foreign or domestic government officials or employees or to foreign or domestic political parties or campaigns or violated any provision of the Foreign Corrupt Practices Act of 1977, as amended, or (iii) made any other unlawful payment. 5. PRE-CLOSING COVENANTS. The Parties agree as follows with respect to the period between the execution of this Agreement and the Closing. (a) GENERAL. Each of the Parties will use its reasonable best efforts to take all action and to do all things necessary, proper or advisable to consummate and make effective the transactions contemplated by this Agreement (including satisfying the closing conditions set forth in SECTION 7 below). In the event that the Buyer notifies the Seller of its desire to acquire Mercer by means of a reverse triangular merger of Mercer with and into a wholly-owned Subsidiary of Buyer no less than five (5) business days prior to the Closing Date, the Parties will cooperate with each other to amend this Agreement to provide for, and to facilitate, such merger. 21 (b) NOTICES AND CONSENTS. The Seller will cause Mercer to give any notices to third parties, and will cause Mercer to use its reasonable best efforts to obtain third-party consents, that the Buyer may reasonably request in connection with the matters pertaining to Mercer disclosed or required to be disclosed in the Disclosure Schedule. Each of the Parties will take any additional action (and the Seller will cause Mercer to take any additional action) that may be necessary, proper or advisable in connection with any other notices to, filings with, and authorizations, consents, and approvals of Governmental Bodies, and third parties that he, she or it may be required to give, make or obtain. (c) OPERATION OF BUSINESS. Except as contemplated hereby or as may be incidental to or in furtherance of the transactions contemplated hereby or as may have been set forth herein or in the Disclosure Schedule, the Seller will not cause or permit Mercer to engage in any practice, take any action, embark on any course of inaction or enter into any transaction outside the Ordinary Course of Business or that would constitute a breach of the representation and warranty contained in SECTION 4(F) if such action, inaction or transaction occurred after December 31, 1997 and prior to the date of this Agreement. (d) PRESERVATION OF BUSINESS. Except as contemplated hereby or as may be incidental to or in furtherance of the transactions contemplated hereby or as may have been set forth herein or in the Disclosure Schedule, the Seller will cause Mercer to use its best efforts to keep its business and properties substantially intact, including its present operations, physical facilities, working conditions, and relationships with lessors, licensors, suppliers, customers and employees. (e) ACCESS. Only in the event that neither the Buyer nor the Seller exercised its right to terminate this Agreement as provided in SECTION 9 herein, the Seller will permit, and the Seller will cause Mercer to permit, representatives of the Buyer to have access at reasonable times, and in a manner so as not to interfere with the normal business operations of Mercer, to the headquarters and all other facilities of Mercer, to all books, records, contracts, Tax records and documents of or pertaining to Mercer and to all employees, customers and suppliers of Mercer. During the Buyer's on-site investigation of Mercer, except as otherwise provided herein, the Buyer shall not discuss any aspects of the operation of Mercer with any employee of Mercer, and the Buyer shall direct all requests for information and material only through the Robert W. Baird & Co., unless otherwise agreed to by the Buyer and the Seller in writing. Robert W. Baird & Co. shall proceed to arrange with the Seller a mutually agreeable time and place at which the Buyer may conduct interviews with key employees and/or customers of Mercer mutually agreed to by Robert W. Baird & Co. and the Seller. Such interviews shall be in strict conformity with the format mutually agreed to by Robert W. Baird & Co. and the Seller. (f) NOTICE OF DEVELOPMENTS. The Seller will give prompt written notice to the Buyer of any Material development affecting the assets, Liabilities, business, financial condition, operations, results of operations or future prospects of Mercer. Each Party will give prompt written notice to the others of any Material development affecting the ability of the Parties to consummate the transactions contemplated by this Agreement. 22 (g) EXCLUSIVITY. The Seller will not (and the Seller will not cause or permit Mercer to) (i) solicit, initiate or encourage the submission of any proposal or offer from any person relating to any (A) liquidation, dissolution or recapitalization, (B) merger or consolidation, (C) acquisition or purchase of securities or assets or (D) similar transaction or business combination involving Mercer or (ii) participate in any discussions or negotiations regarding, furnish any information with respect to, assist or participate in or facilitate in any other manner any effort or attempt by an, person to do or seek any of the foregoing. The Seller will notify the Buyer immediately if any person makes any proposal, offer, inquiry or contact with respect to any of the foregoing. (h) HSR ACT FILING. The Buyer and the Seller will use commercially reasonable efforts to file or cause to be filed with the FTC and the DOJ (it being understood that the Buyer will bear the expense of the filing fee to be paid by the acquiring person), as promptly as practicable but in no event later than ten (10) Business Days after the execution of this Agreement, the Notification and Report Form and related material required to be filed in connection with the transactions contemplated in this Agreement pursuant to the HSR Act, and to promptly file any additional information requested by the FTC or the DOJ as soon as practicable after receipt of a request therefor. In addition, the Buyer shall use its commercially reasonable efforts to take or cause to be taken all actions necessary, proper or advisable to obtain any consent, waiver, approval or authorizations relating to the HSR Act that is required for the consummation of the transactions contemplated by this Agreement; PROVIDED, HOWEVER, that the Buyer shall not be obligated hereby to accept any order providing for the divestiture by the Buyer of such of the assets relating to the Business (or, in lieu thereof, assets and businesses of the Buyer having an approximate equivalent value) as are necessary to fully consummate the transactions contemplated by this Agreement or an order to hold separate such assets and businesses pending such divestiture. (i) PLANT CLOSING NOTIFICATION. The Buyer shall be responsible for providing any notice of layoff or plant closing required with respect to any manufacturing facility of Mercer pursuant to the Federal Worker Adjustment and Retraining Notification Act of 1988, any successor federal law and any applicable state or local plant closing notification statute, for any such layoffs or plant closings which will commence effective on or subsequent to the Closing Date. (j) INTERCOMPANY ITEMS. The Seller shall, as of the date immediately preceding the Closing Date, by appropriate documentation and accounting entries, contribute to the paid in capital of Mercer, any intercompany payables, receivables and/or indebtedness to the Seller arising prior to the Closing Date. (k) 1996 AUDIT. Seller shall cause Mercer to cooperate with Buyer in connection with the audit by KPMG Peat Marwick of Mercer's financial statements for the year ended (which audit shall be paid for by Buyer), and as of, December 31, 1996, including causing Mercer to provide Buyer with access to all related work papers and other documents of Mercer relating to such audit. 23 (l) TRANSITIONAL SERVICES. Prior to the Closing, Buyer and Seller shall use their best efforts to identify and make appropriate arrangements for dealing with any transitional issues which may arise as a result of the purchase of Mercer by Buyer and shall negotiate in good faith to enter into a Transitional Services Agreement reasonably acceptable to both parties, which Agreement shall contemplate the provision to Buyer of certain computer, accounting and similar services and other services relating to the maintenance of Mercer's Employee Benefit Plans and related arrangements through December 31, 1998 or accommodations reasonably necessary for the conduct of Mercer's business for a period of up to six months after the Closing Date. Buyer shall cause Mercer to reimburse Seller for all actual costs for such services in accordance with past practices. (m) FINAL AUDITED FINANCIAL STATEMENTS. On or before March 13, 1998, Seller shall deliver to the Buyer the final audited financial statements ("FINAL AUDITED FINANCIAL STATEMENTS") covering the period shown in the Draft Statements. 6. ADDITIONAL COVENANTS. The Parties further covenant and agree as follows: (a) GENERAL. In case at any time after the Closing any further action is necessary or desirable to carry out the purposes of this Agreement, each of the Parties will take such further action (including the execution and delivery of such further instruments and documents) as any other Party reasonable, may request, all at the sole cost and expense of the requesting Party (unless the requesting Party is entitled to indemnification therefor under SECTION 8 below). The Seller acknowledges and agrees that, from and after the Closing, the Buyer will be entitled to possession of all documents, books, records, agreements, and financial data of any sort relating to Mercer; provided that the Seller may retain any copies of the foregoing as shall be necessary to comply with applicable tax and other laws, regulations and ordinances. (b) LITIGATION SUPPORT. In the event and for so long as any Party actively is contesting or defending against any charge, complaint, action, suit, proceeding, hearing, investigation, claim or demand in connection with (i) any transaction contemplated under this Agreement or (ii) any fact, situation, circumstance, status, condition, activity, practice, plan, occurrence, event, incident, action, failure to act or transaction on or prior to the Closing Date involving Mercer, each of the other Parties will cooperate with him, her or it and his, her or its counsel in the contest or defense, make available their personnel, and provide such testimony and access to their books and records as shall be necessary in connection with the contest or defense, all at the sole cost and expense of the contesting or defending Party (unless the contesting or defending Party is entitled to indemnification therefor under SECTION 8 below). (c) TRANSITION. The Seller will not take any action that is designed or intended to have the effect of discouraging any lessor, licensor, customer, supplier or other business associate of Mercer from maintaining the same business relationships with Mercer after the Closing for a period of 12 months thereafter as it maintained with Mercer prior to the Closing. The Seller will refer all customer inquiries relating to Mercer's Business to the Buyer and/or Mercer from and after the Closing for a period of 12 months thereafter. 