-----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, L06nGO02qsQpjlLcutrQCX16KOR7w63Jb8Z4Ih6kyGb99xtT61q71uSMLmICTrHK k4N4CS+TbLgewPNolEgwWg== 0001047469-98-024633.txt : 19980622 0001047469-98-024633.hdr.sgml : 19980622 ACCESSION NUMBER: 0001047469-98-024633 CONFORMED SUBMISSION TYPE: S-4 PUBLIC DOCUMENT COUNT: 27 FILED AS OF DATE: 19980619 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: S-4 SEC ACT: SEC FILE NUMBER: 333-57211 FILM NUMBER: 98650651 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 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MERCER PRODUCTS CO INC CENTRAL INDEX KEY: 0001048918 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 223061500 STATE OF INCORPORATION: FL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4 SEC ACT: SEC FILE NUMBER: 333-57211-01 FILM NUMBER: 98650652 BUSINESS ADDRESS: STREET 1: 37235 STATE RD 19 N CITY: UMATILLA STATE: FL ZIP: 32984 BUSINESS PHONE: 3523574119 MAIL ADDRESS: STREET 1: 37235 STATE RD 19 N CITY: UMATILLA STATE: FL ZIP: 32784 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BURKE CUSTOM PROCESSING INC CENTRAL INDEX KEY: 0001050661 STANDARD INDUSTRIAL CLASSIFICATION: PLASTICS, MATERIALS, SYNTH RESINS & NONVULCAN ELASTOMERS [2821] IRS NUMBER: 942157282 STATE OF INCORPORATION: CA FISCAL YEAR END: 0102 FILING VALUES: FORM TYPE: S-4 SEC ACT: SEC FILE NUMBER: 333-57211-02 FILM NUMBER: 98650653 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 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BURKE RUBBER CO INC CENTRAL INDEX KEY: 0001050662 STANDARD INDUSTRIAL CLASSIFICATION: PLASTICS, MATERIALS, SYNTH RESINS & NONVULCAN ELASTOMERS [2821] IRS NUMBER: 942157283 STATE OF INCORPORATION: CA FISCAL YEAR END: 0102 FILING VALUES: FORM TYPE: S-4 SEC ACT: SEC FILE NUMBER: 333-57211-03 FILM NUMBER: 98650654 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 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BURKE FLOORING PRODUCTS INC CENTRAL INDEX KEY: 0001050664 STANDARD INDUSTRIAL CLASSIFICATION: PLASTICS, MATERIALS, SYNTH RESINS & NONVULCAN ELASTOMERS [2821] IRS NUMBER: 942157284 STATE OF INCORPORATION: CA FISCAL YEAR END: 0102 FILING VALUES: FORM TYPE: S-4 SEC ACT: SEC FILE NUMBER: 333-57211-04 FILM NUMBER: 98650655 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 S-4 1 S-4 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 19, 1998 REGISTRATION NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------------ FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------------ BURKE INDUSTRIES, INC. and Other Registrants (See Table of Other Registrants Below) (Exact name of each registrant as specified in its charter) CALIFORNIA 3069 94-3081144 (State of Incorporation or (Primary Standard Industrial (I.R.S. employer organization) classification code number) identification number)
2250 SOUTH TENTH STREET SAN JOSE, CALIFORNIA 95112 (408) 297-3500 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) ROCCO C. GENOVESE BURKE INDUSTRIES, INC. 2250 SOUTH TENTH STREET SAN JOSE, CALIFORNIA 95112 (408) 297-3500 (Name, address, including zip code, and telephone number, including area code, of agent for service) ------------------------------ WITH A COPY TO: KENNETH M. DORAN, ESQ. GIBSON, DUNN & CRUTCHER LLP 333 SOUTH GRAND AVENUE LOS ANGELES, CALIFORNIA 90071 (213) 229-7000 ------------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE. ------------------------------ If any of the securities being registered on this Form are to be offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. / / If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / ------------------------------ CALCULATION OF REGISTRATION FEE
PROPOSED MAXIMUM PROPOSED MAXIMUM TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF SECURITIES TO BE REGISTERED BE REGISTERED PER UNIT(1) OFFERING PRICE(1) REGISTRATION FEE Floating Rate Senior Notes due 2007......... $30,000,000 100% $30,000,000 $8,850.00 Guarantees of the Floating Rate Senior Notes due 2007.................................. $30,000,000 None(2) None(2) None(2)
(1) Estimated solely for the purpose of computing the registration fee pursuant to Rule 457. (2) Pursuant to Rule 457(n) under the Securities Act of 1933, no separate fee is payable for the Guarantees. ------------------------------ THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
PRIMARY STANDARD ADDRESS, INCLUDING ZIP CODE AND JURISDICTION INDUSTRIAL IRS EMPLOYER TELEPHONE NUMBER INCLUDING AREA OF CLASSIFICATION CODE IDENTIFICATION CODE, OF PRINCIPAL EXECUTIVE NAME OF CORPORATION INCORPORATION NUMBER NUMBER OFFICES - --------------------------------------- ------------- ------------------- ------------- --------------------------------- Burke Flooring Products, Inc........... California 3069 94-2157284 2250 South Tenth Street, San Jose, CA 95112 (408) 297-3500 Burke Rubber Company, Inc.............. California 3069 94-2157283 2250 South Tenth Street, San Jose, CA 95112 (408) 297-3500 Burke Custom Processing, Inc........... California 3069 94-2157282 2250 South Tenth Street, San Jose, CA 95112 (408) 297-3500 Mercer Products Company, Inc........... New Jersey 3089 22-3061500 37235 State Road 19 N Umatilla, FL 32784 (352) 357-4119
PROSPECTUS - ------------- BURKE INDUSTRIES, INC. OFFER TO EXCHANGE ALL OUTSTANDING FLOATING INTEREST RATE SENIOR NOTES DUE 2007 WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT (GUARANTEED BY SUBSTANTIALLY ALL OF ITS SUBSIDIARIES) ($30,000,000 PRINCIPAL AMOUNT OUTSTANDING) FOR FLOATING INTEREST RATE SENIOR NOTES DUE 2007 (GUARANTEED BY SUBSTANTIALLY ALL OF ITS SUBSIDIARIES) THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON , 1998 (AS SUCH DATE MAY BE EXTENDED, THE "EXPIRATION DATE"). Burke Industries, Inc., a California corporation (the "Company" or "Burke"), hereby offers upon the terms and subject to the conditions set forth in this Prospectus (as the same may be amended or supplemented from time to time, the "Prospectus") and the accompanying letter of transmittal relating to the Old Notes (as defined herein) (the "Letter of Transmittal," which together constitute the "Exchange Offer"), to exchange $1,000 principal amount of its Floating Interest Rate Senior Notes due 2007 (the "New Notes") for each $1,000 in principal amount of its outstanding Floating Interest Rate Senior Notes due 2007 (the "Old Notes") (the Old Notes and the New Notes are collectively referred to herein as the "Notes"). An aggregate principal amount of $30,000,000 of Old Notes is outstanding. See "The Exchange Offer." Each broker-dealer that receives New 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 New 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 amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of New Notes received in exchange for Old Notes where such Old 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 and ending on the close of business 180 days 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." The Company will accept for exchange any and all Old Notes validly tendered prior to 5:00 p.m., New York City time, on the Expiration Date. Tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration Date. The Exchange Offer is not conditioned upon any minimum principal amount of the Old Notes being tendered for exchange. However, the Exchange Offer is subject to the terms and provisions of the Registration Rights Agreement, dated as of April 21, 1998 (the "Registration Rights Agreement"), among the Company, the Subsidiary Guarantors (as defined herein), and NationsBanc Capital Markets, Inc. (the "Initial Purchaser"). The Old Notes may be tendered only in multiples of $1,000. See "The Exchange Offer." -------------------------- SEE "RISK FACTORS" BEGINNING ON PAGE 23 HEREIN FOR A DISCUSSION OF CERTAIN RISKS THAT SHOULD BE CONSIDERED BY HOLDERS IN EVALUATING THE EXCHANGE OFFER. --------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------------------ THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT SURRENDERS FOR EXCHANGE FROM, HOLDERS OF OLD NOTES IN ANY JURISDICTION IN WHICH THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE WITH THE SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION. THE DATE OF THIS PROSPECTUS IS JUNE , 1998 The Old Notes were issued in a transaction (the "Prior Offering") pursuant to which the Company issued an aggregate of $30,000,000 principal amount of the Old Notes to the Initial Purchaser on April 21, 1998 (the "Closing Date") pursuant to a Purchase Agreement, dated April 17, 1998 (the "Purchase Agreement"), among the Company and the Initial Purchaser. The Initial Purchaser subsequently resold the Old Notes in reliance on Rule 144A under the Securities Act of 1933, as amended (the "Securities Act"). The Company, the Subsidiary Guarantors, and the Initial Purchaser also entered into the Registration Rights Agreement, dated April 21, 1998, pursuant to which the Company granted certain registration rights for the benefit of the holders of the Old Notes. The Exchange Offer is intended to satisfy certain of the Company's obligations under the Registration Rights Agreement with respect to the Old Notes. See "The Exchange Offer--Purpose and Effect." The Old Notes were, and the New Notes will be, issued under the Indenture, dated as of April 21, 1998 (the "Indenture"), among the Company, the Subsidiary Guarantors, and United States Trust Company of New York, as trustee (the "Trustee"), and the New Notes and the Old Notes will constitute a single series of debt securities under the Indenture. The terms of the New Notes are identical in all material respects to the terms of the Old Notes except that (i) the New Notes will have been registered under the Securities Act and thus will not bear restrictive legends restricting their transfer pursuant to the Securities Act and will not be entitled to registration rights, (ii) holders of New Notes will not be entitled to liquidated damages for the Company's failure to register the Old Notes or New Notes under the Registration Rights Agreement, and (iii) holders of New Notes will not be, and upon the consummation of the Exchange Offer, holders of Old Notes will no longer be, entitled to certain rights under the Registration Rights Agreement intended for the holders of unregistered securities. The Exchange Offer shall be deemed consummated upon the occurrence of the delivery by the Company to United States Trust Company of New York, as registrar of the Old Notes (in such capacity, the "Registrar") under the Indenture, of New Notes in the same aggregate principal amount as the aggregate principal amount of Old Notes that are validly tendered by holders thereof pursuant to the Exchange Offer. See "The Exchange Offer--Termination of Certain Rights," "--Procedures for Tendering Old Notes" and "Description of Notes." In the event that the Exchange Offer is consummated, any Old Notes which remain outstanding after consummation of the Exchange Offer and the New Notes issued in the Exchange Offer will vote together as a single class for purposes of determining whether holders of the requisite percentage in outstanding principal amount of Notes have taken certain actions or exercised certain rights under the Indenture. The New Notes will mature on August 15, 2007, unless previously redeemed. Interest on the New Notes is payable semiannually on February 15 and August 15, commencing August 15, 1998. The New Notes will bear interest at a rate per annum equal to LIBOR plus 400 basis points. Interest on the New Notes will be reset semi-annually. The New Notes will be redeemable at the option of the Company at any time at the redemption prices set forth herein in "Description of Notes--Redemption--Optional Redemption," plus accrued and unpaid interest thereon, to the redemption date. Upon a Change of Control (as defined herein), the Company will be required to make an offer to repurchase all outstanding New Notes at 101% of the aggregate principal amount thereof plus Liquidated Damages (as defined herein), if any, and accrued and unpaid interest thereon to the date of repurchase. See "Description of Notes-- Redemption--Purchase of Senior Notes Upon Change of Control or Asset Sale" and "--Certain Covenants--Purchase of Senior Notes Upon a Change of Control." Under certain circumstances, the Company will be required to make an offer to purchase all or a portion of the Notes with the proceeds received from an Asset Sale (as defined herein). See "Description of Notes--Certain Covenants--on on Certain Asset Sales." The New Notes will be general unsecured obligations of the Company and will rank senior to all existing and future subordinated indebtedness of the Company and PARI PASSU in right of payment to all unsubordinated indebtedness of the Company, including indebtedness under the Credit Facility and the Existing Notes. The Existing Notes are the $110,000,000 aggregate principal amount of 10% Senior Notes 2 due 2007 previously issued by the Company and currently outstanding. The obligations of the Company under the Credit Facility are secured by substantially all of the assets of the Company and, accordingly, such indebtedness will effectively rank senior to the Notes and the Existing Notes to the extent of such assets. The New Notes will be unconditionally guaranteed (the "Note Guarantees") on a joint and several basis by four subsidiaries of the Company: Burke Flooring Products, Inc., a California corporation, Burke Rubber Company, Inc., a California corporation, Burke Custom Processing, Inc., a California corporation and Mercer Products Company, Inc., a New Jersey corporation ("Mercer") (collectively, the "Subsidiary Guarantors"). None of the Subsidiary Guarantors, other than Mercer, has any substantial assets or properties. The Note Guarantees will rank senior to all existing and future subordinated indebtedness of the Subsidiary Guarantors and PARI PASSU with all other unsubordinated indebtedness of the Subsidiary Guarantors; provided, however, that the guarantees of indebtedness under the Credit Facility are secured by substantially all of the assets of the Subsidiary Guarantors and will effectively rank senior to the Note Guarantees to the extent of such assets. The Indenture restricts, but does not prohibit, the Subsidiary Guarantors from incurring additional secured indebtedness. Based on existing interpretations of the Securities Act by the staff of the Securities and Exchange Commission (the "Commission") set forth in "no-action" letters issued to third parties in other transactions, the Company believes that New Notes issued pursuant to the Exchange Offer to any holder of Old Notes in exchange for Old Notes may be offered for resale, resold and otherwise transferred by such holder (other than a broker-dealer who purchased Old Notes directly from the Company for resale pursuant to Rule 144A under the Securities Act or any other available exemption under the Securities Act) without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that such holder is not an affiliate of the Company, is acquiring the New Notes in the ordinary course of business and is not participating, and has no arrangement or understanding with any person to participate, in the distribution of the New Notes. Holders wishing to accept the Exchange Offer must represent to the Company, as required by the Registration Rights Agreement, that such conditions have been met. In addition, if such holder is not a broker-dealer, it must represent that it is not engaged in, and does not intend to engage in, a distribution of the New Notes. Each broker-dealer that receives New Notes as a result of market-making or other activities must acknowledge that it will deliver a prospectus in connection