24 (d) CONFIDENTIALITY. The Seller will treat and hold as such all of the Confidential Information, refrain from using any of the Confidential Information except in connection with this Agreement for a period of two (2) years from the Closing, and deliver promptly to the Buyer or destroy, at the request and option of the Buyer, all tangible embodiments (and all copies) of the Confidential Information which are in its possession. In the event that the Seller is requested or required (by oral question or request for information or documents in any legal proceeding, interrogatory, subpoena, civil investigative demand or similar process) to disclose any Confidential Information, the Seller will notify the Buyer promptly of the request or requirement so that the Buyer may seek an appropriate protective order or waive compliance with the provisions of this SECTION 6(D). If, in the absence of a protective order or the receipt of a waiver hereunder, the Seller is, on the advice of counsel, compelled to disclose any Confidential Information to any tribunal or else stand liable for contempt, the Seller may disclose the Confidential Information to the tribunal; PROVIDED, HOWEVER, that the Seller shall use its reasonable best efforts to obtain, at the reasonable request of the Buyer, an order or other assurance that confidential treatment will be accorded to such Portion of the Confidential Information required to be disclosed as the Buyer shall designate. The foregoing provisions shall not apply to any Confidential Information which is generally available to the public immediately prior to the time of disclosure. (e) ADDITIONAL TAX MATTERS. (i) Seller shall be responsible for the preparation and filing of all Seller's federal consolidated income Tax Returns with respect to all Pre-Closing Periods, which shall include Mercer, and for the payment of all federal income Taxes with respect to such returns. (ii) Seller shall be responsible for the preparation and filing of all state and local Tax Returns of Mercer that are required to be filed on or before the Closing Date, and for the payment of all Taxes with respect to such Tax Returns (less the portion of such Taxes that are specifically accrued as current taxes on Most Recent Financial Statements.) Such Tax Returns shall be prepared in a manner consistent with prior practice, and shall utilize accounting methods, elections and conventions that do not have the effect of distorting the allocation of income or expense between Pre-Closing Tax Periods and Post-Closing Tax Periods. (iii) Buyer shall be responsible for the preparation and filing of all state and local Tax Returns of Mercer that relate to a Pre-Closing Tax Period and that are required to be filed after the Closing Date. Seller shall pay Buyer, in immediately available funds, any Taxes that are required to be paid with such Tax Returns (less the portion of such Taxes that are specifically accrued as current taxes on Most Recent Financial Statements.) (iv) Buyer shall be responsible for the preparation and filing of all Straddle Period Tax Returns with respect to Mercer, and for the payment of all Taxes with respect to such returns. Seller shall reimburse Buyer, in immediately available funds, for the portion of any Tax relating to a Straddle Period that is allocable, in accordance with paragraph (vii) below, to the pre-Closing portion of such Straddle Period (less the portion of such Taxes that are specifically accrued as current taxes on Most Recent Financial Statements.) 25 (v) Buyer shall be responsible for the preparation and filing of all Tax Returns and the payment of all Taxes with respect to Mercer for all Post-Closing Tax Periods (vi) To the extent permitted by law, Seller and Buyer shall use their best efforts to cause any Tax period to close on the Closing Date. (vii) Taxes payable with respect to a Straddle Period shall be allocated to the pre-Closing and post-Closing portions of a Straddle Period on the basis of a closing of the books as of the Closing Date or any other method agreed upon by Buyer and Seller, except that Taxes imposed on a periodic basis, such as real and personal property Taxes, shall be prorated based on the number of days before and after the Closing Date. (viii) Seller shall pay any stock transfer taxes due as a result of the sale of the Shares to Buyer pursuant to the transactions contemplated by this Agreement. (ix) At Buyer's request, Seller shall join Buyer in making elections under Section 338(g) and Section 338(h)(10) of the Code and any state, local and foreign counterparts with respect to Mercer (the "SECTION 338 ELECTIONS"). Seller shall provide to Buyer such information as may be reasonably requested by Buyer for purposes of determining whether Buyer should make a Section 338 Election under any state or local law. Seller and Buyer shall jointly complete and make the Section 338 Elections on the applicable forms and in accordance with applicable law. Seller shall deliver such forms and related documents to Buyer at least ninety (90) days prior to the due date for filing such elections or forms. Buyer shall deliver to Seller at least forty-five (45) days prior to the due date for filing, such completed forms as are required to be filed with respect to the Section 338 Elections. Buyer and Seller shall timely file the Section 338 Elections and any required forms and documents. (x) Buyer and Seller shall act reasonably and in good faith to reach an agreement promptly, but in no event later than ninety (90) days after the Closing Date, on the allocation of the Purchase Price among the assets of Mercer for purposes of the Section 338 Elections. If Buyer and Seller are unable to reach an agreement within such ninety (90) day period, they shall submit the issue to arbitration by a nationally recognized accounting firm mutually acceptable to Buyer and Seller, whose determination shall be final and binding on both parties, and whose expenses shall be shared equally by Buyer and Seller. (xi) Seller shall be responsible for the payment of any Taxes of Seller's affiliated group or Mercer that result from the Section 338 Elections (the "SECTION 338 TAXES"). However, to the extent the state and local Taxes payable by Seller as a result of making Section 338 Elections exceed the state and local taxes payable by Seller in the absence of Section 338 Elections (such excess hereinafter referred to as the "Section 338 Delta"), Buyer shall reimburse Seller for the Section 338 Delta. (xii) Seller, Buyer and Mercer shall cooperate in good faith in (a) preparing and filing all Tax Returns, (b) maintaining and making available to each other all records necessary in connection with the preparation and filing of all Tax Returns and the payment of all Taxes and (c) resolving all disputes and audits with respect to any Tax Returns and Taxes. Buyer 26 and Seller recognize that each may need access, from time to time, after the Closing Date, to certain accounting and Tax records and information held by the other; therefore, Buyer and Seller agree (A) to retain and maintain Tax records relating to Mercer for a period of five (5) years after the Closing Date, (B) to allow each other and their agents and representatives, at times and dates mutually acceptable to the parties, to inspect, review and make copies of such records, such activities to be conducted during normal business hours and at the requesting party's expense and (C) and to offer the other parties such records before destroying such records. (f) COVENANT NOT TO COMPETE. For a period of two (2) years from and after the Closing Date, the Seller will not, directly or indirectly, as principal, agent, trustee or through the agency of any corporation, partnership, association or agent or agency, (i) participate or engage in the Business existing as of the Closing Date, (ii) service or solicit any of Mercer's business from any customer of Mercer, (iii) request or advise any customer of Mercer to withdraw, curtail or cancel such customer's business with Mercer or (iv) solicit for employment any person employed by Mercer on the Closing Date (other than Michael Prude); PROVIDED HOWEVER, that (A) no owner of less than five percent (5%) of the outstanding stock of any publicly traded corporation shall, for purposes of this SECTION 6(f), be deemed to engage solely by reason thereof in any of its businesses and (B) the future acquisition by the Seller or its Affiliates of any Person or entity engaged in the business of manufacturing floor coverings or related accessories (other than specialty chemicals) (herein, a "Competitive Business") shall not be deemed to violate this SECTION 6(F) if (x) less than thirty percent (30%) of the total revenues of such acquired entity or Person are derived from the Competitive Business and (y) Mercer is given (aa) an option to purchase the Competitive Business on terms and conditions to be negotiated in good faith by the parties at a purchase price reasonably related to the portion of the purchase price of the acquired entity that is related to the Competitive Business and (bb) a right of first refusal to acquire the Competitive Business also on terms and conditions to be negotiated in good faith by the parties. (g) EMPLOYEE BENEFIT PLANS. From and after the Closing Date, the Buyer shall be the plan sponsor for each and every Employee Benefit Plan which is not a Welfare Benefit Plan and such other plans, programs, policies and arrangements of Mercer and shall assume or retain all related trusts, insurance contracts, other assets and documents that have been maintained by Mercer or the Seller for the benefit of employees or former employees of Mercer (all of which plans, trusts, policies, insurance contracts and other assets are set forth on SCHEDULE 4(Q) of the Disclosure Schedule); PROVIDED, HOWEVER, that with respect to: (i) PENSION BENEFITS PROVIDED BY THE SELLER. Prior to the Closing Date, the Buyer shall have established or designated a defined retirement plan of Buyer or Mercer with a Code Section 401(k) arrangement (the "BUYER'S 401(K) PLAN") and, as soon as practicable after the Closing Date, the Seller shall transfer to the Buyer's 401(k) Plan all of the assets and liabilities pertaining to employees and former employees of Mercer from the Sovereign 401(k) Plan (the "SOVEREIGN 401(K) PLAN"). The Buyer shall establish the Buyer's 401(k) Plan on terms substantially equivalent to the Sovereign 401(k) Plan. With respect to notes evidencing plan loans, the Sovereign 401(k) Plan will assign such notes to the Buyer's 401(k) Plan. The interests transferred to the Buyer's 401(k) Plan shall be fully vested effective for periods after the Closing Date or as otherwise provided pursuant to 27 the applicable plan. Current Employees shall cease to make contributions or have contributions made on their behalf under the Sovereign 401(k) Plan. The Seller will cause the Sovereign 401(k) Plan to vest fully all Current Employees in their benefits under such plan, determined as of the Closing Date. (ii) WELFARE BENEFITS PROVIDED BY THE SELLER. Effective as of the Closing Date and through December 31, 1998, Seller shall maintain the Current Employees of Mercer who are retained as employees of Mercer after the Closing Date on the Welfare Benefits Plans of Seller (as set forth on Schedule 4(q) of the Disclosure Schedule) without any change in terms of such Plans. Seller shall bill Buyer for the Mercer employees' share of premium costs and expenses from the Closing Date through December 31, 1998 pursuant to Seller's normal procedures. Effective as of January 1, 1999, the Buyer shall establish or designate a plan or plans to provide welfare benefits (but not retiree medical or life insurance) for Mercer's employees as of that date (collectively, the "BUYER'S WELFARE BENEFITS PLANS"). The Buyer's Welfare Benefits Plans shall provide benefits that are reasonably similar to the benefits provided under the Welfare Benefits Plans of Seller. The Buyer shall cause the Buyer's Welfare Benefits Plans to waive any waiting period and restrictions or limitations for preexisting conditions with respect to Mercer employees. In addition, effective as of the Closing Date and through December 31, 1998, Seller shall be responsible for the administration of "COBRA" for any Current Employee eligible for such benefits on or after the Closing Date and through December 31, 1998. Effective as of January 1, 1999, the Buyer shall be responsible for the administration of "COBRA" for any Mercer employee eligible for such benefits on or after January 1, 1999. (iii) BACK SERVICE CREDIT. Service of each Current Employee shall be recognized by the Buyer's pension plans, the Buyer's 401(k) Plan and the Buyer's Welfare Benefit Plans for all purposes, including, without limitation, vesting, eligibility for benefits and level of benefits but not benefit accrual or optional forms of payment. (h) DISABILITY WORKERS' COMPENSATION. To the extent commercially feasible, the Buyer and its plans shall assume all responsibility for unpaid workers' compensation, short-term disability and long-term disability incurred by a Current Employee after the Closing Date. Any Current Employee on short- term disability on the Closing Date shall continue short-term disability coverage under Seller's Plan for the duration of the coverage period. (i) SEVERANCE POLICY. The Buyer shall establish and maintain, for the period commencing on the Closing Date and terminating not less than one (1) year following the Closing Date, a severance policy for Mercer which provides severance benefits to the Current Employees who are retained by Mercer following the Closing Date which are substantially similar to the severance benefits described on SCHEDULE 6(I) of the Disclosure Schedule; PROVIDED THAT nothing in this Agreement shall require the Buyer to retain any Current Employee or prevent the Buyer from terminating any Current Employee at any time to the extent not inconsistent with applicable Law. The Buyer shall indemnify the Seller against any and all Adverse Consequences the Seller may suffer after the Closing Date as a result of Buyer's termination after the Closing Date of any Current Employee who was retained by Mercer following the Closing Date. 28 (j) COLLECTIVE BARGAINING AGREEMENT. The Buyer agrees to be bound by the terms and conditions of the collective bargaining agreement covering employees of Mercer described on SCHEDULE 4(p)(ii) of the Disclosure Schedule and to continue to provide any compensation or employee benefits required to be provided under the terms of Mercer's collective bargaining agreement. 