with any resale of such New Notes. See "The Exchange Offer--Resales of the New Notes." For a period of 180 days from the Expiration Date, the Company will make this Prospectus, as amended or supplemented, available to any broker-dealer for use in connection with any such resale. See "Plan of Distribution." There has previously been only a limited secondary market, and no public market, for the Old Notes. The Old Notes are eligible for trading in the Private Offering, Resales and Trading through Automatic Linkages ("PORTAL") market. In addition, the Initial Purchaser has advised the Company that it currently intends to make a market in the New Notes; however, the Initial Purchaser is not obligated to do so and any market making activities may be discontinued by the Initial Purchaser at any time. Therefore, there can be no assurance that an active market for the New Notes will develop. If such a trading market develops for the New Notes, future trading prices will depend on many factors, including, among other things, prevailing interest rates, the Company's results of operations and the market for similar securities. Depending on such factors, the New Notes may trade at a discount from their face value. See "Risk Factors--Lack of Public Market." The Old Notes were issued originally in global form (the "Global Old Note"). The Global Old Note was deposited with, or on behalf of, The Depository Trust Company (the "Depositary") and registered in the name of Cede & Co., as nominee of the Depositary (such nominee being referred to herein as the "Global Note Holder"). The use of the Global Old Note to represent certain of the Old Notes permits the Depositary's participants, and anyone holding a beneficial interest in an Old Note registered in the name of such a participant, to transfer interests in the Old Notes electronically in accordance with the Depositary's established procedures without the need to transfer a physical certificate. New Notes issued in 3 exchange for the Global Old Note will also be issued initially as a note in global form (the "Global New Note," and, together with the Global Old Note, the "Global Notes") and deposited with, or on behalf of, the Depositary. After the initial issuance of the Global New Note, New Notes in certificated form will be issued in exchange for a holder's proportionate interest in the Global New Note only as set forth in the Indenture. Any Old Notes not tendered and accepted in the Exchange Offer will remain outstanding and will be entitled to all the same rights and will be subject to the same limitations applicable thereto under the Indenture (except for those rights which terminate upon consummation of the Exchange Offer). Following consummation of the Exchange Offer, the Holders of Old Notes will continue to be subject to the existing restrictions upon transfer thereof and the Company will have no further obligation to such Holders (other than to certain Holders under certain limited circumstances) to provide for registration under the Securities Act of the Old Notes held by them. To the extent that Old Notes are tendered and accepted in the Exchange Offer, a Holder's ability to sell untendered Old Notes could be adversely affected. See "Risk Factors--Consequences of Failure to Exchange" and "The Exchange Offer--Certain Consequences of a Failure to Exchange." This Prospectus, together with the Letter of Transmittal is being sent to all registered Holders of Old Notes as of , 1998. The Company will not receive any proceeds from this Exchange Offer. Pursuant to the Registration Rights Agreement, the Company will bear certain registration expenses. 4 TABLE OF CONTENTS
PAGE ----- Available Information...................................................................................... 6 Prospectus Summary......................................................................................... 7 Risk Factors............................................................................................... 23 The Transactions........................................................................................... 31 Use of Proceeds............................................................................................ 32 The Exchange Offer......................................................................................... 33 Capitalization............................................................................................. 42 Unaudited Pro Forma Combined Financial Statements.......................................................... 43 Selected Historical Consolidated Financial Data............................................................ 52 Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 56 Business................................................................................................... 64 Acquisition of Mercer...................................................................................... 80 Consent Solicitation....................................................................................... 81 Management................................................................................................. 82 Security Ownership of Certain Beneficial Owners and Management............................................. 87 Certain Relationships and Related Transactions............................................................. 88 Description of Notes....................................................................................... 91 Description of New Credit Facility......................................................................... 121 Description of Capital Stock............................................................................... 124 Plan of Distribution....................................................................................... 129 Legal Matters.............................................................................................. 130 Experts.................................................................................................... 130 Index to Financial Statements.............................................................................. F-1
5 AVAILABLE INFORMATION The Company has filed a registration statement on Form S-4 (together with any amendments thereto, the "Registration Statement") with the Commission under the Securities Act with respect to the New Notes. This Prospectus, which constitutes a part of the Registration Statement, omits certain information contained in the Registration Statement and reference is made to the Registration Statement and the exhibits and schedules thereto for further information with respect to the Company and the New Notes offered hereby. This Prospectus contains summaries of the material terms and provisions of certain documents and in each instance reference is made to the copy of such document filed as an exhibit to the Registration Statement. Each such summary is qualified in its entirety by such reference. The Company is subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and in accordance therewith files reports and other information with the Commission. In addition, upon registration of the guarantees of the Existing Notes in connection with the Prior Offering, each Subsidiary Guarantor also became subject to the reporting requirements of the Exchange Act, subject to obtaining exemptive relief from the Commission on no-action advise from the Commission staff. The Registration Statement (including the exhibits and schedules thereto) and the periodic reports and other information filed by the Company with the Commission may be inspected and copied at the public reference facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional offices of the Commission located at 7 World Trade Center, 13th Floor, New York, New York 10048, and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such materials may be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and its public reference facilities in New York, New York and Chicago, Illinois, at prescribed rates. Such information may also be accessed electronically by means of the Commission's homepage on the Internet at http://www.sec.gov., which contains reports, proxy and information statements and other information regarding registrants, including the Company, that file electronically with the Commission. 6 PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL DATA, INCLUDING THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO, INCLUDED ELSEWHERE IN THIS PROSPECTUS. ALL REFERENCES HEREIN TO "BURKE" OR "THE COMPANY" REFER TO BURKE INDUSTRIES, INC. AND INCLUDE ITS SUBSIDIARIES, UNLESS THE CONTEXT OTHERWISE REQUIRES. THE COMPANY'S FISCAL YEAR ENDS ON THE FRIDAY CLOSEST TO DECEMBER 31. THE FINANCIAL INFORMATION OF THE COMPANY CONTAINED HEREIN FOR YEARS PRIOR TO 1996 HAS BEEN RESTATED TO EXCLUDE THE FINANCIAL RESULTS OF THE CUSTOM-MOLDED PRODUCTS UNIT, WHICH WAS SOLD IN 1996. PRO FORMA INFORMATION GIVES EFFECT TO THE TRANSACTIONS (AS DEFINED HEREIN) AND THE PRIOR RECAPITALIZATION (AS DEFINED HEREIN), INCLUDING THE PRIOR OFFERING OF THE EXISTING NOTES, AS IF EACH HAD OCCURRED ON JANUARY 4, 1997 WITH RESPECT TO THE PRO FORMA COMBINED STATEMENT OF INCOME FOR THE YEAR ENDED JANUARY 2, 1998 FOR THE COMPANY AND THE YEAR ENDED DECEMBER 31, 1997 FOR MERCER AND, FOR THE PRO FORMA COMBINED STATEMENT OF INCOME FOR THE THREE MONTHS ENDED APRIL 3, 1998 AND APRIL 4, 1997 FOR THE COMPANY AND THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997 FOR MERCER. ALL REFERENCES HEREIN TO "FISCAL YEAR 1997" REFER TO THE YEAR ENDED JANUARY 2, 1998 FOR THE COMPANY AND THE YEAR ENDED DECEMBER 31, 1997 FOR MERCER. THE COMPANY OVERVIEW 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, respectively ("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. On April 21, 1998, the Company acquired all of the capital stock of Mercer from Sovereign Specialty Chemicals, Inc. ("Sovereign") pursuant to a Stock Purchase Agreement, dated March 5, 1998, among the Company, Sovereign and Mercer (the "Mercer Acquisition"). Mercer is a leading manufacturer of extruded plastic and vinyl flooring products such as vinyl cove base, transitional and finish mouldings, corners, stair treads and other accessories. On a pro forma basis, after giving effect to the Mercer Acquisition as if it had occurred on January 4, 1997, Burke would have generated $115.1 million and $22.4 million in revenues and EBITDA, respectively, in 1997. See "Acquisition of Mercer" and "Unaudited Pro Forma Combined Financial Statements." Mercer represents the fifth acquisition completed by Burke's current management team over the last five years. Burke's integration of these acquisitions has led to a dominant position in the aerospace seals market, opened new markets for its Flooring Products, improved operating efficiencies, consolidated overhead and strengthened technical capabilities. Management intends to continue to evaluate potential acquisitions as a way to augment Burke's internal growth, expand and strengthen existing product lines and enhance the Company's distribution and technological capabilities. 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 The Boeing 7 Company's Commercial Airplane Group ("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 Advanced Tactical Fighter ("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 34.6% of the Company's total net sales in 1997. Management believes the Aerospace Products business is well positioned to benefit from the commercial aircraft build rates which increased in 1997 and are continuing to increase in 1998, along with the associated retrofit, refurbishment, replacement and upgrade projects that are required over the life of the aircraft. 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-Registered Trademark-, and other rubber-based flooring accessories for commercial and industrial applications in the western United States. The acquisition of Mercer significantly expands Burke's product offerings and distribution capabilities given Mercer's historically strong presence as a manufacturer of vinyl cove base and other vinyl-based flooring accessories in the eastern United States. Both Burke's and Mercer's principal product offerings include vinyl cove base and rubber cove base, tile, stair treads, corners, shapes and other flooring accessories. Demand for 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. The Company's Flooring Products sales were $23.5 million in 1997, comprising 26.0% of the Company's total net sales in 1997. Mercer's sales were $24.9 million in 1997. Management believes that the acquisition of Mercer, which is already well established as a leading supplier of vinyl cove base and mouldings in the eastern United States, will enable it to increase revenues through the increased penetration of existing markets and the expansion of its product line to markets where vinyl cove base is traditionally more popular than rubber cove base, such as the midwestern and eastern United States. The Mercer Acquisition also presents the opportunity for cost savings through economies of scale and shared resources. 8 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, one of the nation's largest producers of floor covering accessories and maintains strong positions in its 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 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. Pursuant to the Mercer Acquisition, the Company will also be acquiring Mercer's strong relationships with distributors in the eastern United States and Mercer's trade name Uni-Color-Registered Trademark- color matching system, which is a widely recognized brand name in the flooring business. 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 LEADERSHIP 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 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 9 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. 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 Industries ("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 original equipment manufacturers ("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 and by capitalizing on the strong East Coast presence in vinyl flooring products that Mercer has already established. - LEVERAGE BRAND NAME RECOGNITION AND EXISTING DISTRIBUTION CHANNELS. The Company intends to continue to capitalize on the BurkeBase trademark by expanding and upgrading its existing product line. In addition, the Company intends to capitalize on the strong brand name established by Mercer in the flooring business with Mercer's unique Uni-Color-Registered Trademark- color matching system. 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. COMMERCIAL PRODUCTS - INCREASE PENETRATION OF PUROSIL SILICONE HOSES. The Company believes it has yet to fully capitalize on the growth opportunities for its Purosil silicone hoses, particularly in the heavy-duty truck and bus aftermarket. New initiatives include increasing customer share at a major private-label customer, initiating production of silicone hoses for a major new OEM customer and expanding into new product areas. 10 - 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, such as the Mercer Acquisition, where it can expand and strengthen existing product lines and enhance 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. The Company's principal executive offices are located at 2250 South Tenth Street, San Jose, California 95112; telephone: (408) 297-3500. SUMMARY OF THE TRANSACTIONS ACQUISITION OF MERCER On April 21, 1998, the Company acquired all of the outstanding capital stock of Mercer from Sovereign pursuant to a Stock Purchase Agreement among the Company, Sovereign and Mercer, dated March 5, 1998, for an aggregate consideration of $35,750,000, subject to working capital and other adjustments. 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 mouldings, 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. Management believes the acquisition of Mercer significantly enhances the Company's 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 since 1995. Net sales increased 7.2% and 1.4%, respectively, in 1996 and 1997. The Stock Purchase Agreement contains customary representations and warranties from Sovereign to the Company. Certain of these representations and warranties, and related indemnification rights, will 11 terminate after a limited time following the effectiveness of the Mercer Acquisition. The following table sets forth the sources and uses of funds in connection with the Mercer Acquisition:
(DOLLARS IN THOUSANDS) -------------------- Sources of Funds: Issuance of Senior Notes.............................................. $ 30,000 Issuance of Convertible Preferred Stock(1)............................ 3,000 Cash on Hand.......................................................... 6,500 ------- $ 39,500 ------- ------- Uses of Funds: Aggregate Mercer Acquisition Consideration(2)......................... $ 35,750 Transaction Expenses(3)............................................... 3,750 ------- $ 39,500 ------- -------
- ------------------------ (1) Purchased by JFLEI (as defined herein), together with the other shareholders and warrantholders of the Company who elected to participate in the subscription offering. (2) Subject to adjustment based on Mercer's working capital on the closing date of the Mercer Acquisition pursuant to the Stock Purchase Agreement. (3) Includes discounts and commissions and estimated expenses to be incurred in connection with the Prior Offering, and fees and expenses payable in connection with the Mercer Acquisition and the related financing thereof, including the Consent Solicitation. See "The Transactions" and "Certain Relationships and Related Transactions." For a more detailed discussion of the business and operations of Mercer, see "Acquisition of Mercer." CONSENT SOLICITATION In connection with the Prior Offering, pursuant to a consent solicitation (the "Consent Solicitation"), the Company obtained the consents (the "Consent") of holders of its Existing Notes to certain amendments (the "Amendments") to the indenture pursuant to which the Existing Notes were issued between the Company and United States Trust Company of New York (the "Existing Indenture") which, among other things, (i) permitted the issuance of the Notes and permit the incurrence of indebtedness represented by the Notes, (ii) increased certain of the permitted indebtedness and permitted investment baskets contained in the indebtedness and restricted payment covenants in the Existing Indenture, (iii) modified the lien covenant to enhance the Company's ability to use existing assets as collateral for new financings and (iv) made certain other amendments of a non-substantive nature to the Existing Indenture. Pursuant to the Consent Solicitation, the Company made certain payments to holders thereof who properly furnished their Consents to the Amendments. The Prior Offering, the related financing transactions and the Consent Solicitation are collectively referred to herein as the "Transactions." THE PRIOR OFFERING The outstanding $30.0 million principal amount of Old Notes were sold by the Company to the Initial Purchaser on the Closing Date (as defined herein) pursuant to the Purchase Agreement among the Company and the Initial Purchaser. The Initial Purchaser subsequently resold the Old Notes in reliance on Rule 144A under the Securities Act. The Company, the Subsidiary Guarantors and the Initial Purchaser also entered into the Registration Rights Agreement pursuant to which the Company granted certain registration rights for the benefit of the holders of the Old Notes. The Exchange Offer is intended to 12 satisfy certain of the Company's obligations under the Registration Rights Agreement with respect to the Old Notes. See "The Exchange Offer--Purpose and Effect." THE EXCHANGE OFFER The Exchange Offer................ The Company is offering upon the terms and subject to the conditions set forth herein and in the accompanying letter of transmittal (the "Letter of Transmittal"), to exchange $1,000 in principal amount of its Floating Interest Rate Senior Notes due 2007 (the "New Notes", with the Old Notes and the New Notes collectively referred to herein as the "Notes") for each $1,000 in principal amount of the outstanding Old Notes (the "Exchange Offer"). As of the date of this Prospectus, $30.0 million in aggregate principal amount of the Old Notes is outstanding. See "The Exchange Offer--Terms of the Exchange Offer." Expiration Date................... 5:00 p.m., New York City time, on , 1998 as the same may be extended. See "The Exchange Offer--Expiration Date; Extensions; Amendments." Conditions of the Exchange Offer........................... The Exchange Offer is not conditioned upon any minimum principal amount of Old Notes being tendered for exchange. The only condition to the Exchange Offer is the declaration by the Commission of the effectiveness of the Registration Statement of which this Prospectus constitutes a part. See "The Exchange Offer--Conditions of the Exchange Offer." Termination of Certain Rights..... Pursuant to the Registration Rights Agreement and the Old Notes, holders of Old Notes (i) have rights to receive Liquidated Damages and (ii) have certain rights intended for the holders of unregistered securities. "Liquidated Damages" means damages of $0.05 per week per $1,000 principal amount of Old Notes (up to a maximum of $0.30 per week per $1,000 principal amount) during the period in which a Registration Default is continuing pursuant to the terms of the Registration Rights Agreement. Holders of New Notes will not be and, upon consummation of the Exchange Offer, holders of Old Notes will no longer be, entitled to (i) the right to receive the Liquidated Damages or (ii) certain other rights under the Registration Rights Agreement intended for holders of unregistered securities. "See The Exchange Offer--Termination of Certain Rights" and --"Procedures for Tendering Old Notes." Accrued Interest.................. The New Notes will bear interest at a rate per annum equal to LIBOR plus 400 basis points. Interest shall accrue from April 21, 1998 or from the most recent Interest Payment Date with respect to the Old Notes to which interest was paid or duly provided for. See "Description of Notes--Principal, Maturity and Interest." Procedures for Tendering Old Notes........................... Unless a tender of Old Notes is effected pursuant to the procedures for book-entry transfer as provided herein, each holder desiring to accept the Exchange Offer must complete and sign the Letter of Transmittal, have the signature thereon
13 guaranteed if required by the Letter of Transmittal, and mail or deliver the Letter of Transmittal, together with the Old Notes or a Notice of Guaranteed Delivery and any other required documents (such as evidence of authority to act, if the Letter of Transmittal is signed by someone acting in a fiduciary or representative capacity), to the Exchange Agent (as defined) at the address set forth on the back cover page of this Prospectus prior to 5:00 p.m., New York City time, on the Expiration Date. Any Beneficial Owner (as defined herein) of the Old Notes whose Old Notes are registered in the name of a nominee, such as a broker, dealer, commercial bank or trust company and who wishes to tender Old Notes in the Exchange Offer, should instruct such entity or person to promptly tender on such Beneficial Owner's behalf. See "The Exchange Offer-- Procedures for Tendering Old Notes." Guaranteed Delivery Procedures.... Holders of Old Notes who wish to tender their Old Notes and (i) whose Old Notes are not immediately available or (ii) who cannot deliver their Old Notes or any other documents required by the Letter of Transmittal to the Exchange Agent prior to the Expiration Date (or complete the procedure for book-entry transfer on a timely basis), may tender their Old Notes according to the guaranteed delivery procedures set forth in the Letter of Transmittal. See "The Exchange Offer--Guaranteed Delivery Procedures." Acceptance of Old Notes and Delivery of New Notes........... Upon effectiveness of the Registration Statement of which this Prospectus constitutes a part and consummation of the Exchange Offer, the Company will accept any and all Old Notes that are properly tendered in the Exchange Offer prior to 5:00 p.m., New York City time, on the Expiration Date. The New Notes issued pursuant to the Exchange Offer will be delivered promptly after acceptance of the Old Notes. See "The Exchange Offer--Acceptance of Old Notes for Exchange; Delivery of New Notes." Withdrawal Rights................. Tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration Date. See "The Exchange Offer--Withdrawal Rights." The Exchange Agent................ United States Trust Company of New York is the exchange agent (in such capacity, the "Exchange Agent"). The address and telephone number of the Exchange Agent are set forth in "The Exchange Offer--The Exchange Agent; Assistance." Fees and Expenses................. All expenses incident to the Company's consummation of the Exchange Offer and compliance with the Registration Rights Agreement will be borne by the Company. The Company will also pay certain transfer taxes applicable to the Exchange Offer. See "The Exchange Offer--Fees and Expenses." Resales of the New Notes.......... Based on existing interpretations by the staff of the Commission set forth in no-action letters issued to third parties, the Company believes that New Notes issued pursuant to the Exchange Offer
14 to a holder in exchange for Old Notes may be offered for resale, resold and otherwise transferred by a holder (other than (i) a broker-dealer who purchased the Old Notes directly from the Company for resale pursuant to Rule 144A under the Securities Act or any other available exemption under the Securities Act or (ii) a person that is an affiliate of the Company within the meaning of Rule 405 under the Securities Act), without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that such holder is acquiring the New Notes in the ordinary course of business and is not participating, and has no arrangement or understanding with any person to participate, in a distribution of the New Notes. Each broker-dealer that receives New Notes for its own account in exchange for Old Notes, where such Old Notes were acquired by such broker as a result of market-making or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such New Notes. See "The Exchange Offer--Resales of the New Notes and Plan of Distribution." Effect of Not Tendering Old Notes for Exchange.................... Old Notes that are not tendered or that are not properly tendered will, following the expiration of the Exchange Offer, continue to be subject to the existing restrictions upon transfer thereof. The Company will have no further obligations to provide for the registration under the Securities Act of such Old Notes and such Old Notes will, following the expiration of the Exchange Offer, bear interest at the same rate as the New Notes. Certain Federal Income Tax Consequences.................... The Company believes that the exchange pursuant to the Exchange Offer will not be a taxable event for federal income tax purposes. See "Federal Income Tax Consequences of the Exchange Offer."
DESCRIPTION OF NEW NOTES The form and terms of the New Notes will be identical in all material respects to the form and terms of the Old Notes, except that (i) the New Notes have been registered under the Securities Act and, therefore, will not bear legends restricting the transfer thereof, (ii) holders of the New Notes will not be entitled to Liquidated Damages and (iii) holders of the New Notes will not be, and upon consummation of the Exchange Offer, holders of the Old Notes will no longer be, entitled to certain rights under the Registration Rights Agreement intended for the holders of unregistered securities, except in limited circumstances. See "Exchange Offer--Termination of Certain Rights." The Exchange Offer shall be deemed consummated upon the occurrence of the delivery by the Company to the Registrar under the Indenture of the New Notes in the same aggregate principal amount as the aggregate principal amount of Old Notes that are tendered by holders thereof pursuant to the Exchange Offer. See "The Exchange Offer--Termination of Certain Rights" and "Procedures for Tendering Old Notes;" and "Description of Notes." 15 Securities Offered................ $30,000,000 aggregate principal amount of Floating Interest Rate Senior Subordinated Notes Due 2007. Maturity Date..................... August 15, 2007. Interest Rate and Payment Dates... Interest on the Notes will accrue from the date of issuance and will be payable semi-annually on each February 15 and August 15, commencing August 15, 1998. The Senior Notes will bear interest at a rate per annum equal to LIBOR plus 400 basis points. Interest on the Senior Notes will be reset semi-annually. Ranking........................... The Notes will be general unsecured obligations of the Company, senior to all existing and future subordinated indebtedness of the Company and PARI PASSU in right of payment with all other existing and future unsubordinated indebtedness of the Company, including indebtedness under the Credit Facility and the Existing Notes. However, the obligations of the Company under the Credit Facility will be secured by substantially all of the assets of the Company. Accordingly, such secured indebtedness will effectively rank senior to the Notes to the extent of such assets. The indenture for the Notes (the "Indenture") and the indenture for the Existing Notes (the "Existing Indenture") restrict, but do not prohibit, the Company from incurring additional indebtedness. See "Description of Senior Notes--Ranking." Optional Redemption............... The Company may redeem the Notes at any time, in whole or in part, at the redemption prices set forth herein, plus accrued and unpaid interest, if any, to the date of redemption. See "Description of Senior Notes--Redemption--Optional Redemption." Guarantees........................ The Notes will be unconditionally guaranteed on a joint and several basis (the "Note Guarantees") by substantially all of the subsidiaries of the Company (collectively, the "Subsidiary Guarantors"). None of the Subsidiary Guarantors, other than Mercer, has any substantial assets or properties. The Note Guarantees will rank senior to all existing and future subordinated indebtedness of the Subsidiary Guarantors and PARI PASSU with all other unsubordinated indebtedness of the Subsidiary Guarantors, including the guarantees of indebtedness under the Credit Facility. Any Subsidiary Guarantor's obligations under the Credit Facility, however, will be secured by substantially all of the assets of such Subsidiary Guarantor. Accordingly, such secured indebtedness will effectively rank senior to the Note Guarantees to the extent of such assets. The Indenture and the Existing Indenture restrict but do not prohibit, the Subsidiary Guarantors from incurring additional secured indebtedness. See "Description of Senior Notes--Note Guarantees." Mandatory Redemption.............. None, except as set forth under "Description of Senior Notes-- Change of Control."