7. CONDITIONS TO OBLIGATIONS TO CLOSING. (a) CONDITIONS TO OBLIGATION OF THE BUYER. The obligation of the Buyer to consummate the transactions to be performed by it in connection with the Closing is subject to satisfaction or waiver of the following conditions: (i) the representations and warranties set forth in Section 3(a) and Section 4 above shall be true and correct in all Material respects at and as of the Closing Date; (ii) the Seller shall have performed and complied with all of its covenants hereunder in all Material respects through the Closing; (iii) Mercer shall have procured all necessary third party consents specified in SECTION 5(B) above; (iv) no action, suit or proceeding shall be pending or threatened before any court or quasi-judicial or administrative agency of any federal, state, local or foreign jurisdiction wherein an unfavorable judgment order, decree, stipulation, injunction or charge would (A) prevent consummation of any of the transactions contemplated by this Agreement, (B) cause any of the transactions contemplated by this Agreement to be rescinded following consummation or (C) affect adversely the right of the Buyer to own, operate or control the Mercer Shares or Mercer (and no such judgment order, decree, stipulation, injunction or charge shall be in effect); (v) the Seller shall have delivered to the Buyer a certificate (without qualification as to knowledge or Materiality or otherwise) to the effect that each of the conditions specified above in SECTION 7(a)(i)- (iv) is satisfied in all respects; (vi) the acquisition by the Buyer of the Mercer Shares shall represent one hundred percent (100%) of the issued and outstanding capital stock of Mercer and all of the Mercer Shares shall be free and clear of any Security Interests or other liens, claims or encumbrances of any nature whatsoever; (vii) the Parties and Mercer shall have received all other authorizations, consents and approvals of Governmental Bodies including such authorizations, consents or approvals required under the HSR Act and set forth in the Disclosure Schedule; (viii) the Buyer shall have received from counsel to the Seller an opinion with respect to the matters set forth in EXHIBIT B attached hereto, addressed to the Buyer and Buyer's financing sources and dated as of the Closing Date; 29 (ix) the Buyer shall have received the resignations, effective as of the Closing, of (A) each director of Mercer and (B) each officer of Mercer designated by the Buyer, in each case prior to the Closing; (x) no Material Adverse Change shall have occurred in Mercer's Business or its future prospects; (xi) all funded indebtedness of Mercer shall have been paid in full prior to or at the Closing and all Security Interests in the Shares and in any assets of Mercer except Permitted Liens shall have been fully released of record to the satisfaction of the Buyer and all mortgages and Uniform Commercial Code financing statements covering such funded indebtedness shall have been terminated or the Buyer shall be reasonably satisfied that all such Security Interests will be fully released of record within three (3) days thereafter; (xii) all appropriate corporate and shareholder authorizations of Mercer shall have been obtained; (xiii) except as set forth on the Disclosure Schedule, since August 5, 1997, Mercer shall not have transferred, conveyed, disposed of and/or sold any of Material assets, except in the Ordinary Course of Business; and (xiv) On or before March 13, 1998, Seller shall have delivered to Buyer the Final Audited Financial Statements, which shall not change from the Draft Statements except for the allocation of goodwill amortization and the tax implications related thereto. The Buyer may waive any condition specified in this SECTION 7(A) if it executes a writing so stating at or prior to the Closing. (b) CONDITIONS TO OBLIGATIONS OF THE SELLER. Obligations of the Seller to consummate the transactions to be performed by it in connection with the Closing is subject to satisfaction or waiver of the following conditions: (i) the representations and warranties set forth in Section 3(b) above shall be true and correct in all Material respects at and as of the Closing Date; (ii) the Buyer shall have performed and complied with all of its covenants hereunder in all Material respects through the Closing; (iii) no action, suit or proceeding shall be pending or threatened before any court or quasi-judicial or administrative agency of any federal, state, local or foreign jurisdiction wherein an unfavorable judgment order, decree, stipulation, injunction or charge would (A) prevent consummation of any of the transactions contemplated by this Agreement or (B) cause any of the transactions contemplated by this Agreement to be rescinded following consummation (and no such judgment order, decree, stipulation, injunction or charge shall be in effect); 30 (iv) the Buyer shall have delivered to the Seller a certificate (without qualification as to knowledge or Materiality or otherwise) to the effect that each of the conditions specified above in SECTION 702)(i)-(iii) is satisfied in all respects; (v) the Parties and Mercer shall have received all other authorizations, consents, and approvals of Governmental Bodies including such authorizations, consents and approvals required under the HSR Act and set forth in the Disclosure Schedule; (vi) the Seller shall have received from counsel to the Buyer an opinion with respect to the matters set forth in EXHIBIT C attached hereto, addressed to the Seller and dated as of the Closing Date; (vii) the Buyer shall have delivered to the Seller a certificate of Buyer addressed to Laporte Inc. pursuant to which Buyer agrees to be bound by the provisions of Section 8.4(a)(viii) of that certain Stock Purchase Agreement dated May 22, 1997, as amended, among Laporte Inc., Seller and Sovereign Specialty Chemicals, L.P.; and (viii) all actions to be taken by the Buyer in connection with the consummation of the transactions contemplated hereby will be reasonably satisfactory in form and substance to the Seller. The Seller may waive any condition specified in this SECTION 7(b) if it executes a writing so stating at or prior to the Closing. 8. REMEDIES FOR BREACH OF THIS AGREEMENT. (a) SURVIVAL. All of the representations and warranties of the Seller contained in SECTION 4 above (other than the representations and warranties of the Seller contained in SECTIONS 4(b), (h), (r), (u) and (z) above) shall survive the Closing hereunder (even if the Buyer knew or had reason to know of any misrepresentation or breach of warranty at the time of the Closing) and continue in full force and effect until the 90th day after receipt by the Buyer of audited financial statements of Mercer for the fiscal year ending December 31, 1998, but in no event later than June 30, 1999. The representation and warranty of the Seller contained in SECTION 4(r) shall survive the Closing hereunder (even if the Buyer knew or had reason to know of any misrepresentation or breach of warranty at the time of the Closing) and continue in full force and effect until the 90th day after receipt by the Buyer of audited financial statements of Mercer for the fiscal year ending December 31, 1999, but in no event later than June 30, 2000. The other representations, warranties, and covenants of the Parties contained in this Agreement (including the representations and warranties of the Seller contained in SECTION 3(a) and SECTIONS 4(b), (h), (u) and (z) above and the representations and warranties of the Buyer contained in SECTION 3(b) above) shall survive the Closing (even if the damaged Party knew or had reason to know of any misrepresentation or breach of warranty or covenant at the time of the Closing) and continue in full force and effect until the expiration of the applicable statute of limitations. 31 (b) INDEMNIFICATION PROVISIONS FOR BENEFIT OF THE BUYER. (i) In the event the Seller breaches any of its representations, warranties, agreements and covenants contained herein (other than those contained in SECTION 3(A) above), and provided that the particular representation, warranty, agreement or covenant survives the Closing and that the Buyer makes a written claim for indemnification against the Seller pursuant to SECTION 10(G) below within the applicable survival period, then the Seller agrees to indemnify the Buyer from and against the entirety of any Adverse Consequences the Buyer may suffer through and after the date of the claim for indemnification (including any Adverse Consequences the Buyer may suffer after the end of the applicable survival period; PROVIDED THAT the Buyer asserted its claim for indemnification prior to the end of the applicable survival period) resulting from, arising out of, relating to, in the nature of or caused by the breach; PROVIDED, HOWEVER, that the Seller shall not have any obligation to indemnify the Buyer from and against any Adverse Consequences resulting from, arising out of, relating to, in the nature of or caused by the breach of any representation or warranty of the Seller contained in SECTION 4 above (A) until the Buyer has suffered by reason of any breaches aggregate losses in excess of a $250,000 threshold (at which point the Seller will be obligated to indemnify the Buyer from and against all aggregate losses in excess of $25,000) and (B) if the Seller has already paid any claims for indemnification pursuant to this Section 8(b)(i) in excess of $5,000,000 (or the Purchase Price, as adjusted, in the case of Sections 4(b), (h), and (u)) individually or in the aggregate (after which point the Seller shall have no obligation to indemnify the Buyer from and against further such Adverse Consequences). Notwithstanding anything herein to the contrary, it is understood and agreed that the disclosures relating to environmental matters on Schedule 4(r) are included herein for informational purposes only and shall not be deemed to qualify or otherwise alter, affect or limit the representations and warranties made by the Seller in Section 4(r) hereof (and any purported breach of the representation and warranty contained in Section 4(r) shall be tested without regard to such disclosures relating to environmental matters on Schedule 4(r) for purposes of Section 8(b)). Notwithstanding anything herein to the contrary, it is understood and agreed that Seller will not be liable to Buyer for any breach of the representations and warranties contained in Sections 4(w) and 4(x) above to the extent that an appropriate adjustment to Mercer's accounts receivables or inventory entries to the Net Working Capital of Mercer at Closing has been made. (ii) In the event any Seller breaches any of its representations and warranties contained in SECTION 3(A) herein and provided that the Buyer makes a written claim for indemnification against such Seller pursuant to SECTION 10(G) below within the applicable survival period, then the Seller agrees to indemnify the Buyer from and against the entirety of any Adverse Consequences the Buyer may suffer through and after the date of the claim for indemnification (including any Adverse Consequences the Buyer may suffer after the end of the applicable survival period; PROVIDED THAT the Buyer asserted its claim for indemnification prior to the end of the applicable survival period) resulting from, arising out of, relating to, in the nature of or caused by the breach; PROVIDED, HOWEVER, that the Seller shall not have any obligation to indemnify the Buyer from and against any Adverse Consequences resulting from, arising out of, relating to or caused by the breach 32 of any representation or warranty of the Seller contained in SECTION 3(a) if the Seller has already paid any claims for indemnification pursuant to this SECTION 8(b)(ii) in excess of the Purchase Price, as adjusted. (iii) The Seller agrees to indemnify the Buyer from and against the entirety of any brokerage fees or investment banking commissions due by the Seller or Mercer by reason of the transactions contemplated by this Agreement. (iv) Seller shall indemnify Buyer and Mercer for (A) breaches of any representations and warranties in Section 4(h)(iv), (v) and (vi), (B) all liability for Taxes of the Seller and its subsidiaries, including Mercer, for all Pre-Closing Tax Periods and for the portion of all Straddle Periods that ends on the Closing Date, (C) all Section 338 Taxes other than Section 338 Delta and (D) all liability for reasonable legal and accounting fees and expenses incurred with respect to any item indemnified pursuant to clauses (A), (B) and (C) above. The indemnification obligations of the parties set forth in this subsection (iv) shall survive until the expiration of the applicable statute of limitations relating to the Taxes that are the subject of the indemnification obligation. (v) The Seller shall be liable for, and hereby agrees to indemnify, the Buyer for and all liability associated, directly or indirectly, with the stay-on bonuses. (vi) Seller shall be liable for, and hereby agrees to indemnify, subject to the dollar limitations of Section 8(b)(i), the Buyer, its successors, and successors in interest, from and against the entirety of any Adverse Consequences the Buyer, its successors, and successors in interest may suffer resulting from, arising out of, or relating to liability attributable to Laporte Inc. or any of its affiliates in respect to any contamination of the Real Property or facility thereon with hazardous materials, the existence, storage or presence of hazardous materials in, on or under the facility or the buildings, structures and all other improvements on any portion of such Real Property or the emission, disposal, deposit, release or discharge of hazardous materials (whether on or off such Real Property or facility). (c) INDEMNIFICATION PROVISIONS FOR BENEFIT OF THE SELLER. In the event the Buyer breaches any of its representations, warranties and covenants contained herein, and provided that the particular representation, warranty or covenant survives the Closing and that the Seller make a written claim for indemnification against the Buyer pursuant to SECTION 10(g) below within the applicable survival period, then the Buyer agrees to indemnify the Seller from and against the entirety of any Adverse Consequences the Seller may suffer through and after the date of the claim for indemnification, (including any Adverse Consequences the Seller may suffer after the end of the applicable survival period) resulting from, arising out of, relating to, in the nature of or caused by the breach; PROVIDED, HOWEVER, that the Buyer shall not have any obligation to indemnify the Seller from and against any Adverse Consequences resulting from, arising out of, relating to or caused by the breach of any representation or warranty of the Buyer contained in SECTION 3(b) if the Buyer has already paid any claims for indemnification pursuant to this SECTION 8(c) in excess of the Purchase Price, as adjusted. In addition, Buyer shall indemnify Seller for (A) all liability for Taxes of the Buyer and its subsidiaries, including Mercer, for all Post- 33 Closing Tax Periods and for the portion of all Straddle Periods after the Closing Date, (B) all Section 338 Delta and (C) all liability for reasonable legal and accounting fees and expenses incurred with respect to any item indemnified pursuant to clauses (A) and (B) above. The indemnification obligation of Buyer set forth in the previous sentence shall survive until the expiration of the applicable statute of limitations relating to the Taxes that are the subject of the indemnification obligation. (d) MATTERS INVOLVING THIRD PARTIES. If any third party shall notify any Party (the "INDEMNIFIED PARTY") with respect to any matter which may give rise to a claim for indemnification against any other Party (the "INDEMNIFYING PARTY") under this SECTION 8, then the Indemnified Party shall notify in writing each Indemnifying Party thereof promptly; PROVIDED, HOWEVER, that no delay on the part of the Indemnified Party in notifying any Indemnifying Party shall relieve the Indemnifying Party from any liability or obligation hereunder unless (and then solely to the extent) the Indemnifying Party thereby is damaged and prejudiced from adequately defending such claim. In the event any Indemnifying Party notifies the Indemnified Party within 30 days after the Indemnified Party has given notice of the matter that the Indemnifying Party is assuming the defense thereof, (i) the Indemnifying Party will defend the Indemnified Party against the matter with counsel of its choice reasonably satisfactory to the Indemnified Party, (ii) the Indemnified Party may retain separate co-counsel at its sole cost and expense and (iii) the Indemnified Party will not consent to the entry of any judgment or enter into any settlement with respect to the matter without the written consent of the Indemnifying Party (not to be withheld unreasonably). In the event no Indemnifying Party notifies in writing the Indemnified Party within thirty (30) days after the Indemnified Party has given notice of the matter that the Indemnifying Party is assuming the defense thereof, however, the Indemnified Party may defend against or enter into any settlement with respect to, the matter in any manner it reasonably may deem appropriate. At any time after commencement of any such action, any Indemnifying Party may request an Indemnified Party to accept a bona fide offer from the other Party(ies) to the action for a monetary settlement payable solely by such Indemnifying Party (which does not burden or restrict the Indemnified Party nor otherwise prejudice him or her) whereupon such action shall be taken unless the Indemnified Party determines that the dispute should be continued, the Indemnifying Party shall be liable for indemnity hereunder only to the extent of the lesser of (A) the amount of the settlement offer or (B) the amount for which the Indemnified Party may be liable with respect to such action. In addition, the Party controlling the defense of any third party claim shall deliver or cause to be delivered, to the other Party copies of all correspondence, pleadings, motions, briefs, appeals or other written statements relating to or submitted in connection with the defense of the third party claim, and timely notices of, and the right to participate in (as an observer) any hearing or other court proceeding relating to the third party claim. (e) DETERMINATION OF LOSS. The Parties shall make appropriate adjustments for Tax benefits and insurance proceeds (reasonably certain of receipt and utility in each case) in determining the amount of any Adverse Consequence or loss for purposes of this SECTION 8. (f) EXCLUSIVE REMEDY. Except as set forth in SECTION 8(h), the Parties acknowledge and agree that the foregoing indemnification provisions in this SECTION 8 shall be the exclusive remedy of the Parties for any breach of the representations and warranties of the Parties contained in SECTION 3 or SECTION 4 of this Agreement. 34 (g) PAYMENT. The Indemnifying Parties shall promptly pay to the Indemnified Party as may be entitled to indemnity hereunder in cash the amount of any Adverse Consequences to which such Indemnified Party may become entitled to by reason of the provisions of this Agreement. (h) RESERVATION AND NONWAIVER OF RIGHTS AND REMEDIES. Notwithstanding any other provision of this Agreement, the Parties reserve, and this Agreement is without prejudice to, any rights or remedies the Parties have or may have against each other under any state or federal statutory or common law. (i) ARBITRATION WITH RESPECT TO CERTAIN INDEMNIFICATION MATTERS. The Parties agree to submit to arbitration, in accordance with these provisions, any disputed claim or controversy arising from or related to the alleged breach of this Agreement or any disputed indemnification claim made pursuant to this SECTION 8. The Parties further agree that the arbitration process agreed upon herein shall be the exclusive means for resolving all disputes made subject to arbitration herein, but that no arbitrator shall have authority to expand the scope of these arbitration provisions. Any arbitration hereunder shall be conducted under the procedures of the American Arbitration Association (AAA). Either Party may invoke arbitration procedures herein by written notice for arbitration containing a statement of the matter to be arbitrated. The Parties shall then have fourteen (14) days in which they may identify a mutually agreeable, neutral arbitrator who, in the case of any arbitration the subject matter of which is related to accounting matters, shall have extensive knowledge of accounting matters. After the fourteen (14) day period has expired, the Parties shall prepare and submit to the AAA a joint submission, with each Party to contribute half of the appropriate administrative fee. In the event the Parties cannot agree upon a neutral arbitrator within fourteen (14) days after written notice for arbitration is received, their joint submission to the AAA shall request a panel of three arbitrators who are practicing attorneys with professional experience in the field of corporate law, and the Parties shall attempt to select an arbitrator from the panel according to AAA procedures. Unless otherwise agreed by the Parties, the arbitration hearing shall take place in Chicago, Illinois, at a place designated by the AAA. All procedures hereunder shall be confidential. Each Party shall be responsible for its costs incurred in any arbitration, and the arbitrator shall not have authority to include all or any portion of said costs in an award, regardless of' which Party prevails. The arbitrator may include equitable relief. Any arbitration awarded shall be accompanied by a written statement containing a summary of the issues in controversy, a description of the award, and an explanation of the reasons for the award. The arbitration will be subject to the following conditions: (i) that each party shall be entitled to discovery pursuant to the Federal Rules of Civil Procedure and Federal Rules of Evidence; (ii) that evidence shall be competent only if it is admissible in evidence, under the Federal Rules of Civil Procedure and Federal Rules of Evidence; and (iii) that the losing Party shall pay the reasonable legal fees and costs of the prevailing Party, as shall be determined by the arbitrator. 35 (j) ADJUSTMENT TO PURCHASE PRICE. Any payment under this Section 8 shall be treated for tax purposes as an adjustment of the Purchase Price to the extent such characterization is proper and permissible under relevant Tax authorities, including court decisions, statutes, regulations and administrative promulgations. 