16 Change of Control................. Upon a Change of Control (as defined herein), the Company will be required to make an offer to repurchase all outstanding Notes at 101% of the principal amount thereof plus accrued and unpaid interest thereon, if any, and Liquidated Damages, if any, to the date of repurchase. See "Description of Senior Notes-- Redemption--Purchase of Senior Notes Upon Change of Control or Asset Sale" and "--Certain Covenants--Purchase of Senior Notes Upon a Change of Control." There can be no assurance that sufficient funds will be available to the Company at the time of any Change of Control to make any required repurchases of Notes. See "Risk Factors--Potential Inability to Fund Change of Control Offer." Covenants......................... The Indenture restricts, among other things, the Company's and its subsidiaries' 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. See "Description of Senior Notes--Certain Covenants." Use of Proceeds................... The Company used the net proceeds received from the Prior Offering and the other financing transactions described herein to finance the Mercer Acquisition and to pay fees and expenses related to the Mercer Acquisition and the Consent Solicitation. See "The Transactions" and "Use of Proceeds." Absence of a Public Market for the New Notes....................... The New Notes are a new issue of securities with no established market. Accordingly, there can be no assurance as to the development or liquidity of any market for the New Notes. The Initial Purchaser has advised the Company that it currently intends to make a market in the New Notes. However, the Initial Purchaser is not obligated to do so, and any market making with respect to the New Notes may be discontinued at any time without notice. The Company does not intend to apply for listing of the New Notes on a securities exchange.
17 RISK FACTORS For a discussion of certain matters that should be considered by prospective investors in connection with the Exchange Offer, see "Risk Factors." SUMMARY UNAUDITED PRO FORMA FINANCIAL DATA The following sets forth summary unaudited pro forma financial data derived from the unaudited pro forma financial data contained elsewhere herein (the "Pro Formas"). The following unaudited pro forma statement of income data for the year ended January 2, 1998 and the three months ended April 4, 1997 give effect to the Prior Recapitalization as if it had occurred on January 4, 1997. The unaudited pro forma combined statement of income data for Burke and Mercer together for the year ended January 2, 1998 for Burke and December 31, 1997 for Mercer have been further adjusted to give effect to the Transactions, including the Prior Offering, the application of funds therefrom and the Mercer Acquisition as if they had occurred on January 4, 1997. The unaudited pro forma combined statement of income data for Burke and Mercer together for the three months ended April 3, 1998 and April 4, 1997 for Burke and March 31, 1998 and 1997 for Mercer have been adjusted to give effect to the Transactions, including the Prior Offering, the application of funds therefrom and the Mercer Acquisition as if they had occurred on January 4, 1997. The unaudited pro forma combined balance sheet data for Burke and Mercer together as of April 3, 1998 for Burke and March 31, 1998 for Mercer give effect to the Transactions, including the Prior Offering, and to the Mercer Acquisition, as if they had occurred on April 3, 1998. Certain management assumptions and adjustments relating to the Prior Recapitalization and the Transactions are described in the accompanying notes hereto. This pro forma information is not necessarily indicative of the results that would have occurred had the Transactions and the Prior Recapitalization been completed on the date indicated or Burke's or Mercer's actual or future results or financial position. The summary unaudited pro forma financial data should be read in conjunction with the information contained in the financial statements of Burke and Mercer and the notes thereto, "Unaudited Pro Forma Combined Financial Statements," "Selected Historical Consolidated Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere herein. 18 SUMMARY UNAUDITED PRO FORMA FINANCIAL DATA (CONTINUED)
PRO FORMA COMBINED --------------------------------------------- THREE MONTHS THREE MONTHS FISCAL YEAR ENDED APRIL 4, ENDED APRIL 3, 1997 1997 1998 ----------- --------------- --------------- (DOLLARS IN THOUSANDS) OPERATING DATA: Net sales.......................... $ 115,127 $ 29,122 $ 29,147 Cost of sales...................... 78,995 20,337 20,120 ----------- --------------- --------------- Gross profit....................... 36,132 8,785 9,027 Selling, general and administrative expenses......................... 17,665 4,598 4,789 ----------- --------------- --------------- Income from operations............. 18,467 4,187 4,238 Interest expense, net.............. 14,166 3,541 3,578 ----------- --------------- --------------- Income before income tax provision........................ 4,301 646 660 Income tax provision............... 1,763 265 270 ----------- --------------- --------------- Net income......................... $ 2,538 $ 381 $ 390 ----------- --------------- --------------- ----------- --------------- --------------- OTHER DATA: EBITDA(1).......................... $ 22,366 $ 5,106 $ 5,185 EBITDA margin(1)................... 19.4% 17.5% 17.8% Depreciation and amortization...... $ 3,899 $ 919 $ 947 Capital expenditures............... 1,551 437 431 Cash interest expense.............. 13,350 3,337 3,351 Ratio of EBITDA to cash interest expense.......................... 1.7x 1.5x 1.5x Ratio of earnings to fixed charges(2)....................... 1.3x 1.2x 1.2x Ratio of earnings to combined fixed charges(3)....................... 1.0x -- -- Net cash used in operating activities....................... $ (11,432) $ (3,815) $ (4,340) Net cash used in investing activities....................... (36,745) (35,631) (431) Net cash provided by (used in) financing activities............. 50,254 43,675 (2,985) BALANCE SHEET DATA AT APRIL 3, 1998: Working capital.................... $ 19,595 Total assets....................... 93,678 Long-term obligations, less current portion.......................... 140,000 Redeemable Preferred Stock(4)...... 16,652 Convertible Preferred Stock(5)..... 3,000 Shareholders' deficit.............. (83,562)
- ------------------------ (1) EBITDA is the sum of income before income tax provision 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. 19 (2) In calculating the ratio of earnings to fixed charges, earnings consist of income before income tax provision, discontinued operation (as applicable) plus fixed charges (excluding capitalized interest). Fixed charges consist of interest expense incurred (which includes amortization of deferred financing costs) whether expensed or capitalized and a portion of rental expense estimated to be attributable to interest. (3) In calculating the ratio of earnings to combined fixed charges, combined fixed charges consist of fixed charges, paid-in-kind dividends on the Redeemable Preferred Stock, accretion of the carrying value of the Redeemable Preferred Stock and dividends on the Convertible Preferred Stock. Earnings were insufficient to cover combined fixed charges by $403 for the three months ended April 3, 1998 and $412 for the three months ended April 4, 1997. (4) Net of $2,350 attributable to the Warrants (as defined herein) and issuance of costs of $106 and including $1,108 of accrued dividends-in-kind. Dividends on the Redeemable Preferred Stock are cumulative, accrue quarterly at the rate of 11 1/2% per annum on the stated value of $18,000 and are paid-in-kind through July 15, 2000. See "Description of Capital Stock-Preferred Stock-Redeemable Preferred Stock." (5) See "Description of Capital Stock-Preferred Stock-Convertible Preferred Stock." SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA The summary historical consolidated financial data below for Burke 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 Burke which have been audited by Ernst & Young LLP, independent auditors, and are included elsewhere in this Prospectus. The summary consolidated financial data below for Burke 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 Burke which have also been audited by Ernst & Young LLP, but which are not included elsewhere herein. The summary financial data for the three months ended April 4, 1997 and April 3, 1998 and as of April 3, 1998 have been derived from the Company's Unaudited Consolidated Financial Statements for those periods included elsewhere in the Prospectus and the summary financial data as of April 4, 1997 have been derived from the Company's Unaudited Consolidated Financial Statements for that period, but are not included elsewhere herein and, in each case, include, in the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the results for the unaudited interim periods. Results for the three months ended April 3, 1998 are not necessarily indicative of the results that may be expected for the entire year. The information presented below is qualified in its entirety by, and should be read in conjunction with, "Selected Historical Consolidated Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements of the Company and related notes included elsewhere in this Prospectus. The data below reflect the acquisition by Burke of certain assets of Purosil in March 1993; of Silicone Fabrication 20 Specialists, Inc. ("SFS") in February 1995; of Haskon Corporation ("Haskon") in June 1995; of Kentile Corporation ("Kentile") in April 1996; and the effect of the Prior Recapitalization in August 1997.
THREE MONTHS ENDED FISCAL YEAR ------------------------- ------------------------------------------- APRIL 4, APRIL 3, 1993 1994 1995 1996 1997 1997 1998 ------- ------- ------- ------- ------- ----------- ----------- (DOLLARS IN THOUSANDS) OPERATING DATA: Net sales......................................... $36,431 $44,370 $68,411 $72,466 $90,228 $23,124 $22,943 Cost of sales..................................... 25,355 29,998 49,226 49,689 62,917 16,419 16,180 ------- ------- ------- ------- ------- ----------- ----------- Gross profit...................................... 11,076 14,372 19,185 22,777 27,311 6,705 6,763 Selling, general and administrative expenses(1)... 9,215 8,152 10,212 11,610 12,238 3,182 3,256 Transaction expenses(2)........................... -- -- -- -- 1,321 -- -- Stock option purchase(3).......................... -- -- -- -- 14,105 -- -- ------- ------- ------- ------- ------- ----------- ----------- Income (loss) from operations..................... 1,861 6,220 8,973 11,167 (353) 3,523 3,507 Interest expense, net............................. 2,897 2,812 3,007 2,668 5,408 498 2,787 ------- ------- ------- ------- ------- ----------- ----------- Income (loss) from continuing operations 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) 3,025 720 Income tax provision (benefit).................... 146 1,395 3,393 3,466 (1,818) 1,209 288 ------- ------- ------- ------- ------- ----------- ----------- 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) $ 1,816 $ 432 ------- ------- ------- ------- ------- ----------- ----------- ------- ------- ------- ------- ------- ----------- ----------- Net income (loss)(4).............................. $ (657) $ 1,502 $ 1,094 $ 4,101 $(3,943) $ 1,816 $ 432 ------- ------- ------- ------- ------- ----------- ----------- ------- ------- ------- ------- ------- ----------- ----------- OTHER DATA: EBITDA(5)......................................... $16,851(6) $ 3,872 $ 3,873 EBITDA margin(5).................................. 18.7%(6) 16.7% 16.9% Depreciation and amortization..................... $ 1,499 $ 349 $ 366 Capital expenditures.............................. 1,454 419 419 Cash interest expense............................. 2,059 498 2,639 Ratio of EBITDA to cash interest expenses......... 8.2x 7.8x 1.5x Net cash used in operating activities............. $(8,543) $ (928) $(4,275) Net cash provided by (used in) investing activities...................................... 2,852 (419) (419) Net cash provided by (used in) financing activities...................................... 17,254 1,347 (2,985) Ratio of earnings to fixed charges(7)............. -- 1.2x Ratio of earnings to combined fixed charges(8).... -- --
AS OF AS OF FISCAL YEAR ------------------- ------------------------------------------- APRIL 4, APRIL 3, 1993 1994 1995 1996 1997 1997 1998 ------- ------- ------- ------- ------- -------- -------- BALANCE SHEET DATA (AT PERIOD END): Working capital......................... $ 4,932 $ 4,766 $ 5,402 $ 5,328 $21,678 $ 8,425 $ 22,084 Total assets............................ 30,535 28,551 39,729 40,673 62,837 44,599 55,915 Long-term obligations, less current portion............................... 20,011 16,937 21,803 18,126 110,000 19,579 110,000 Redeemable Preferred Stock.............. -- -- -- -- 16,148 -- 16,652 Shareholders' (deficit) equity.......... (654) 849 340 4,283 (86,490) 6,099 (86,562)
- ------------------------ (1) Selling, general and administrative expenses include amortization of acquisition costs of $850 in 1993. (2) Reflects $1,321 of expenses associated with the Prior 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 Prior 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 21 organic rubber products 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 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 Prior Recapitalization and management fees paid to a former controlling shareholder. (7) 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 $5,790 for fiscal year 1997. The ratio of earnings to fixed charges has not been presented for periods prior to the Transactions as the Company believes the ratio is not material to investors. (8) In calculating the ratio of earnings to combined fixed charges, combined fixed charges consist of fixed charges, paid in kind dividends on the Redeemable Preferred Stock and accretion of the carrying value of the Redeemable Preferred Stock. Earnings were insufficient to cover combined fixed charges by $6,968 for fiscal year 1997 and $129 for three months ended April 3, 1998. 