9. TERMINATION. (a) TERMINATION OF AGREEMENT. The Parties may terminate this Agreement as provided below: (i) the Buyer and the Seller may terminate this Agreement by mutual written consent at any time prior to the Closing; (ii) the Buyer may terminate this Agreement by giving written notice to the Seller at any time prior to the Closing in the event the Seller is in breach of any representation, warranty or covenant contained in this Agreement and such breach has not been cured within fifteen (15) days of written notice thereof, and the Seller may terminate this Agreement by giving written notice to the Buyer at any time prior to the Closing in the event the Buyer is in breach of any representation, warranty or covenant contained in this Agreement and such breach has not been cured within fifteen (15) days of written notice thereof; (iii) the Buyer may terminate this Agreement by giving written notice to the Seller at any time prior to the Closing if the Closing shall not have occurred on or before April 30, 1998 by reason of the failure of any condition precedent under SECTION 7(a) hereof (unless the failure results primarily from the Buyer itself breaching any representation, warranty or covenant contained in this Agreement); or (iv) the Seller may terminate this Agreement by giving written notice to the Buyer at any time prior to the Closing if the Closing shall not have occurred on or before April 30, 1998 by reason of the failure of any condition precedent under SECTION 7(b) hereof (unless the failure results primarily from the Seller itself breaching any representation, warranty or covenant contained in this Agreement). Nothing contained in this SECTION 9(a) shall alter, affect, modify or restrict either Parties' rights to rely on and/or seek indemnification for a breach of any of the representations and warranties and/or conditions or covenants of any of the Parties contained in this Agreement. (b) EFFECT OF TERMINATION. If either the Buyer or the Seller terminates this Agreement pursuant to SECTION 9(a) above, all obligations of the Parties hereunder shall terminate without any Liability of any Party to any other Party. 10. MISCELLANEOUS. (a) PRESS RELEASES AND ANNOUNCEMENTS. Except as may be required by applicable securities laws or stock exchange requirements, no Party shall issue any press release or announcement relating to the subject matter of this Agreement prior to, at or about the Closing 36 without the prior written approval of the Buyer and the Seller, which written approval will not be unreasonably withheld; PROVIDED, HOWEVER, that any Party may make any public disclosure it believes in good faith is required by law or regulation (in which case the disclosing Party will advise the other Parties prior to making the disclosure). (b) NO THIRD-PARTY BENEFICIARIES. This Agreement shall not confer any rights or remedies upon any person other than the Parties and their respective successors and permitted assigns. (c) ENTIRE AGREEMENT. This Agreement (including the documents referred to herein) constitutes the entire agreement among the Parties and supersedes any prior understandings, agreements or representations by or among the Parties, written or oral, that may have related in any way to the subject matter hereof. (d) SUCCESSION AND ASSIGNMENT. This Agreement shall be binding upon and inure to the benefit of the Parties named herein and their respective successors and permitted assigns. No Party may assign either this Agreement or any of his, her or its rights, interests or obligations hereunder without the prior written approval of the Buyer and the Seller; PROVIDED, HOWEVER, that the Buyer may (i) assign any or all of its rights and interests hereunder to a wholly-owned Subsidiary and (ii) assign its rights to indemnity hereunder as additional collateral to its lenders. (e) FACSIMILE/COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original but all of which together will constitute one and the same instrument. A facsimile, telecopy or other reproduction of this Agreement may be executed by one or more parties hereto, and an executed copy of this Agreement may be delivered by one or more parties hereto by facsimile or similar instantaneous electronic transmission device pursuant to which the signature of or on behalf of such party can be seen, and such execution and delivery shall be considered valid, binding and effective for all purposes. At the request of any Party hereto, all parties hereto agree to execute an original of this Agreement as well as any facsimile, telecopy or other reproduction hereof. (f) HEADINGS. The section headings contained in this Agreement are inserted for convenience only and shall not affect in any way the meaning or interpretation of this Agreement. (g) NOTICES. All notices, requests, demands, claims, and other communications hereunder will be in writing. Any notice, request, demand, claim or other communication hereunder shall be deemed duly given if (and then two Business Days after) it is sent by registered or certified mail, return receipt requested, postage prepaid, and addressed to the intended recipient as set forth below: 37 If to Mercer or the Seller: C/O Sovereign Specialty Chemicals, Inc. W. Washington Street Suite 2200 Chicago, Illinois 60606 Attn: Lowell Johnson Chief Financial Officer Tel: (312) 419-7100 Fax: (312) 419-7151 with a copy to: Christopher J. Hagan, Esq. Hogan & Hartson, L.L.P. 555 Thirteenth Street, N.W. Washington, D.C. 20004 Tel: (202) 637-5771 Fax: (202) 637-5910 If to the Buyer: Burke Industries, Inc. 2250 South Tenth Street San Jose, California 95112 Attn: Rocco C. Genovese President and Chief Executive Officer Tel: (408) 297-3500 Fax: (408) 995-5163 with a copy to: Kenneth M. Doran, Esq. Gibson, Dunn & Crutcher LLP 333 South Grand Avenue Los Angeles, California 90071 Tel: (213) 229-7537 Fax: (213) 229-7520 J.F. Lehman & Company 450 Park Avenue, Sixth Floor New York, New York 10022 Attn: Donald P. Glickman Partner Tel: (212) 634-0100 Fax: (212) 634-1155 38 Any Party may give any notice, request, demand, claim or other communication hereunder using any other means (including personal delivery, expedited courier, messenger service, facsimile, ordinary mail or electronic mail), but no such notice, request, demand, claim or other communication shall be deemed to have been duly given unless and until it actually is received by the individual for whom it is intended. Any Party may change the address to which notices, requests, demands, claims and other communications hereunder are to be delivered by giving the other parties notice in the manner herein set forth. (h) SUBMISSION TO JURISDICTION. This Agreement and the rights and obligations of the Seller and the Buyer hereunder shall be construed in accordance with and be governed by the laws (and not the conflict of laws) of the State of Delaware. Except as provided in SECTION 8(i), any legal action or proceeding against the Seller with respect to this Agreement may be brought and enforced in a federal or state court located in the Northern District of Illinois, and by execution and delivery of this Agreement, each of the Seller and the Buyer hereby irrevocably accepts for itself and in respect of its property, generally, irrevocably and unconditionally, the jurisdiction of the aforesaid courts. Each of the Seller and the Buyer agree that a judgment, after exhaustion of all available appeals, in any such action or proceedings shall be conclusive and binding upon them, and may be enforced in any other jurisdiction by a suit upon such judgment, a certified copy of which shall be conclusive evidenced of this judgment. The Seller hereby irrevocably designates, appoints and empowers CT Corporation System, with offices on the date hereof at 208 S. La Salle Street, Chicago, Illinois 60604, so long as this Agreement is outstanding, as its designee, appointee and Agent with respect to any action or proceeding to receive, accept and acknowledge for and on its behalf, and in respect of its property, service of any mid all legal process, summons, notices and documents which may be served in any such action or proceeding and agree that the failure of any such agent to give any advice or any service of process to the Seller shall not impair or affect the validity of such service or of any judgment based thereon. If for any reason such designee, appointee and agent shall cease to be available to act as such, the Seller agree to designate a new designee, appointee and agent in the State of Illinois on the terms and for the purposes of this provision satisfactory to the Buyer. Each of the Seller and the Buyer further irrevocably consents to the service of process out of any of the aforementioned courts in any such action or proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to the Seller or Buyer, as the case may be, at its address set forth in SECTION 10(g) hereof, such service to become effective 30 days after such mailing. Nothing herein shall affect the right of the Buyer to serve process or to commence legal proceedings or otherwise proceed against the Seller in any other manner permitted by law. Each of the Seller and the Buyer hereby waives irrevocably, to the fullest extent permitted by law, any objection to the laying of venue in Chicago, Illinois or any claim of inconvenient forum in respect of any such action in Chicago, Illinois to which it might otherwise now or hereafter be entitled in any actions arising out of or based on this Agreement. (i) AMENDMENTS AND WAIVERS. No amendment of any provision of this Agreement shall be valid unless the same shall be in writing and signed by the Buyer and the Seller. No waiver by any Party of any default, misrepresentation or breach of warranty or covenant hereunder, whether intentional or not, shall be deemed to extend to any prior or subsequent default, misrepresentation or breach of warranty or covenant hereunder or affect in any way any rights arising by virtue of any prior or subsequent such occurrence. 39 (j) SEVERABILITY. Any term or provision of this Agreement that is invalid or unenforceable in any situation in any jurisdiction shall not affect the validity or enforceability of the remaining terms and provisions hereof or the validity or enforceability of the offending term or provision in any other situation or in any other jurisdiction. If the final judgment of a court of competent jurisdiction declares that any term or provision hereof is invalid or unenforceable, the Parties agree that the court making the determination of invalidity or unenforceability shall have the power to reduce the scope, duration or area of the term or provision, to delete specific words or phrases or to replace any invalid or unenforceable term or provision with a term or provision that is valid and enforceable and that comes closest to expressing the intention of the invalid or unenforceable term or provision, and this Agreement shall be enforceable as so modified after the expiration of the time within which the judgment may be appealed. (k) EXPENSES. Each of the Parties and Mercer will bear his, her or its own costs and expenses (including legal fees and expenses and investment banking fees) incurred in connection with this Agreement and the transactions contemplated hereby. Except as paid out of cash of Mercer prior to the Closing Date, the Seller acknowledges and agrees that Mercer has not borne or will bear any of the Seller's costs and expenses (including any of its legal fees and expenses and investment banking fees or liability for (or otherwise associated with) stay-on bonuses) in connection with this Agreement or any of the transactions contemplated hereby. (l) CONSTRUCTION. The language used in this Agreement will be deemed to be the language chosen by the Parties to express their mutual intent, and no rule of strict construction shall be applied against any Party. Any reference to any federal, state, local or foreign statute or law shall be deemed also to refer to all rules and regulations promulgated thereunder, unless the context requires otherwise. The Parties intend that each representation, warranty, and covenant contained herein shall have independent significance. If any Party has breached any representation, warranty or covenant relating to the same subject matter as any other representation, warranty or covenant (regardless of the relative levels of specificity) which the Party has not breached, it shall not detract from or mitigate the fact that the Party is in breach of the first representation, warranty or covenant. (m) INCORPORATION OF EXHIBITS, ANNEXES AND SCHEDULES. The Exhibits, Annexes, and Schedules identified in this Agreement are incorporated herein by reference and made a part hereof. (n) SPECIFIC PERFORMANCE. Each of the Parties acknowledges and agrees that the other Parties would be damaged irreparably in the event any of the provisions of this Agreement are not performed in accordance with their specific terms or otherwise are breached. Accordingly, each of the Parties agrees that the other Parties shall be entitled to an injunction or injunctions to prevent breaches of the provisions of this Agreement and to enforce specifically this Agreement and the terms and provisions hereof in any action instituted in any court of the United States or any state thereof having jurisdiction over the Parties and the matter, in addition to any other remedy to which they may be entitled, at law or in equity. 40 IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of the date first above written. BUYER: BURKE INDUSTRIES, INC. By: /S/ ROCCO C. GENOVESE ------------------------------ Name: ROCCO C. GENOVESE ------------------------ Title: PRESIDENT & CEO ------------------------ MERCER: MERCER PRODUCTS COMPANY, INC. By: /S/ ROBERT B. COVALT ------------------------------ Name: ROBERT B. COVALT ------------------------ Title: CHAIRMAN ------------------------ SELLER: SOVEREIGN SPECIALTY CHEMICALS, INC. By: /S/ ROBERT B. COVALT ------------------------------ Name: ROBERT B. COVALT ------------------------ Title: CHAIRMAN, PRESIDENT AND CEO ------------------------ 41 BURKE INDUSTRIES, INC. ANNEX 1 - List of Management Bonuses paid at Closing
Rocco Genovese $168,000 Reed Wolthausen 112,000 David Worthington 70,000 Robert Pitman 50,000 Robert Harrison 50,000 Hisham Alameddine 40,000 Craig Carnes 40,000 Robert Engle 40,000 Tom Sobol 20,000 Roseann Dybas 10,000 ------------- $600,000 ------------- -------------
SCHEDULE 4(c) AUTHORITY, APPROVALS AND CONSENTS 1. Consent of RTC Properties, Inc. under the Agreement of Lease dated December 1, 1988 between RTC Properties, Inc. and Mercer.* - Extension and First Amendment of Lease dated January 13, 1994 between RTC Properties, Inc. and Mercer. - Extension and Second Amendment of Lease dated January 23, 1995 between RTC Properties, Inc. and Mercer. - Extension and Third Amendment of Lease dated March 26, 1997 between RTC Properties, Inc. and Mercer. 2. Consent of the Childs Family Trust u/t/a and A.G. Gardner Family Trust u/t/a under the Standard Industrial/Commercial Single-Tenant Lease-Gross dated June 22, 1994 between The Childs Family Trust u/t/a of April 30, 1981 and The A.G. Gardner Family Trust u/t/a of March 3, 1981 dba LANDCO and Mercer.* 3. Consent of Chase Manhattan Bank pursuant to that certain Amended and Restated Credit Agreement dated August 5, 1997 pursuant to which Mercer is a party. GENERAL Amendments to or filings with respect to permits may have to be made as a result of consummation of the Closing. SCHEDULE 4(d) SUBSIDIARIES Mercer Products Company, Inc. owns one (1) share of Pine Meadows Golf Estates, Inc./Stock Certificate NO. 1445 issued April 29, 1986. This share is owned in connection with a country club membership. SCHEDULE 4(e) EXCEPTIONS TO FINANCIAL STATEMENTS The Financial Statements fairly present the financial condition of Mercer except as set forth below: 1. The Most Recent Financial Statements (the period from August 5, 1997 thorough December 31, 1997) which have been prepared in accordance with GAAP may not be consistent with prior periods. 2. The Most Recent Financial Statements have been prepared on Sovereign's basis of accounting in accordance with GAAP. However, the Financial Statements prior to August 5, 1997 (i.e., during the ownership by Laporte PLC) (the "Laporte Financial Statements"), were accounted for on Laporte PLC's basis of accounting (i.e., based on Laporte PLC's cost of its acquisition) and reflecting Laporte PLC's accounting policies and procedures. 3. The information contained in the Laporte Financial Statements was prepared based on Mercer's internal accounting records and do not include (i) United States/United Kingdom GAAP adjustments and (ii) push-down accounting for goodwill, debt and income taxes. 4. Certain of the expenses recognized by Mercer as allocated by Laporte PLC in the Laporte Financial Statements may or may not reflect the true operating expenses that Mercer would have incurred had it operated as a stand-alone entity during such time periods. SCHEDULE 4(f) CERTAIN EVENTS 4(e)(ii) Bayshore Vinyl Compounds Inc. supply contract for vinyl dated January 1, 1998. 4(e)(iii) Termination of contract with AlphaGary Corporation pursuant to settlement letter dated February 4, 1998. SCHEDULE 4(h) TAX MATTERS 1. Prior to August 5, 1997, Mercer was included in the consolidated federal income tax returns filed by the group of Laporte Inc. Prior to January 1, 1996, Mercer was included in an affiliated group filing consolidated federal income tax returns of which Evode U.S.A., Inc. was the common parent (the "EVODE GROUP"). 2. The Evode Group's federal income tax returns have been audited through the period ending December 31, 1993. Amended California, Florida, New Jersey, and North Carolina state income tax returns reflecting those adjustments are being prepared for Mercer for the year ended October 31, 1992. 3. The statute of limitations for Laporte Inc.'s consolidated federal tax return for the year ended December 31, 1993 has been extended to December 31, 1997. SCHEDULE 4(j) REAL PROPERTY OWNED BY MERCER 1. 37235 State Road 19, Umatilla, Florida 32784 LEASED BY MERCER 1. Standard Industrial/Commercial Single-Tenant Lease-Gross dated June 22, 1994 between The Childs Family Trust u/t/a of 4/30/81 and The A.G. Gardner Family Trust u/t/a of 3/5/81 dba LANDCO and Mercer. 2. Agreement of Lease dated December 1, 1988 between RTC Properties, Inc. and Mercer. - Extension and First Amendment of Lease dated January 13, 1994 between RTC Properties, Inc. and Mercer. - Extension and Second Amendment of Lease dated January 23, 1995 between RTC Properties, Inc. and Mercer. - Extension and Third Amendment of Lease dated March 27, 1997 between RTC Properties, Inc. and Mercer. SCHEDULE 4(k) INTELLECTUAL PROPERTY PATENTS: None. TRADEMARKS - - DOCKSIDERS & DESIGN US Trademark Registration No. 1,372,591 Registered November 26, 1985 Expires November 26, 2005 - - MAXXI-TREAD US Trademark Registration No. 1,355,586 Registered August 20, 1985 Expires August 20, 2005 - - MERCER FRICTION GRIP US Trademark Registration No. 861,475 Registered December 3, 1968 Renewed September 19, 1989 - - MERCER & DESIGN US Trademark Registration No. 1,810,789 Registered December 14, 1993 Expires December 14, 2003 - - MERCER US Trademark Registration No. 1,851,484 Registered August 30, 1994 Expires August 30, 2004 - - MIRROR-FINISH US Trademark Registration No. 1,782,795 Registered July 20, 1993 Expires July 20, 2003 - - RUBBERLYTE US Trademark Registration No. 1,524,506 Registered February 14, 1989 Expires February 14, 2009 - - RUBBERMYTE US Trademark Registration No. 1,641,500 Registered July 23, 1991 Expires July 23, 2001 - - UNICOLOR US Trademark Registration No. 1,829,424 Registered April 5, 1994 Expires April 5, 2004 LICENSES - - Pursuant to the Tamms Supply Agreement dated March 4, 1997, Mercer granted Tamms Acquisition Corporation a royalty-free license to use the polymer and know-how to manufacture certain waterstop products. - - Pursuant to the Segue Manufacturing, Distribution and Sales Sublicensing Agreement dated November 5, 1997, Segue, Inc. granted Mercer a sublicense to manufacture, distribute, sell and export the Step Loc II carpet base. - - Pursuant to the License Agreement dated December 5, 1997 with Future Industries Corporation, Future licensed to Mercer the right to manufacturer and sell flexible transition mouldings. SCHEDULE 4(l) WARRANTIES None. See attached for a description of warranty claims against Mercer in the aggregate amount of $34,460. SCHEDULE 4(m) MATERIAL CONTRACTS 1. Supply Agreement dated March 4, 1997 between Mercer and Tamms Acquisition Corporation. 2. In connection with finding a buyer for Mercer, Laporte plc and Seller entered into various confidentiality agreements with potential buyers. Although these agreements are not in the name of Mercer, Seller has the right and will cause Laporte plc to reasonably cooperate with Mercer at Mercer's expense in enforcing such agreements for the benefit of Mercer. 3. The Biltrite Corporation Contract dated December 14, 1994 for the supply to Mercer of Private-label rubber stamp stair treads products. 4. Master Truck Leases with Clark Rental Systems and Rollins Leasing Corp. 5. Bayshore Vinyl Compounds Inc. supply contract to Mercer for PVC Compound. 6. Purchase Order with OSI Sealants, Inc., an affiliate of Mercer. 7 Undertaking dated August 5, 1997 by Mercer, Evode-Tanner Industries, Inc. and Laporte Construction Chemicals North America, Inc. in favor of ATO Findley S.A. 8. Segue Manufacturing, Distribution and Sales Sublicensing Agreement dated November 5, 1997, between Segue, Inc. and Mercer. 9. Supply Agreement dated April 21, 1997 between American Biltrite (Canada) Ltd. and Mercer. 10 Non-Firm Electric Service Agreement dated May 20, 1996, between Florida Power Corporation and Mercer. 11. StarNet Sales Agreement dated December 5, 1996, between StarNet Commercial Flooring, Inc. and Mercer. 12. Non-Disclosure Agreement dated July 21, 1995, between Layman Plastics Corporation and Mercer. 13 Non-Disclosure Agreement dated July 21, 1995, between Polymer Recovery Corporation and Mercer. 14 Non-Disclosure Agreement with Benny Wood and Martin Anderson dated January 29, 1991. SEE ALSO SCHEDULES 4(c) AND 4(p). SCHEDULE 4(n) INSURANCE Insurance provided by Laporte Inc. prior to August 5, 1997: CLASS INSURER POLICY NO. ----- ------- ---------- All Risks Royal & Sun Alliance 0741/89 Global Primary Liability Royal Insurance As applicable Global DIC/DIL Royal & Sun Alliance YMM 817193 Excess Layers AIG Europe & Others 3200799696 Zurich Ins. & Others 16/50962896 XL Europe XLEXS-1 Fidelity Guarantee AIG Europe 3171007393 Directors & Officers AIG Europe 33001182 Liability The All Risks and Primary Liability policies are part of Global programs with local policies being issued by Royal & Sun Alliance, an affiliate of Laporte plc. Master policies in the UK provide DIC/DIL cover above the local policies Insurance provided by Seller on and after August 5, 1997 is listed on the attached Summary of Insurance. MERCER PRODUCTS COMPANY, INC. PROPERTY NAMED INSURED: Mercer Products Company, Inc., A New Jersey Corporation COMPANY: National Union Fire Insurance Company of Pittsburgh, PA POLICY NO.: ST2604484 TERM: August 4, 1997 to August 4, 1998 COVERAGE: Property LIMIT: $29,246,701 Limit on: Real and Personal Property, Business Interruption, Extra Expense, Contingent Business Interruption, Contingent Extra Expense for Chemical Manufacturers $29,246,701 Boiler & Machinery Limit of Liability BOILER & MACHINERY SUBLIMITS: ----------------------------- $ 50,000 Expediting Expenses Per Occurrence $ 50,000 Hazardous Substances Per Occurrence $ 50,000 Ammonia Contamination Per Occurrence $ 50,000 Water Damage Per Occurrence DEDUCTIBLES (PER OCCURRENCE): $ 15,000 Property EXCEPT $ 25,000 Earthquake