22 RISK FACTORS IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, HOLDERS OF NOTES SHOULD CONSIDER CAREFULLY THE RISK FACTORS SET FORTH BELOW, AS WELL AS THE OTHER INFORMATION SET FORTH ELSEWHERE IN THIS PROSPECTUS. SIGNIFICANT LEVERAGE AND DEBT SERVICE Upon consummation of the Transactions, the Company and its subsidiaries incurred significant outstanding indebtedness and became highly leveraged. As of April 3, 1998, after giving effect to the Transactions, the Company had outstanding consolidated indebtedness of approximately $140.0 million. See "Capitalization." In addition, subject to the limitations set forth in the Indenture, the Existing Indenture and the Credit Agreement, the Company and its subsidiaries may incur additional indebtedness, including borrowings under the Credit Facility. See "Description of Credit Facility." The degree to which the Company is leveraged could have important consequences to the holders of the Notes, including (i) the Company's vulnerability to adverse general economic and industry conditions, including higher than anticipated interest rates on the Notes (ii) the Company's ability to obtain additional financing for future capital expenditures, general corporate or other purposes and (iii) the dedication of a substantial portion of the Company's cash flow from operations to the payment of principal and interest on indebtedness, thereby reducing the funds available for operations and future business opportunities. The Company's ability to make scheduled payments on the principal of, or interest on, or to refinance, its indebtedness will depend on its future operating performance and cash flow, which are subject to prevailing economic conditions, prevailing interest rate levels, and financial, competitive, business and other factors, many of which are beyond its control, as well as the availability of borrowings under the Credit Facility or successor facilities and the interest rate on the Notes not increasing materially. However, based upon the current and anticipated level of operations, the Company believes that its cash flow from operations, together with amounts available under the Credit Facility and its other sources of liquidity, will be adequate to meet its anticipated cash requirements for the foreseeable future for working capital, capital expenditures, interest payments and principal payments. There can be no assurance, however, that the Company's business will continue to generate cash flow at or above current levels. If the Company is unable to generate sufficient cash flow from operations in the future to service its indebtedness, it may be required to refinance all or a portion of its existing indebtedness, including the Senior Notes, or to obtain additional financing. There can be no assurance that any such refinancing would be possible or that any additional financing could be obtained. The inability to obtain additional financing could have a material adverse effect on the Company. Finally, in order to pay the principal balance of the Notes due at maturity, the Company may have to obtain alternative financing. RANKING OF SENIOR NOTES; ASSET ENCUMBRANCE The Notes and Note Guarantees will be senior unsecured obligations and will rank PARI PASSU in right of payment with all other existing and future senior obligations of the Company and the Subsidiary Guarantors, respectively, including the Existing Notes. Loans under the Credit Facility will be secured by substantially all of the Company's assets and will be guaranteed by four of the Company's domestic subsidiaries (including Mercer), which guarantees will be secured by substantially all of the assets of the Company's domestic subsidiaries. Accordingly, the Notes and the Note Guarantees are effectively subordinated to all secured indebtedness to the extent of the collateral and will rank PARI PASSU in right of payment with all other existing and future senior obligations of the Company or the Subsidiary Guarantors, respectively. Upon an event of default under any such secured indebtedness, the lenders could elect to declare all amounts outstanding, together with accrued and unpaid interest thereon, to be immediately due and payable. If the Company or the Subsidiary Guarantors were unable to repay those amounts, the lenders could proceed against the collateral granted them to secure that indebtedness. There can be no 23 assurance that the assets of the Company or the relevant subsidiary would be sufficient to repay in full any such secured indebtedness. RESTRICTIVE COVENANTS The Existing Indenture and the Credit Agreement and Indenture contain numerous restrictive covenants that limit the discretion of the management of the Company with respect to certain business matters. These covenants place significant restrictions on, among other things, the ability of the Company to incur additional indebtedness, to create liens or other encumbrances, to pay dividends or make other restricted payments, to make investments, loans and guarantees and to 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" will constitute an event of default. See "Description of Senior Notes--Certain Covenants" and "Description of Credit Facility." A failure to comply with the obligations contained in the Credit Agreement, the Existing Indenture or the Indenture, if not cured or waived, could permit acceleration of the related indebtedness and acceleration of indebtedness under other instruments that contain cross-acceleration or cross-default provisions. In the case of an event of default under the Credit Agreement, the lenders under the Credit Facility would be entitled to exercise the remedies available to a secured lender under applicable law. If the Company were obligated to repay all or a significant portion of its indebtedness, there can be no assurance that the Company would have sufficient cash to do so or that the Company could successfully refinance such indebtedness. Other indebtedness of the Company that may be incurred in the future may contain financial or other covenants more restrictive than those applicable to the Credit Facility, the Existing Notes or the Notes. IMPORTANCE OF KEY CUSTOMERS TO THE AEROSPACE PRODUCTS BUSINESS Certain customers are material to the business and operations of the Company. Boeing accounted for $11.4 million, or 12.6%, of the Company's total net sales and 36.5% of the Aerospace Products division's net sales in 1997, and for $7.9 million, or 11.0% of the Company's total net sales and 32.1% of the Aerospace Products business' net sales in 1996. In 1997, the top five 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 Products division's net sales in that year. The Company's prospects will continue to depend on the success of these customers whose products incorporate aerospace products manufactured by the Company, as well as Boeing's retention of the Company as a major supplier. Boeing has recently announced certain production problems relating to its 737 aircraft, and there is no assurance that such production problems would not have a material adverse effect on the Company. Although the Company believes that it has excellent long-standing relationships with these customers and that such relationships are mutually beneficial, the Company does not have long-term contracts with Boeing or any of its other major customers and the loss of any as a customer, or a significant reduction in the Company's business with any of them would have a material adverse effect on the Company and its business, results of operations and financial condition. See "Business--Products and Markets--Aerospace Products--Competition." DEPENDENCE ON CUSTOMERS IN CYCLICAL INDUSTRIES A majority of the Company's revenues were derived from customers who are in industries and businesses that are highly cyclical in nature, such as the commercial and military aerospace and commercial construction industries. The world-wide market for commercial jet aircraft is predominantly driven by long-term trends in airline passenger traffic. The principal factors underlying long-term traffic growth are sustained economic growth in developed and emerging countries and political stability. Demand for commercial aircraft is further influenced by airline industry profitability, world trade policies, government- to-government relations, technological changes and price and other competitive factors. The military 24 aircraft industry is highly sensitive to changes in international political conditions, national priorities and United States government defense budgets. The commercial construction industry is affected by downturns in general economic conditions, raw material price fluctuations and adverse weather conditions. Each of these industries is also subject to changes in general economic conditions. In addition, because the Company conducts its operations in a variety of markets, it is subject to the economic conditions in each such market. General economic downturns in the commercial and military aerospace and commercial construction industries could have a material adverse effect on the Company and its business, results of operations and financial condition. The Company's outlook for its aerospace business and its allocation of resources are premised on the continued growth in the commercial aerospace industry. If this growth fails to continue, the Company's results of operations could be adversely affected. COMPETITION The Company experiences significant competition in all of the areas in which it does business. In general, other than the aerospace seals market, the markets in which it competes are not dominated by a single company or a small number of companies; instead a large number of companies offer products that overlap and are competitive with those offered by the Company. However, the markets in which the Company's Aerospace Products compete have recently experienced consolidation, and any future consolidation may result in loss of customers of the Company and lower profit margins on the Company's Aerospace Products. A number of the Company's competitors are significantly larger and have greater financial resources than the Company, and some of these competitors are divisions or subsidiaries of large, diversified companies that have access to the financial resources of their parent companies. The Company believes that the principal competitive factors in the businesses in which it operates are technologically advanced production, management capability, past performance in terms of timeliness and quality of product and price. There can be no assurance that the Company will be able to compete successfully. See "Business--Products and Markets--Aerospace Products--Competition," "--Products and Markets-- Flooring Products--Competition" and "--Products and Markets--Commercial Products--Competition." DEPENDENCE ON KEY PERSONNEL The Company's operations are largely dependent on the efforts of its senior management. While the Company has entered into employment agreements with its key personnel, there can be no assurance that the Company will be able to retain such persons. Additionally, in order to successfully manage its growth strategy, the Company must continue to attract qualified personnel. The Company does not maintain "key man" life insurance policies on any of its employees. If certain of the current key personnel should cease to be employed by the Company for any reason, or if the Company should be unable to continue to attract and retain qualified management personnel, the Company's business, financial condition and results of operations could suffer a material adverse effect. See "Management." CONTROL BY INVESTORS The Company is controlled by J.F. Lehman Equity Investors I, L.P. ("JFLEI"), which beneficially owns shares representing 65% of the voting interest in the Company and has the right to designate eight of the nine directors of the Company. In addition, certain limited partners in JFLEI own Warrants representing an additional 20% of the Common Stock. JFLEI's ownership percentages are calculated without giving effect to the shares issuable upon conversion of Convertible Preferred Stock (as defined herein) and shares issuable upon exercise of certain options granted to management of the Company. Pursuant to the terms of the Shareholders Agreement (as defined herein), for so long as JFLEI, together with its related transferees, owns 75% of the Warrants initially issued to it, one of the holders of the Warrants will have the right to designate the ninth director. In addition, pursuant to the terms in the Shareholders Agreement, for so long as JFLEI, together with its related transferees, owns 75% of the Warrants initially issued to it, another of the holders of the Warrants has the right to cause the number of directors of the Company to be increased 25 to ten and to designate the tenth director. Accordingly, JFLEI and certain of the investors therein have the power to elect the Company's board of directors, appoint new management and approve any action requiring the approval of the holders of the Company's Common Stock, including adopting amendments to the Company's Articles of Incorporation and approving mergers or sales of substantially all of the Company's assets. The current directors elected by JFLEI have the authority to make decisions affecting the capital structure of the Company, including the issuance of additional indebtedness and the declaration of dividends. See "Management," "Certain Relationships and Related Transactions" and "Security Ownership of Certain Beneficial Owners and Management." GOVERNMENT PROCUREMENT POLICIES Approximately 27% of the Company's Aerospace Products division's net sales in 1997 were made pursuant to contracts between the United States government, on the one hand, and the Company or a customer of the Company, on the other hand. Management's projected growth in the Aerospace Products division is based, in part, on management's belief that there will continue to be growth in purchases made under United States government military aircraft contracts and that the Company will benefit, directly or indirectly through its customers, from such growth. There can be no assurance, however, that there will be continued growth in such purchases. See "Risk Factors--Dependence on Customers in Cyclical Industries." In addition, contracts with the United States government are subject to cancellation for default or for convenience by the government if deemed in its best interests. Contracts which are terminated for convenience generally provide for payments to a contractor for its costs and a proportionate share of profit for work accomplished through the date of termination. Contracts which are terminated for default generally provide that the government pay only for the work it has accepted, can require the contractor to pay the difference between the original contract price and the cost to reprocure the contract items net of the value of the work accepted from the original contractor, and can hold a contractor liable for damages. There can be no assurance that any current or prospective contract on which the Company is a primary contractor or any such contract on which the Company is a subcontractor or supplier will not be terminated for default or for convenience by the government or that any such cancellation will not result in the Company realizing a loss or failing to realize the expected profit on any such contract. Certain of the military programs for which the Company is producing or developing products are subject to continuous budgetary scrutiny by the United States Congress and by the Pentagon. In particular, the expense budgets of both the B-2 bomber and the F-22 fighter aircraft are highly controversial and proposals to limit or eliminate these programs are periodically made in both the United States House of Representatives and the Senate. The B-2 bomber has been subject to particularly high levels of scrutiny recently based on reports calling into doubt the efficacy of its stealth capabilities. Although the Company does not currently derive a high percentage of its revenues from sales relating to either of these programs, the Company's ability to expand its Aerospace Products business may be limited if either of these programs were to be curtailed or eliminated. RISKS RELATING TO MERCER ACQUISITION The Company acquired all of the capital stock of Mercer from Sovereign concurrent with the closing of the Prior Offering. Under the Stock Purchase Agreement pursuant to which the Company acquired Mercer, certain of the representations and warranties and related indemnity obligations of Sovereign will survive the effectiveness of the Mercer Acquisition for a limited time. There can be no assurance that the Company will not encounter unanticipated problems or liabilities with respect to the operations of Mercer or with the integration of Mercer's operations with those of the Company. See "Acquisition of Mercer." FUTURE ACQUISITIONS The Company expects to continue a strategy of identifying and acquiring companies with complementary products or services that may be expected to enhance the Company's operations and profitability. 26 There can be no assurance that the Company will be able to identify appropriate acquisition candidates, negotiate appropriate acquisition terms, obtain financing which may be needed to effect such acquisitions or integrate acquisitions successfully into the Company's operations or that any of such acquisitions will prove profitable. 