THE ABOVE SUMMARY IS PRESENTED AS A GENERAL COMMENTARY ON THE POLICY BUT IN NO WAY AMENDS OR REPLACES THE WORDING OF THIS POLICY. IN THE EVENT OF ANY DISCREPANCY BETWEEN THIS SUMMARY AND THE POLICY, THE POLICY WORDING WILL PREVAIL. - ------------------------------------------------------------------------------- MERCER PRODUCTS COMPANY, INC. PROPERTY DEDUCTIBLES (PER OCCURRENCE) CONT.: $ 25,000 @ Locations: - Mercer Products, 9070 Bridgeport, Rancho Cucamonga California Earthquake - Business Interruption - 360 Hours $ 25,000 Flood (Property Damage) FLOOD ZONE A (PROPERTY DAMAGE): ------------------------------- 2% of TIV at risk, but not less than $500,000 Contents/$500,000 Bldgs. FLOOD ZONE B (BUSINESS INTERRUPTION): - 360 Hours ------------------------------------- Windstorm: 2% of TIV at risk, but not less than $25,000 120 Hours Business Interruption 120 Hours Contingent Business Interruption 120 Hours Extra Expense 120 Hours Contingent Extra Expense $ 5,000 Transit $ 5,000 Fine Arts $ 5,000 EDP Equipment/Media BOILER & MACHINERY DEDUCTIBLES: ------------------------------- $ 15,000 Property Damage 120 Hours Business Interruption/Extra Expense SUBLIMTS: $15,000,000 Annual Aggregate - Earthquake $ 1,000,000 Annual Aggregate - California Earthquake Excluding Unnamed or Newly Acquired Property $15,000,000 Annual Aggregate - Flood $10,000,000 Annual Aggregate - Flood Zone A 25% Annual Aggregate - Debris Removal - The greater of or $1,000,000 $ 25,000 Annual Aggregate - Pollution - Real & Personal Property $ 25,000 Annual Aggregate - Business Interruption - Pollution $ 1,000,000 Per Occurrence - EDP Equipment/Media $ 1,000,000 Per Occurrence - Transit
THE ABOVE SUMMARY IS PRESENTED AS A GENERAL COMMENTARY ON THE POLICY BUT IN NO WAY AMENDS OR REPLACES THE WORDING OF THIS POLICY. IN THE EVENT OF ANY DISCREPANCY BETWEEN THIS SUMMARY AND THE POLICY, THE POLICY WORDING WILL PREVAIL. - ------------------------------------------------------------------------------- MERCER PRODUCTS COMPANY, INC. PROPERTY SUBLIMITS CONT.: $ 1,000,000 Per Occurrence - Newly Acquired Real & Personal Property with One Hundred and Eighty (180) day reporting excluding Flood and Earthquake $ 1,000,000 Per Occurrence - Valuable Papers $ 500,000 Per Occurrence - Personal Property at Unnamed Locations excluding Flood and Earthquake $ 1,000,000 Per Occurrence - Demolition $ 1,000,000 Per Occurrence - Increased Cost of Construction $ 1,000,000 Per Occurrence - Contingent Liability from the operation of building laws combined property damage/business Interruption $ 5,000,000 Per Occurrence - Off Premises Power Directly Supplying (Combined Property Damage/ Business Interruption) $ 5,000,000 Extra Expense COVERAGE EXTENSIONS: $ 500,000 Newly Acquired EDP Equipment with One Hundred (100) Day Reporting Excluding Flood and Earthquake $ 250,000 Exhibition Floater $ 10,000 Trees, Shrubs and Plants $ 1,000,000 Unscheduled Contingent Business Interruption $ 25,000 Fire Department Service Charges $ 1,000,000 Expediting Expense Property $ 1,000,000 Temporary Removal $ 100,000 Inventory and Appraisals 14 Days Interruption by Civil Authority $ 1,000,000 Rents and Rental Values/Lease Hold Interest $ 1,000,000 Fine Arts VALUATION: Property - Replacement Cost Business Interruption - Actual Loss Sustained Stock - Manufacturer's Selling Price
THE ABOVE SUMMARY IS PRESENTED AS A GENERAL COMMENTARY ON THE POLICY BUT IN NO WAY AMENDS OR REPLACES THE WORDING OF THIS POLICY. IN THE EVENT OF ANY DISCREPANCY BETWEEN THIS SUMMARY AND THE POLICY, THE POLICY WORDING WILL PREVAIL. - ------------------------------------------------------------------------------- MERCER PRODUCTS COMPANY, INC. STATEMENT OF VALUES
MERCER PRODUCTS COMPANY $ 12,702,990 Buildings, Machinery, Plant, Equipment and other Contents $ 3,050,000 Stock/Inventory $ 13,493,711 Business Interruption ----------- $ 29,246,701
THE ABOVE SUMMARY IS PRESENTED AS A GENERAL COMMENTARY ON THE POLICY BUT IN NO WAY AMENDS OR REPLACES THE WORDING OF THIS POLICY. IN THE EVENT OF ANY DISCREPANCY BETWEEN THIS SUMMARY AND THE POLICY, THE POLICY WORDING WILL PREVAIL. - ------------------------------------------------------------------------------- MERCER PRODUCTS COMPANY, INC. MOTOR TRUCK CARGO NAMED INSURED: Mercer Products Company, Inc., A New Jersey Corporation COMPANY: Hartford Fire Insurance Company POLICY NO.: 57MS FI6500 TERM: October 14, 1997 to October 14, 1998 COVERAGE: Motor Truck Cargo Risks of direct physical loss subject to policy terms, conditions and exclusions LIMIT: $ 100,000 Limit - Any One Truck DEDUCTIBLE: $ 2,500
THE ABOVE SUMMARY IS PRESENTED AS A GENERAL COMMENTARY ON THE POLICY BUT IN NO WAY AMENDS OR REPLACES THE WORDING OF THIS POLICY. IN THE EVENT OF ANY DISCREPANCY BETWEEN THIS SUMMARY AND THE POLICY, THE POLICY WORDING WILL PREVAIL. - ------------------------------------------------------------------------------- MERCER PRODUCTS COMPANY, INC. GENERAL LIABILITY/POLLUTION LIABILITY NAMED INSURED: Mercer Products Company, Inc., A New Jersey Corporation COMPANY: American Int'l Specialty Lines Ins. Co. (Non-Admitted) AIG Group POLICY NO.: 819 06 56 TERM: August 4, 1997 to August 4, 1998 COVERAGE: General Liability/Pollution Liability LIMIT: $ 2,000,000 General Aggregate Limit (Other than Prods/Comp. Ops) $ 2,000,000 Products/Completed Operations Aggregate Limit $ 1,000,000 Personal & Advertising Injury Limit $ 1,000,000 Pollution Legal Liability $ 1,000,000 Each Occurrence Limit (Coverages A, B, & C only) $ 100,000 Fire Damage Limit $ 10,000 Medical Expense DEDUCTIBLE: $ 50,000 Deductible per loss applies to Coverage D (Pollution Legal Liability) SPECIAL CONDITIONS: Applicable to Coverages A, B, C: - Total Pollution Exclusion - Exclusion - Waste Disposal Sites - Testing E&O Exclusion - Radioactive Matter Exclusion - Lead Exclusion - Asbestos Exclusion - Nuclear Energy Liability Exclusion - Professional Liability Exclusion - All Professional Services - Owned Underground Storage Tank Removal
THE ABOVE SUMMARY IS PRESENTED AS A GENERAL COMMENTARY ON THE POLICY BUT IN NO WAY AMENDS OR REPLACES THE WORDING OF THIS POLICY. IN THE EVENT OF ANY DISCREPANCY BETWEEN THIS SUMMARY AND THE POLICY, THE POLICY WORDING WILL PREVAIL. - ------------------------------------------------------------------------------- SOVEREIGN SPECIALTY CHEMICAL, INC. GENERAL LIABILITY/POLLUTION LIABILITY SPECIAL CONDITIONS: - Owned Disposal Site Exclusion - Employment Related Practice Exclusion - Employee Bodily Injury Exclusion - Blanket Additional Insured Endorsement - Cancellation notice - 60 days except for non-pay - Knowledge of Occurrence/Notice of Occurrence/Unintentional E&O - Cross Suits Exclusion - Amendment to Pollution Exclusion with Products Exception APPLICABLE TO COVERAGE D (POLLUTION): ------------------------------------ - Third party claims for off-site cleanup of new conditions, bodily injury and property damage. - Retroactive Date: 8/1/97 - Covered manufacturing locations: - Eutis, FL THE ABOVE SUMMARY IS PRESENTED AS A GENERAL COMMENTARY ON THE POLICY BUT IN NO WAY AMENDS OR REPLACES THE WORDING OF THIS POLICY. IN THE EVENT OF ANY DISCREPANCY BETWEEN THIS SUMMARY AND THE POLICY, THE POLICY WORDING WILL PREVAIL. - ------------------------------------------------------------------------------- MERCER PRODUCTS COMPANY, INC. COMMERCIAL AUTOMOBILE NAMED INSURED: Mercer Products Company, Inc., A New Jersey Corporation COMPANY: AIG Environmental (AIG Group) POLICY NO.: CA2772058 TERM: August 4, 1997 to August 4, 1998 COVERAGE: Commercial Automobile LIMIT: $ 1,000,000 Combined Bodily Injury and Property Damage $ 1,000,000 Uninsured/Underinsured Motorists Statutory Personal Injury Protection $ 10,000 Medical Payments $ 1,000 Ded. Comprehensive and Collision on Private Passenger Types $ 1,000 Ded. Comprehensive and Collision on XHvy Trucks SPECIAL CONDITIONS: Automobile Endorsements: - Applicable State Forms - Drive Other Car Coverage - MCS-90 - Composite Rate Endorsement - Broad Form Named Insured - Knowledge/Notice/Unintentional E&O/Cross Liability Endorsement - Independent Counsel Endorsement - Misdelivery of Liquid Products VEHICLES: 9 Private Passenger 5 Heavy Tractors 8 Trailers
THE ABOVE SUMMARY IS PRESENTED AS A GENERAL COMMENTARY ON THE POLICY BUT IN NO WAY AMENDS OR REPLACES THE WORDING OF THIS POLICY. IN THE EVENT OF ANY DISCREPANCY BETWEEN THIS SUMMARY AND THE POLICY, THE POLICY WORDING WILL PREVAIL. - ------------------------------------------------------------------------------- MERCER PRODUCTS COMPANY, INC. UMBRELLA LIABILITY NAMED INSURED: Mercer Products Company, Inc., A New Jersey Corporation COMPANY: National Union Fire Insurance Company of Pittsburgh, PA POLICY NO.: BE3570117 TERM: August 4, 1997 to August 4, 1998 COVERAGE: Umbrella Liability LIMIT: $ 50,000,000 Each Occurrence for Bodily Injury and Property Damage $ 50,000,000 General Aggregate $ 50,000,000 Products/Completed Operations Aggregate DEDUCTIBLE: $ 25,000 Self-Insured Retention each occurrence that is not covered by Underlying Insurance SPECIAL CONDITIONS: - Named Peril & Time Element (7/21) Pollution excess of a $1,000,000 indemnity payments only retention each occurrence without aggregate - Follow form Incidental Medical Malpractice Liability Endorsement - Follow form Employee Benefits Liability - Uninsured Motorists Coverage Option - Follow form Foreign Liability - Notice of Occurrence - Knowledge of Occurrence - Unintentional Errors & Omissions - MCS 90 as required It is also agreed that with respects to pollution liability coverage provided in the primary General Liability policy, defense expense is in addition to the limit of liability, subject to a sublimit of $250,000 annual aggregate. This policy will recognize this fact and drop down over the possible reduced limit in the event of a loss(es) that would be covered under Named Peril and Time Element Pollution Endorsement.
THE ABOVE SUMMARY IS PRESENTED AS A GENERAL COMMENTARY ON THE POLICY BUT IN NO WAY AMENDS OR REPLACES THE WORDING OF THIS POLICY. IN THE EVENT OF ANY DISCREPANCY BETWEEN THIS SUMMARY AND THE POLICY, THE POLICY WORDING WILL PREVAIL. - ------------------------------------------------------------------------------- MERCER PRODUCTS COMPANY, INC. EXCESS LIABILITY NAMED INSURED: Mercer Products Company, Inc., A New Jersey Corporation COMPANY: Zurich American Insurance Group POLICY NO.: EUO 2809339-N TERM: August 4, 1997 to August 4, 1998 COVERAGE: Excess Liability LIMIT: $50,000,000 Per Occurrence $50,000,000 Products/Completed Operations Aggregate $50,000,000 General Aggregate except for Auto Excess of $50,000,000 Underlying Umbrella Policy ADDITIONAL ENDORSEMENTS: - Form - Pay on Behalf of - Delete Non-Concurrency wording in Section III (a) (ii) and VII.2 - Delete Item 7 of Declaration Page - 90 Days Notice of Cancellation - Lead Exclusion General Aggregate applies separately in excess of each aggregate limit provided by the policy of policies listed in the schedule of underlying insurances, but Zurich will not provide unaggregated limits except for auto.
THE ABOVE SUMMARY IS PRESENTED AS A GENERAL COMMENTARY ON THE POLICY BUT IN NO WAY AMENDS OR REPLACES THE WORDING OF THIS POLICY. IN THE EVENT OF ANY DISCREPANCY BETWEEN THIS SUMMARY AND THE POLICY, THE POLICY WORDING WILL PREVAIL. - ------------------------------------------------------------------------------- MERCER PRODUCTS COMPANY, INC. POLLUTION LEGAL LIABILITY NAMED INSURED: Mercer Products Company, Inc., A New Jersey Corporation COMPANY: American International Specialty Lines Insurance Company POLICY NO.: PLS-8193264 TERM: August 4, 1997 to August 4, 2002 COVERAGE: Pollution Legal Liability LIMIT: $ 5,000,000 Each Incident Limit $ 5,000,000 Coverage Section Aggregate $ 5,000,000 Policy Aggregate Limit DEDUCTIBLE: $ 500,000 SPECIAL CONDITIONS: Coverage Sections: C - 3rd Party Claims for On-Site Cleanup of Pre-Existing Conditions G - 3rd Party Claims for Off-Site Cleanup of Pre-Existing Conditions I - 3rd Party Claims for Off-Site Property Damage J - 3rd Party Claims for Off-Site Bodily Injury Covered Location Only: 37236 State Road 19, Eustis, FL THE ABOVE SUMMARY IS PRESENTED AS A GENERAL COMMENTARY ON THE POLICY BUT IN NO WAY AMENDS OR REPLACES THE WORDING OF THIS POLICY. IN THE EVENT OF ANY DISCREPANCY BETWEEN THIS SUMMARY AND THE POLICY, THE POLICY WORDING WILL PREVAIL. - ------------------------------------------------------------------------------- MERCER PRODUCTS COMPANY, INC. POLLUTION LEGAL LIABILITY SUDDEN AND GRADUAL POLLUTION WILL BE COVERED USING AMERICAN INTERNATIONAL SPECIALTY LINES INSURANCE COMPANY (AISLIC) FORM #67852 (5/97) MODIFIED AS FOLLOWS: 1. No coverage will be provided for any underground storage tank(s) until satisfactory integrity testing results (AISLIC acceptable method) certifying that the tanks are tight to the NFPA standard of plus/minus 0.05 gph, are received, approved and on file with the underwriter. Coverage will only be provided for those underground storage tanks specifically scheduled onto the policy by endorsement. 2. No coverage will be provided for loss arising out of pollution conditions at or emanating from the covered locations occurring after August 4, 1997 (inception of the EAGLE policy bound by AIG Environmental's NYC underwriting office). 3. No coverage will be provided for loss arising out of pollution conditions at the 37235 State Road 19, Eustis, FL site as identified in the October 1996 Environmental Review performed by Delta Environmental: - lead contamination of soil and groundwater associated with the former cooling water discharge - lead and cadmium contamination of soil and groundwater related to baghouse operations - soil and groundwater contamination arising out of the former practice of using waste oil for on-site dust control THE ABOVE SUMMARY IS PRESENTED AS A GENERAL COMMENTARY ON THE POLICY BUT IN NO WAY AMENDS OR REPLACES THE WORDING OF THIS POLICY. IN THE EVENT OF ANY DISCREPANCY BETWEEN THIS SUMMARY AND THE POLICY, THE POLICY WORDING WILL PREVAIL. - ------------------------------------------------------------------------------- MERCER PRODUCTS COMPANY, INC. COMMERCIAL CRIME COVERAGE NAMED INSURED: Mercer Products Company, Inc., A New Jersey Corporation COMPANY: National Union Fire Insurance Company of Pittsburgh, PA POLICY NO.: 486 09 92 TERM: August 4, 1997 to August 4, 1998 COVERAGE: Commercial Crime Coverage LIMIT: $ 1,000,000 Limit of Liability (Insuring Agreements I-V) DEDUCTIBLE: $ 25,000 Retention
THE ABOVE SUMMARY IS PRESENTED AS A GENERAL COMMENTARY ON THE POLICY BUT IN NO WAY AMENDS OR REPLACES THE WORDING OF THIS POLICY. IN THE EVENT OF ANY DISCREPANCY BETWEEN THIS SUMMARY AND THE POLICY, THE POLICY WORDING WILL PREVAIL. - ------------------------------------------------------------------------------- MERCER PRODUCTS COMPANY, INC. PENSION TRUST LIABILITY NAMED INSURED: Mercer Products Company, Inc., A New Jersey Corporation COMPANY: National Union Fire Insurance Company of Pittsburgh, PA POLICY NO.: 486 09 94 TERM: August 4, 1997 to August 4, 1998 COVERAGE: Pension Trust Liability LIMIT: $ 1,000,000 Limit of Liability DEDUCTIBLE: $ 10,000 Retention
THE ABOVE SUMMARY IS PRESENTED AS A GENERAL COMMENTARY ON THE POLICY BUT IN NO WAY AMENDS OR REPLACES THE WORDING OF THIS POLICY. IN THE EVENT OF ANY DISCREPANCY BETWEEN THIS SUMMARY AND THE POLICY, THE POLICY WORDING WILL PREVAIL. - ------------------------------------------------------------------------------- MERCER PRODUCTS COMPANY, INC. DIRECTORS' & OFFICERS' LIABILITY NAMED INSURED: Mercer Products Company, Inc., A New Jersey Corporation COMPANY: National Union Fire Insurance Company of Pittsburgh, PA POLICY NO.: 486-09-15 TERM: August 4, 1997 to August 4, 1998 COVERAGE: Directors' & Officers' Liability LIMIT: $ 5,000,000 Limit of Liability DEDUCTIBLE: $ 100,000 Retention SPECIAL CONDITIONS: - Coinsurance (Security Claims): 00% - Continuity Dates: Coverage A&B : 7/10/97 Coverage B(i): 7/10/97 THE ABOVE SUMMARY IS PRESENTED AS A GENERAL COMMENTARY ON THE POLICY BUT IN NO WAY AMENDS OR REPLACES THE WORDING OF THIS POLICY. IN THE EVENT OF ANY DISCREPANCY BETWEEN THIS SUMMARY AND THE POLICY, THE POLICY WORDING WILL PREVAIL. - ------------------------------------------------------------------------------- MERCER PRODUCTS COMPANY, INC. CORPORATE KIDNAP & RANSOM/EXTORTION INSURANCE NAMED INSURED: Mercer Products Company, Inc., A New Jersey Corporation COMPANY: National Union Fire Insurance Company of Pittsburgh, PA POLICY NO.: 646-6294 TERM: August 4, 1997 to August 4, 1998 COVERAGE: Corporate Kidnap & Ransom/Extortion Insurance LIMIT: $ 1,000,000 Each Loss $ Unlimited Each Policy Year Aggregate DEDUCTIBLE: Nil
THE ABOVE SUMMARY IS PRESENTED AS A GENERAL COMMENTARY ON THE POLICY BUT IN NO WAY AMENDS OR REPLACES THE WORDING OF THIS POLICY. IN THE EVENT OF ANY DISCREPANCY BETWEEN THIS SUMMARY AND THE POLICY, THE POLICY WORDING WILL PREVAIL. - ------------------------------------------------------------------------------- MERCER PRODUCTS COMPANY, INC. WORKERS' COMPENSATION/EMPLOYERS LIABILITY NAMED INSURED: Mercer Products Company, Inc., A New Jersey Corporation COMPANY: American Home Assurance Co. (AIG Group) POLICY NO.: WC5715890 TERM: August 4, 1997 to August 4, 1998 COVERAGE: Workers' Compensation/Employers Liability LIMIT: Statutory Benefits in State of Hire Employers Liability: $ 1,000,000 Each Accident $ 1,000,000 Disease - Policy Limit $ 1,000,000 Disease - Each Employee (Stop Gap Employers Liability applies in Monopolistic States) SPECIAL CONDITIONS: Terms & Conditions: - Voluntary Compensation - Foreign Voluntary Compensation - Bodily Injury from Endemic Disease - $100,000 limit per employee Repatriation Expense - Federal Employers Liability Act Coverage included - Longshore & Harbor Workers Compensation Coverage - Defense Base Act Coverage - Maritime Employers Liability - Federal Acts - All Executive Officers covered for Bodily Injury - 60 Day Notice of Cancellation except for non-pay
THE ABOVE SUMMARY IS PRESENTED AS A GENERAL COMMENTARY ON THE POLICY BUT IN NO WAY AMENDS OR REPLACES THE WORDING OF THIS POLICY. IN THE EVENT OF ANY DISCREPANCY BETWEEN THIS SUMMARY AND THE POLICY, THE POLICY WORDING WILL PREVAIL. - ------------------------------------------------------------------------------- SCHEDULE 4(o) LITIGATION PENDING LITIGATION: - JOHN J. IRWIN V. MERCER PRODUCTS COMPANY, INC., ET AL. - BADALIANS V. ALEKNA CONSTRUCTION, INC., ET AL. V. UNITED STATES MINERAL PRODUCTS COMPANY V. ENJEM'S, INC. V. MERCER PRODUCTS COMPANY, INC. ET. AL. - HAMMOND V. ALEKNA CONSTRUCTION, INC., ET. AL. V. UNITED STATES MINERAL PRODUCTS COMPANY V. ENJEM'S, INC. V. MERCER PRODUCTS COMPANY, INC. ET. AL. - JONES V. ALEKNA CONSTRUCTION, INC., ET. AL. V. UNITED STATES MINERAL PRODUCTS COMPANY V. ENJEM'S, INC. V. MERCER PRODUCTS COMPANY, INC. ET. AL. - O'SHEA V. ALEKNA CONSTRUCTION, INC, ET AL. V. UNITED STATES MINERAL PRODUCTS COMPANY V. ENJEM'S, INC. V. MERCER PRODUCTS COMPANY, INC. ET. AL.. - SISTI V. ALEKNA CONSTRUCTION, INC, ET AL. V. UNITED STATES MINERAL PRODUCTS COMPANY V. ENJEM'S, INC. V. MERCER PRODUCTS COMPANY, INC. ET. AL.. THREATENED LITIGATION: None. SCHEDULE 4(p) EMPLOYEES; LABOR RELATIONS Agreement dated November 16, 1995 between Mercer and the Glass, Molders, Pottery, Plastics and Allied Workers International Union (AFL-CIO, CLC) and its Local Union No. 211 Eustis, Florida Effective Date: December 1, 1995 through December 31, 1998. Mercer has approximately 120 employees. SCHEDULE 4(q) EMPLOYEE BENEFIT PLANS A. BENEFIT PLANS SOVEREIGN 1. Sovereign 401(k) Plan 2. Healthcare - Medical (pre-tax employee contributions) - Dental (pre-tax employee contributions) - Prescription Drug 3. Flexible Spending Plans (pre-tax) - Healthcare - Dependent Care 4. Life Insurance - Company provided (2x annual salary up to $50,000 maximum) - Matching ADD - Optional Life - Optional Dependent Life - Optional ADD - Optional Dependent ADD 5. Long-Term Disability 6. Employee Assistance Plan 7. Workers Compensation 8. Tuition Assistance 9. Business Travel Accident Insurance MERCER 1. Bonus and Sales Incentive Plans 2. Short-Term Disability Income (Salary Continuance) 3. Company cars 4. Severance 5. Vacation/Holidays 6. Leave of Absence (jury duty, bereavement, personal days) B. COMPLIANCE Mercer has a severance policy. There is neither a written plan document nor a summary plan description for these policies. These policies have been reported on the annual Form 5500 filed by Laporte Inc. Generally, the policy is one week of severance per year of service with Mercer. SCHEDULE 4(r) ENVIRONMENTAL MATTERS All matters disclosed in or arising out of facts and circumstances discussed in the following environmental reports: - Environmental Review Mercer Products Company, Inc. Eustis, Florida Delta Project No. E096-068 Prepared by Delta Environmental Consultants, Inc. October 1996 - Environmental Review Mercer Products Company, Inc. & Laporte Construction Chemicals North America, Inc. Leased Warehouses/Richmond, Washington/ South Kearny, New Jersey/Rancho Cucamonga, California Delta Project No. E096-068 Prepared by Delta Environmental Consultants, Inc. October 1996 - Environmental Review Mercer Products Company, Inc. 37235 State Road 19 Bustis, Florida Project No. 771463.0204 Prepared by IT Corporation Submitted to Sovereign Specialty Chemicals, L.P. July 1997 MERCER PERMITS - Lake County (Florida) Occupational License No. 501-0000033 - See letter from the Florida Department of Environmental Regulation dated February 5, 1992 re: Plastic Extruding Baghouse (no air permit required). - See letter from the Florida Department of Environmental Regulation dated April 7, 1992 re: Lake County - IW/Mercer Products Company/ Closed Loop Cooling System/Request for Exemption (no water permit required). OSHA The following issues are being addressed at the Mercer facility: - - The use of flexible electrical cable will be replaced with fixed conduit or other compliant device to the extent required by OSHA regulations. SCHEDULE 4(t) TRANSACTIONS WITH AFFILIATES Mercer has an arrangement with the AlphaGary Corporation, an affiliate of Laporte Inc. pursuant to which Mercer purchases plastic from AlphaGary on a purchase order basis. There is no obligation on the part of either party to continue this arrangement. AlphaGary had tried to require Mercer to buy its plastic requirements for 1998 from AlphaGary based on an alleged oral agreement. This arrangement is now being settled by Mercer's purchase of up to $81,415.81 worth of inventory from AlphaGary pursuant to a letter agreement dated February 4, 1998. OSI Sealants, Inc. is a customer of Mercer. SCHEDULE 6(g) LIST OF EMPLOYEES [PREVIOUSLY PROVIDED] SCHEDULE 6(i) SEVERANCE POLICY One week of severance pay is provided for each year of service with Mercer. EX-12.1 17 EXH 12.1 COMPUTATION OF RATIOS EXHIBIT 12.1 COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES AND COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS (DOLLARS IN THOUSANDS)
FISCAL YEAR ENDED ----------------------------------------------------- 1993 1994 1995 1996 1997 --------- --------- --------- --------- --------- Interest expense...... $ 2,909 $2,836 $3,039 $ 2,771 $ 5,900 Estimated interest portion of rent expense............. 283 174 335 381 468 ------- ------ ------ ------- ------- Fixed charges......... $ 3,192 $3,010 $3,374 $ 3,152 $ 6,368 ------- ------ ------ ------- ------- ------- ------ ------ ------- ------- Income (loss) before income taxes........ $(1,036) $3,408 $5,966 $ 8,499 $(5,761) Fixed charges......... 3,192 3,010 3,374 3,152 6,368 Less: interest charges capitalized.. (12) (11) (30) (19) (29) ------- ------ ------ ------- ------- Earnings ............. $ 2,144 $6,407 $9,310 $11,632 $ 578 ------- ------ ------ ------- ------- ------- ------ ------ ------- ------- Ratio of earnings to fixed charges(A).... -- 2.1x 2.8x 3.7x -- ------- ------ ------ ------- ------- ------- ------ ------ ------- -------
- ------------------------ (A) Earnings were insufficient to cover fixed charges by $1,048 and $5,790 in fiscal years 1993 and 1997, respectively. EX-27 18 EXH 27 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL REPORT ON FORM 10-K 1,000 12-MOS JAN-02-1998 JAN-04-1997 JAN-02-1998 11,563 0 11,520 (334) 11,187 40,546 25,556 (10,536) 62,837 18,868 110,000 16,148 0 25,464 (111,954) 62,837 90,228 90,228 62,917 62,917 (27,424) (240) 5,408 (5,761) (1,818) (3,943) 0 0 0 (3,943) 0 0
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