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. INABILITY TO FUND CHANGE OF CONTROL OFFER Upon a Change in Control (as defined in the Indenture), each holder will have the right to require the Company to repurchase all or any part of such holder's Senior Notes at 101% of the principal amount thereof, plus accrued and unpaid interest thereon, if any, and Liquidated Damages, if any, to the date of repurchase. See "Description of Senior Notes--Certain Covenants--Purchase of Senior Notes Upon Change of Control." However, there can be no assurance that sufficient funds will be available to the Company at the time of the Change of Control to make any required repurchases of Senior Notes tendered. Moreover, restrictions in the Credit Agreement prohibit the Company from making such required repurchases; therefore, any such repurchases would constitute an event of default under the Credit Agreement absent a waiver. In addition, the holders of the Existing Notes and holders of the Redeemable Preferred Stock may also require the Company to repurchase their respective notes and shares upon a Change of Control, which would also constitute a default under the Credit Agreement, absent a waiver. Notwithstanding these provisions, the Company could enter into certain transactions, including certain recapitalizations, that would not constitute a Change of Control but would increase the amount of debt outstanding at such time. ENVIRONMENTAL MATTERS The Company and Mercer are 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 Prior 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 may require remediation. Pursuant to the merger agreement entered into in connection with the Prior Recapitalization, 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 Prior Recapitalization. See "The Prior Recapitalization." Based 27 in part on the investigations conducted and the indemnification provisions of the merger agreement entered into in connection with the Prior Recapitalization 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. In connection with the Mercer Acquisition, the Company conducted an environmental review of Mercer's operations and its compliance with applicable environmental laws. The review included a site visit to Mercer's manufacturing facility in Eustis, Florida and interviews with facility personnel regarding environmental matters. In addition, the Company reviewed existing environmental reports that included Phase I assessments, audits and limited soil and ground water sampling data. The environmental review revealed that Mercer's facilities have had, or may have had, releases of hazardous substances that may require remediation. Pursuant to the Stock Purchase Agreement, the former shareholders of Mercer have agreed to indemnify the Company against certain environmental liabilities incurred prior to the purchase provided the Company makes a written claim for indemnification against the former shareholders of Mercer prior to the 90th day after receipt by the Company of audited financial statements of Mercer for the fiscal year ending December 31, 1999, but in no event later than June 30, 2000, and subject to a maximum cap on liability of $5,000,000 or the adjusted purchase price for Mercer. Based, in part, on the environmental review conducted by the Company and the indemnification provisions of the Stock Purchase Agreement 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. FRAUDULENT CONVEYANCE AND PREFERENCE CONSIDERATIONS Under applicable provisions of federal bankruptcy law or comparable provisions of state fraudulent conveyance law, if, among other things, the Company or any of the Subsidiary Guarantors, at the time it incurred the indebtedness evidenced by the Notes or its Note Guarantee, as the case may be, (i)(a) was or is insolvent or rendered insolvent by reason of such occurrence or (b) was or is engaged in a business or transaction of which the assets remaining with the Company or such Subsidiary Guarantor were unreasonably small or constitute unreasonably small capital or (c) intended or intends to incur, or believed, believes or should have believed that it would incur, debts beyond its ability to repay such debts as they mature and (ii) the Company or such Subsidiary Guarantor received or receives less than the reasonably equivalent value or fair consideration for the incurrence of such indebtedness, the Notes and the Note Guarantees could be invalidated or subordinated to all other debts of the Company or such Subsidiary Guarantors, as the case may be. The Notes or Note Guarantees could also be invalidated or subordinated if it were found that the Company or the Subsidiary Guarantor party thereto, as the case may be, incurred indebtedness in connection with the Notes or its Note Guarantee with the intent of hindering, delaying or defrauding current or future creditors of the Company or such Subsidiary Guarantor, as the case may be. In addition, the payment of interest and principal by the Company pursuant to the Notes or the payment of amounts by a Subsidiary Guarantor pursuant to a Note Guarantee could be voided and required to be returned to the person making such payment, or to a fund for the benefit of the creditors of the Company or such Subsidiary Guarantor, as the case may be. The measures of insolvency for purposes of the foregoing considerations will vary depending upon the law applied in any proceeding with respect to the foregoing. Generally, however, the Company or a Subsidiary Guarantor would be considered insolvent if (i) the sum of its debts, including contingent liabilities, were greater than the sum of all of its assets at a fair valuation or if the present fair saleable value of its assets were less than the amount that would be required to pay its probable liability on its existing debts, including contingent liabilities, as they become absolute and mature or (ii) it could not pay its debts as they become due. 28 Additionally, under federal bankruptcy or applicable state insolvency law, if certain bankruptcy or insolvency proceedings were initiated by or against the Company or any Subsidiary Guarantor within 90 days after any payment by the Company or such Subsidiary Guarantor with respect to the Notes or a Note Guarantee, respectively, or after the issuance of a Note Guarantee, or if the Company or such Subsidiary Guarantor anticipated becoming insolvent at the time of such payment or issuance, all or a portion of such payment or such Note Guarantee could be avoided as a preferential transfer, and the recipient of any such payment could be required to return such payment. To the extent any Note Guarantees were voided as a fraudulent conveyance or held unenforceable for any other reason, holders of Notes would cease to have any claim in respect of such Subsidiary Guarantor and would be creditors solely of the Company and any Subsidiary Guarantor whose Note Guarantee was not avoided or held unenforceable. In such event, the claims of holders of Notes against the issuer of an invalid Note Guarantee would be subject to the prior payment of all liabilities and preferred stock claims of such Subsidiary Guarantor. There can be no assurance that, after providing for all prior claims and preferred stock interests, if any, there would be sufficient assets to satisfy the claims of holders of Notes relating to any voided portions of any Note Guarantees. Upon consummation of the Prior Offering, the Company would not have any significant subsidiary other than Mercer. On the basis of its historical financial information and recent operating history, as discussed in "Offering Memorandum Summary," "Unaudited Pro Forma Combined Financial Statements" and "Management's Discussion and Analysis of Financial Condition and Results of Operations," the Company believes that, after giving effect to the indebtedness incurred in connection with the Transactions, it will not be insolvent, will not have unreasonably small assets or capital for the businesses in which it is engaged and will not incur debts beyond its ability to pay such debts as they mature. There can be no assurance, however, as to what standard a court would apply in making such determinations. ABSENCE OF PUBLIC MARKET FOR THE NOTES; TRANSFER RESTRICTIONS There is no existing trading market for the Notes. Although the Initial Purchaser has advised the Company that it currently intends to make a market in the Notes, it is not obligated to do so and may discontinue such market-making at any time without notice. In addition, such market activity may be limited during the Exchange Offer. See "Plan of Distribution." Accordingly, there can be no assurance that an active market will develop upon completion of this Offering or, if developed, that such market will be sustained. The initial offering price of the Notes was determined through negotiations between the Company and the Initial Purchaser, and may bear no relationship to the market price of the Notes after the Offering. Although the Notes are expected to be eligible for trading in the PORTAL market, there can be no assurance as to the development of any market or the liquidity of any market that may develop for the Notes or the Exchange Notes (as defined herein). The Company does not intend to apply to list the Notes or the Exchange Notes on any securities exchange or for quotation through the National Association of Securities Dealers Automated Quotation Systems. The liquidity of, and trading market for, the Notes or the Exchange Notes also may be adversely affected by general declines in the market for similar securities, regardless of the Company's financial performance or prospects. CONSEQUENCES OF FAILURE TO EXCHANGE Holders of Old Notes who do not exchange for New Notes pursuant to the Exchange Offer will continue to be subject to the restrictions on transfer of such Old Notes as set forth in the legend thereon as a consequence of the issuance of the Old Notes pursuant to exemptions from, or in transactions not subject to, the registration requirements of the Securities Act and applicable state securities laws. In general, the Old Notes may not be offered or sold, unless registered under the Securities Act, except pursuant to an exemption from, or in a transaction not subject to, the Securities Act and applicable state securities laws. The Company does not currently anticipate that it will register the Old Notes under the Securities Act. New Notes issued pursuant to the Exchange Offer may be offered for resale, resold, or otherwise 29 transferred by Holders thereof (other than any such holder which is an "affiliate" of the Company or any Guarantor within the meaning of Rule 405 under the Securities Act) without compliance with the registration and prospectus delivery provisions of the Securities Act provided that such New Notes are in the ordinary course of such holders' business and such holders have no arrangement with any person to participate in the distribution of such notes. Each broker-dealer that receives New Notes as a result of market-making or other activities must acknowledge that it will deliver a prospectus in connection with any resale of such New Notes. The Letter of Transmittal states that, by so acknowledging and 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 amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of New Notes received in exchange for Old Notes where such Old Notes were acquired by such broker-dealer as a result market-making activities or other trading activities. The Company has agreed that, for a period of 180 days after the effective date of this Prospectus, it will make this Prospectus available to any broker-dealer for use in connection with any such resale. See "Plan of Distribution." However, to comply with the Securities laws of certain jurisdictions, if applicable, the New Notes may not be offered or sold unless they have been registered or qualified for sale in such jurisdictions or an exemption from registration or qualification is available and is complied with. To the extent that Old Notes are tendered and accepted in the Exchange Offer, the trading market for untendered and tendered but unaccepted Old Notes will be adversely affected. 30 THE TRANSACTIONS THE SPONSOR J.F. Lehman & Company ("Lehman") was established in 1992 by John F. Lehman, Donald Glickman and George Sawyer (the "Managing Principals") to acquire niche manufacturing and service companies operating in the electronics, engineering, aerospace and defense industries. The Managing Principals have significant operating and investing experience in these industries and have a proven track record in producing strong equity returns by employing this focused investment strategy. The Managing Principals are the managing members of JFL Investors LLC, the general partner of JFLEI. In 1993, Lehman purchased Sperry Marine Inc., a recognized world leader in the design and manufacture of advanced electronic maritime instruments and sensors, from Tenneco Inc. After working closely for over two years with Sperry's management to reposition the company and improve its profitability, Lehman sold Sperry to Litton Industries, realizing a substantial gain on its original equity investment. Similarly, in 1992, Lehman sponsored the acquisition of Astra Holdings Corporation, a leading manufacturer of electronic and electromechanical devices and subsystems for military and commercial uses, which it later sold to Alliant Techsystems in 1993, producing an annualized rate of return on its invested equity in excess of 100%. In each of its investments, Lehman has taken an active, hands-on approach toward portfolio company oversight. Lehman provides the Company with additional strategic opportunities utilizing the strong operating experience in the aerospace and electronics industries that its general and limited partners possess. In addition to the Managing Principals, Lehman's other partners include: Mr. Oliver C. Boileau, Jr., former President of Boeing Aerospace, General Dynamics and Northrop; Mr. Thomas G. Pownall, former Chairman and Chief Executive Officer of Martin Marietta; Sir Christopher Lewinton, Chairman of TI Group plc and Dowty Aerospace; Mr. William Paul, former Executive Vice President of United Technologies Corporation and President of Sikorsky Aircraft and Space Systems; and General P.X. Kelley, former Commandant of the United States Marine Corps. See "Management." THE PRIOR RECAPITALIZATION On August 20, 1997, JFLEI acquired a controlling interest in Burke through a recapitalization of the outstanding securities of Burke (the "Prior Recapitalization"). The Prior Recapitalization was financed through (i) a $20 million capital contribution by JFLEI to the Company, (ii) the sale of $18 million in Redeemable Preferred Stock and Warrants by the Company and (iii) the issuance of the Existing Notes in an aggregate principal amount of $110 million. Upon the completion of the Prior Recapitalization, on a fully diluted basis, (i) JFLEI and its affiliates owned approximately 65% of the common equity of the Company, (ii) the holders of the Warrants had the right to purchase approximately 20% of the common equity of the Company and (iii) certain members of management and certain other shareholders of the Company owned 15% of the common equity of the Company. These ownership percentages are calculated, in each case, without giving effect to shares issuable upon conversion of Convertible Preferred Stock and shares issuable upon exercise of certain options granted to management of the Company. In connection with the Prior Recapitalization, the former shareholders of the Company made certain customary representations, warranties and covenants and agreed to indemnify the Company and JFLEI against any losses brought about by a breach of these representations, warranties or covenants, up to an aggregate maximum amount of approximately $8.8 million (except for certain tax and title issues which are not subject to this indemnification cap). This indemnity, excluding these tax and title issues, expired on March 31, 1998. 31 THE MERCER ACQUISITION Concurrent with the consummation of the Prior Offering on April 21, 1998, the Company acquired all of the outstanding capital stock of Mercer from Sovereign for an aggregate consideration of $35,750,000, subject to working capital and other adjustments, pursuant to a Stock Purchase Agreement, dated March 5, 1998, among Burke, Sovereign and Mercer. The consummation of the Mercer Acquisition was subject to customary conditions. The Stock Purchase Agreement 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. CONSENT SOLICITATION In connection with the Prior Offering, pursuant to a consent solicitation (the "Consent Solicitation"), the Company obtained the consents (the "Consent") of holders of its Existing Notes to certain amendments (the "Amendments") to the indenture pursuant to which the Existing Notes were issued between the Company and United States Trust Company of New York (the "Existing Indenture") which, among other things, (i) permitted the issuance of the Notes and permit the incurrence of indebtedness represented by the Notes, (ii) increased certain of the permitted indebtedness and permitted investment baskets contained in the indebtedness and restricted payment covenants in the Existing Indenture, (iii) modified the lien covenant to enhance the Company's ability to use existing assets as collateral for new financings and (iv) made certain other amendments of a non-substantive nature to the Existing Indenture. Pursuant to the Consent Solicitation, the Company made certain payments to holders thereof who properly furnished their Consents to the Amendments. USE OF PROCEEDS The gross proceeds to the Company from the Prior Offering were $30.0 million before deducting commissions and estimated expenses of the Prior Offering. The Company used the proceeds from the issuance of the Old Notes, the related financings and existing cash to finance the Mercer Acquisition and to pay certain expenses of the Transactions. The following table sets forth the sources and uses of funds in connection with the Transactions:
(DOLLARS IN THOUSANDS) -------------------- Sources of Funds: Issuance of Senior Notes.................................................................. $ 30,000 Issuance of Convertible Preferred Stock(1)................................................ 3,000 Cash on Hand.............................................................................. 6,500 ------- $ 39,500 ------- ------- Uses of Funds: Aggregate Mercer Acquisition Consideration(2)............................................. $ 35,750 Transaction Expenses(3)................................................................... 3,750 ------- $ 39,500 ------- -------
- ------------------------ (1) Purchased by JFLEI and the other shareholders and warrantholders of the Company who elected to participate in a subscription offering. (2) Subject to adjustment based on Mercer's working capital on the closing date of the Mercer Acquisition pursuant to the Stock Purchase Agreement. (3) Includes discounts and commissions and estimated expenses incurred in connection with the Prior Offering, and fees and expenses payable in connection with the Mercer Acquisition and the related financing thereof, including the Consent Solicitation. See "Certain Relationships and Related Transactions." 32 THE EXCHANGE OFFER PURPOSE AND EFFECT The Old Notes were sold by the Company to the Initial Purchaser on April 21, 1998 pursuant to the Purchase Agreement. The Initial Purchaser subsequently resold the Old Notes in reliance on Rule 144A under the Securities Act. The Company, the Subsidiary Guarantors and the Initial Purchaser entered into the Registration Rights Agreement, pursuant to which the Company and the Subsidiary Guarantors agreed, for the benefit of the Holders of the Old Notes, at the expense of the Company and the Subsidiary Guarantors, to (i) file on or prior to the 60th calendar day following the Closing Date a registration statement (the "Exchange Offer Registration Statement") with the Commission, (ii) use their best efforts 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 (iii) use their best efforts to consummate the Exchange Offer on or prior to the 150th calendar day following the Closing Date. The Company will keep the Exchange Offer open for not less than 30 days and not more than 45 days (or longer if required by applicable law) after the date notice of the Exchange Offer is mailed to the Holders of the Old Notes. This Exchange Offer is intended to satisfy the Company's exchange offer obligations under the Registration Rights Agreement. CONSEQUENCES OF FAILURE TO EXCHANGE OLD NOTES Following the expiration of the Exchange Offer, holders of Old Notes not tendered, or not properly tendered will not have any further registration rights and such Old Notes will continue to be subject to the existing restrictions on transfer thereof. Accordingly, the liquidity of the market for a holder's Old Notes could be adversely affected upon expiration of the Exchange Offer if such holder elects to not participate in the Exchange Offer. TERMS OF THE EXCHANGE OFFER The Company hereby offers, upon the terms and subject to the conditions set forth herein and in the accompanying Letter of Transmittal, to exchange $1,000 in principal amount of the New Notes for each $1,000 in principal amount of the outstanding Old Notes. The Company will accept for exchange any and all Old Notes that are validly tendered on or prior to 5:00 p.m., New York City time, on the Expiration Date. Tenders of the Old Notes may be withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration Date. The Exchange Offer is not conditioned upon any minimum principal amount of Old Notes being tendered for exchange. However, the Exchange Offer is subject to the terms and provisions of the Registration Rights Agreement. See "Conditions of the Exchange Offer." Old Notes may be tendered only in multiples of $1,000. Subject to the foregoing, holders of Old Notes may tender less than the aggregate principal amount represented by the Old Notes held by them, provided that they appropriately indicate this fact on the Letter of Transmittal accompanying the tendered Old Notes (or so indicate pursuant to the procedures for book-entry transfer). As of the date of this Prospectus, $30.0 million in aggregate principal amount of the Old Notes is outstanding, the maximum amount authorized by the Indenture for all Notes. Solely for reasons of administration (and for no other purpose), the Company has fixed the close of business on , 1998, as the record date (the "Record Date") for purposes of determining the persons to whom this Prospectus and the Letter of Transmittal will be mailed initially. Only a holder of the Old Notes (or such holder's legal representative or attorney-in-fact) may participate in the Exchange Offer. There will be no fixed record date for determining holders of the Old Notes entitled to participate in the Exchange Offer. The Company believes that, as of the date of this Prospectus, no such holder is an affiliate (as defined in Rule 405 under the Securities Act) of the Company. 33 The Company shall be deemed to have accepted validly tendered Old Notes when, as and if the Company has given oral or written notice thereof to the Exchange Agent. The Exchange Agent will act as agent for the tendering holders of Old Notes and for the purposes of receiving the New Notes from the Company. If any tendered Old Notes are not accepted for exchange because of an invalid tender, the occurrence of certain other events set forth herein or otherwise, certificates for any such unaccepted Old Notes will be returned, without expense, to the tendering holder thereof as promptly as practicable after the Expiration Date. EXPIRATION DATE; EXTENSIONS; AMENDMENTS The Expiration Date shall be , 1998 at 5:00 p.m., New York City time, unless the Company, in its sole discretion, extends the Exchange Offer, in which case the Expiration Date shall be the latest date and time to which the Exchange Offer is extended. In order to extend the Exchange Offer, the Company will notify the Exchange Agent of any extension by oral or written notice and will make a public announcement thereof, each prior to 9:00 a.m., New York City time, on the next business day after the previously scheduled Expiration Date. The Company reserves the right, in its sole discretion, (i) to delay accepting any Old Notes, (ii) to extend the Exchange Offer, (iii) if any of the conditions set forth below under "Conditions of the Exchange Offer" shall not have been satisfied, to terminate the Exchange Offer, by giving oral or written notice of such delay, extension, or termination to the Exchange Agent and (iv) to amend the terms of the Exchange Offer in any manner. If the Exchange Offer is amended in a manner determined by the Company to constitute a material change, the Company will promptly disclose such amendments by means of a prospectus supplement that will be distributed to the registered holders of the Old Notes. CONDITIONS OF THE EXCHANGE OFFER The Exchange Offer is not conditioned upon any minimum principal amount of the Old Notes being tendered for exchange. However, the Exchange Offer is conditioned upon the declaration by the Commission of the effectiveness of the Registration Statement of which this Prospectus constitutes a part. TERMINATION OF CERTAIN RIGHTS Pursuant to the Registration Rights Agreement the Company and the Subsidiary Guarantors agreed, at their own expense, to (i) file on or prior to the 60th calendar day following the Closing Date a registration statement (the "Exchange Offer Registration Statement") with the Commission with respect to a registered offer to exchange the Old Notes for a new issue of debt securities of the Company (the "Exchange Notes") to be issued under the Indenture in the same aggregate principal amount as and with the terms that will be identical in all respects to the Old Notes (except that the Exchange Notes will not contain terms that will be identical in all respects to the interest rate step-up provision and transfer restrictions) and (ii) use its best efforts 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 (iii) use its best effort to consummate the Exchange Offer on or prior to the 150th calendar day following the Closing Date. The Company agreed to keep the Exchange Offer open for not less than 30 days and not more than 45 days (or longer if required by applicable law) after the date notice of the Exchange Offer is mailed to the Holders of the Old Notes. In the event that changes in the law or applicable interpretations of the staff of the Commission do not permit the Company to effect the Exchange Offer, or if for any reason the Exchange Offer is not consummated within 150 days of the Closing Date or in certain other circumstances, the Registration Rights Agreement provides that the Company and the Subsidiary Guarantors will, at their own expense, 34 (i) as promptly as practicable, and in any event on or prior to 60 days after such filing obligation arises, file with the Commission a shelf registration statement (the Shelf Registration Statement") covering resales of the Old Notes, (ii) use their best efforts to cause the Shelf Registration Statement to be declared effective under the Securities Act on or prior to 45 days after such filing occurs and (iii) keep effective the Shelf Registration Statement until two years after its effective date (or such shorter period that will terminate when all the Old Notes covered thereby have been sold pursuant thereto or in certain other circumstances). The Registration Rights Agreement provides that, subject to certain exceptions, in the event of a Registration Default (as defined below), holders of Old Notes are entitled to receive Liquidated Damages, 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 Old Notes held by such holders. The amount of Liquidated Damages will increase by an additional $0.05 per week per $1,000 principal amount of Old Notes with respect to each subsequent 90-day period until all Registration Defaults have been cured, up to a maximum of amount of Liquidated Damages of $0.30 per week per $1,000 principal amount of Old Notes. A "Registration Default" with respect to the Exchange Offer shall occur if: (i) 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, (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") or (iii) 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 (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 Notes during the periods specified in the Registration Rights Agreement. Holders of New Notes will not be and, upon consummation of the Exchange Offer, holders of Old Notes will no longer be, entitled to (i) the right to receive the Liquidated Damages or (ii) certain other rights under the Registration Rights Agreement intended for holders of Old Notes. The Exchange Offer shall be deemed consummated upon the occurrence of the delivery by the Company to the Registrar under the Indenture of New Notes in the same aggregate principal amount as the aggregate principal amount of Old Notes that are tendered by holders thereof pursuant to the Exchange Offer. ACCRUED INTEREST The New Notes will bear interest at a floating rate equal to LIBOR plus 400 basis points per annum, which interest shall accrue from August 15, 1998 or from the most recent Interest Payment Date with respect to the Old Notes to which interest was paid or duly provided for. See "Description of Notes-- Principal, Maturity and Interest." PROCEDURES FOR TENDERING OLD NOTES The tender of a holder's Old Notes as set forth below and the acceptance thereof by the Company will constitute a binding agreement between the tendering holder and the Company upon the terms and subject to the conditions set forth in this Prospectus and in the accompanying Letter of Transmittal. Except as set forth below, a holder who wishes to tender Old Notes for exchange pursuant to the Exchange Offer must transmit such Old Notes, together with a properly completed and duly executed Letter of Transmittal, including all other documents required by such Letter of Transmittal, to the Exchange Agent at the address set forth on the back cover page of this Prospectus prior to 5:00 p.m., New York City time, on the Expiration Date. THE METHOD OF DELIVERY OF OLD NOTES, LETTERS OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDER. IF SUCH DELIVERY IS BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL, PROPERLY INSURED, WITH RETURN RECEIPT REQUESTED, BE USED. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT THE HOLDER USE AN OVERNIGHT OR 35 HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE TIMELY DELIVERY. Any financial institution that is a participant in the Depositary's Book-Entry Transfer Facility system may make book-entry delivery of the Old Notes by causing the Depositary to transfer such Old Notes into the Exchange Agent's account in accordance with the Depositary's procedures for such transfer. In connection with a book-entry transfer, a Letter of Transmittal need not be transmitted to the Exchange Agent, provided that the book-entry transfer procedure must be complied with prior to 5:00 p.m., New York City time, on the Expiration Date. Each signature on a Letter of Transmittal or a notice of withdrawal, as the case may be, must be guaranteed unless the Old Notes surrendered for exchange pursuant hereto are tendered (i) by a registered holder of the Old Notes who has not completed either the box entitled "Special Exchange Instructions" or the box entitled "Special Delivery Instructions" in the Letter of Transmittal or (ii) by an Eligible Institution (as defined). In the event that a signature on a Letter of Transmittal or a notice of withdrawal, as the case may be, is required to be guaranteed, such guarantee must be by a firm which is a member of a registered national securities exchange or the National Association of Securities Dealers, Inc., a commercial bank or trust company having an office or correspondent in the United States or otherwise be an "eligible guarantor institution" within the meaning of Rule 17Ad-15 under the Exchange Act (collectively, "Eligible Institutions"). If the Letter of Transmittal is signed by a person other than the registered holder of the Old Notes, the Old Notes surrendered for exchange must either (i) be endorsed by the registered holder, with the signature thereon guaranteed by an Eligible Institution, or (ii) be accompanied by a bond power, in satisfactory form as determined by the Company in its sole discretion, duly executed by the registered holder, with the signature thereon guaranteed by an Eligible Institution. The term "registered holder" as used herein with respect to the Old Notes means any person in whose name the Old Notes are registered on the books of the Registrar. LETTERS OF TRANSMITTAL AND OLD NOTES SHOULD NOT BE SENT TO THE COMPANY. WE ARE NOT ASKING FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A PROXY. All questions as to the validity, form, eligibility (including time of receipt), acceptance and withdrawal of Old Notes tendered for exchange will be determined by the Company in its sole discretion, which determination shall be final and binding. The Company reserves the absolute right to reject any and all Old Notes not properly tendered and to reject any Old Notes the Company's acceptance of which might, in the judgment of the Company or its counsel, be unlawful. The Company also reserves the absolute right to waive any defects or irregularities or conditions of the Exchange Offer as to particular Old Notes either before or after the Expiration Date (including the right to waive the ineligibility of any holder who seeks to tender Old Notes in the Exchange Offer). The interpretation of the terms and Conditions of the Exchange Offer (including the Letter of Transmittal and the instructions thereto) by the Company shall be final and binding on all parties. Unless waived, any defects or irregularities in connection with tenders of Old Notes for exchange must be cured within such period of time as the Company shall determine. The Company will use reasonable efforts to give notification of defects or irregularities with respect to tenders of Old Notes for exchange but shall not incur any liability for failure to give such notification. Tenders of the Old Notes will not be deemed to have been made until such irregularities have been cured or waived. If any Letter of Transmittal, endorsement, bond power, power of attorney or any other document required by the Letter of Transmittal is signed by a trustee, executor, corporation or other person acting in a fiduciary or representative capacity, such person should so indicate when signing and, unless waived by the Company, proper evidence satisfactory to the Company, in its sole discretion, of such person's authority to so act must be submitted. Any beneficial owner of the Old Notes (a "Beneficial Owner") whose Old Notes are registered in the name of a broker, dealer, commercial bank, trust company or other nominee and who wishes to tender Old Notes in the Exchange Offer should contact such registered holder promptly and instruct such registered 36 holder to tender on such Beneficial Owner's behalf. If such Beneficial Owner wishes to tender directly, such Beneficial Owner must, prior to completing and executing the Letter of Transmittal and tendering Old Notes, make appropriate arrangements to register ownership of the Old Notes in such Beneficial Owner's name. Beneficial Owners should be aware that the transfer of registered ownership may take considerable time. By tendering, each registered holder will represent to the Company that, among other things (i) the New Notes to be acquired in connection with the Exchange Offer by the holder and each Beneficial Owner of the Old Notes are being acquired by the holder and each Beneficial Owner in the ordinary course of business of the holder and each Beneficial Owner, (ii) the holder and each Beneficial Owner are not participating, do not intend to participate, and have no arrangement or understanding with any person to participate, in the distribution of the New Notes, (iii) the holder and each Beneficial Owner acknowledge and agree that any person participating in the Exchange Offer for the purpose of distributing the New Notes must comply with the registration and prospectus delivery requirements of the Securities Act in connection with a secondary resale transaction of the New Notes acquired by such person and cannot rely on the position of the staff of the Commission set forth in no-action letters that are discussed herein under "Resales of New Notes," (iv) that if the holder is a broker-dealer that acquired Old Notes as a result of market making or other trading activities, it will deliver a Prospectus in connection with any resale of New Notes acquired in the Exchange Offer, (v) the holder and each Beneficial Owner understand that a secondary resale transaction described in clause (iii) above should be covered by an effective registration statement containing the selling security holder information required by Item 507 of Regulation S-K of the Commission and (vi) neither the holder nor any Beneficial Owner is an "affiliate," as defined under Rule 405 of the Securities Act, of the Company except as otherwise disclosed to the Company in writing. In connection with a book-entry transfer, each participant will confirm that it makes the representations and warranties contained in the Letter of Transmittal. GUARANTEED DELIVERY PROCEDURES Holders who wish to tender their Old Notes and (i) whose Old Notes are not immediately available or (ii) who cannot deliver their Old Notes or any other documents required by the Letter of Transmittal to the Exchange Agent prior to the Expiration Date (or complete the procedure for book-entry transfer on a timely basis), may tender their Old Notes according to the guaranteed delivery procedures set forth in the Letter of Transmittal. Pursuant to such procedures: (i) such tender must be made by or through an Eligible Institution and a Notice of Guaranteed Delivery (as defined in the Letter of Transmittal) must be signed by such Holder, (ii) on or prior to the Expiration Date, the Exchange Agent must have received from the Holder and the Eligible Institution a properly completed and duly executed Notice of Guaranteed Delivery (by facsimile transmission, mail or hand delivery) setting forth the name and address of the Holder, the certificate number or numbers of the tendered Old Notes, and the principal amount of tendered Old Notes, stating that the tender is being made thereby and guaranteeing that, within four (4) business days after the date of delivery of the Notice of Guaranteed Delivery, the tendered Old Notes, a duly executed Letter of Transmittal and any other required documents will be deposited by the Eligible Institution with the Exchange Agent and (iii) such properly completed and executed documents required by the Letter of Transmittal and the tendered Old Notes in proper form for transfer (or confirmation of a book-entry transfer of such Old Notes into the Exchange Agent's account at the Depositary) must be received by the Exchange Agent within four (4) business days after the Expiration Date. Any Holder who wishes to tender Old Notes pursuant to the guaranteed delivery procedures described above must ensure that the Exchange Agent receives the Notice of Guaranteed Delivery and Letter of Transmittal relating to such Old Notes prior to 5:00 p.m., New York City time, on the Expiration Date. 37 ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES Upon satisfaction or waiver of all the conditions to the Exchange Offer, the Company will accept any and all Old Notes that are properly tendered in the Exchange Offer prior to 5:00 p.m., New York City time, on the Expiration Date. The New Notes issued pursuant to the Exchange Offer will be delivered promptly after acceptance of the Old Notes. For purposes of the Exchange Offer, the Company shall be deemed to have accepted validly tendered Old Notes, when, as, and if the Company has given oral or written notice thereof to the Exchange Agent. In all cases, issuances of New Notes for Old Notes that are accepted for exchange pursuant to the Exchange Offer will be made only after timely receipt by the Exchange Agent of such Old Notes, a properly completed and duly executed Letter of Transmittal and all other required documents (or of confirmation of a book-entry transfer of such Old Notes into the Exchange Agent's account at the Depositary); provided, however, that the Company reserves the absolute right to waive any defects or irregularities in the tender or conditions of the Exchange Offer. If any tendered Old Notes are not accepted for any reason, such unaccepted Old Notes will be returned without expense to the tendering Holder thereof as promptly as practicable after the expiration or termination of the Exchange Offer. WITHDRAWAL RIGHTS Tenders of the Old Notes may be withdrawn by delivery of a written notice to the Exchange Agent, at its address set forth on the back cover page of this Prospectus, at any time prior to 5:00 p.m., New York City time, on the Expiration Date. Any such notice of withdrawal must (i) specify the name of the person having deposited the Old Notes to be withdrawn (the "Depositor"), (ii) identify the Old Notes to be withdrawn (including the certificate number or numbers and principal amount of such Old Notes, as applicable), (iii) be signed by the Holder in the same manner as the original signature on the Letter of Transmittal by which such Old Notes were tendered (including any required signature guarantees) or be accompanied by a bond power in the name of the person withdrawing the tender, in satisfactory form as determined by the Company in its sole discretion, duly executed by the registered holder, with the signature thereon guaranteed by an Eligible Institution together with the other documents required upon transfer by the Indenture and (iv) specify the name in which such Old Notes are to be re-registered, if different from the Depositor, pursuant to such documents of transfer. Any questions as to the validity, form and eligibility (including time of receipt) of such notices will be determined by the Company, in its sole discretion. The Old Notes so withdrawn will be deemed not to have been validly tendered for exchange for purposes of the Exchange Offer. Any Old Notes which have been tendered for exchange but which are withdrawn will be returned to the Holder thereof without cost to such Holder as soon as practicable after withdrawal. Properly withdrawn Old Notes may be retendered by following one of the procedures described under "The Exchange Offer--Procedures for Tendering Old Notes" at any time on or prior to the Expiration Date. 38 THE EXCHANGE AGENT; ASSISTANCE UNITED STATES TRUST COMPANY OF NEW YORK IS THE EXCHANGE AGENT. All tendered Old Notes, executed Letters of Transmittal and other related documents should be directed to the Exchange Agent. Questions and requests for assistance and requests for additional copies of the Prospectus, the Letter of Transmittal and other related documents should be addressed to the Exchange Agent as follows: BY REGISTERED OR CERTIFIED MAIL: UNITED STATES TRUST COMPANY OF NEW YORK P.O. BOX 844 COOPER STATION NEW YORK, NY 10276-0844 ATTN: CORPORATE TRUST SERVICES BY FACSIMILE: (212) 420-6152 BY OVERNIGHT COURIER: UNITED STATES TRUST COMPANY OF NEW YORK 770 BROADWAY, 13TH FLOOR NEW YORK, NEW YORK 10003 ATTN: CORPORATE TRUST SERVICES BY HAND: UNITED STATES TRUST COMPANY OF NEW YORK 111 BROADWAY LOWER LEVEL NEW YORK, NEW YORK 10006 ATTN: CORPORATE TRUST SERVICES CONFIRM BY TELEPHONE 800-548-6565 FEES AND EXPENSES All expenses incident to the Company's consummation of the Exchange Offer and compliance with the Registration Rights Agreement will be borne by the Company, including, without limitation: (i) all registration and filing fees (including, without limitation, fees and expenses of compliance with state securities or Blue Sky laws), (ii) printing expenses (including, without limitation, expenses of printing certificates for the New Notes in a form eligible for deposit with the Depositary and of printing Prospectuses), (iii) messenger, telephone and delivery expenses, (iv) fees and disbursements of counsel for the Company, (v) fees and disbursements of independent certified public accountants, (vi) rating agency fees, (vii) internal expenses of the Company (including, without limitation, all salaries and expenses of officers and employees of the Company performing legal or accounting duties) and (ix) fees and expenses incurred in connection with the listing of the New Notes on a securities exchange. The Company has not retained any dealer-manager in connection with the Exchange Offer and will not make any payments to brokers, dealers or others soliciting acceptance of the Exchange Offer. The Company, however, will pay the Exchange Agent reasonable and customary fees for its services and will reimburse it for its reasonable out-of-pocket expenses in connection therewith. The Company will pay all transfer taxes, if any, applicable to the exchange of Old Notes pursuant to the Exchange Offer. If, however, a transfer tax is imposed for any reason other than the exchange of Old Notes pursuant to the Exchange Offer, then the amount of any such transfer taxes (whether imposed on 39 the registered holder or any other persons) will be payable by the tendering holder. If satisfactory evidence of payment of such taxes or exemption is not submitted with the Letter of Transmittal, the amount of such transfer taxes will be billed directly to such tendering holder. ACCOUNTING TREATMENT The New Notes will be recorded at the same carrying value as the Old Notes, as reflected in the Company's accounting records on the date of the exchange. Accordingly, no gain or loss will be recognized by the Company for accounting purposes. The expenses of the Exchange Offer will be amortized over the term of the New Notes. FEDERAL INCOME TAX CONSEQUENCES The following discussion summarizing the federal income tax consequences of the Exchange Offer reflects the opinion of Gibson, Dunn & Crutcher LLP, counsel to the Company, as to the material federal income tax consequences expected to result from the Exchange Offer. An opinion of counsel is not binding on the Internal Revenue Service ("IRS") or the courts, and there can be no assurances that the IRS will not take, and that a court would not sustain, a position contrary to that described below. Moreover, the following discussion does not constitute comprehensive tax advice to any particular Holder of Old Notes. The summary is based on the current provisions of the Internal Revenue Code of 1986, as amended, and applicable Treasury regulations, judicial authority and administrative pronouncements. The tax consequences described below could be modified by future changes in the relevant law, which could have retroactive effect. Each holder of Old Notes should consult its own tax adviser as to these and any other federal income tax consequences of the Exchange Offer as well as any tax consequences to it under foreign, state, local or other law. In the opinion of Gibson, Dunn & Crutcher LLP, exchanges of Old Notes for New Notes pursuant to the Exchange Offer will be treated as a modification of the Old Notes that does not constitute a material change in their terms, and the Company intends to treat the exchanges in that manner. Therefore, a New Note is treated as a continuation of the corresponding Old Note. An exchanging Holder's holding period for a New Note will include such Holder's holding period for the Old Note. Such Holder will not recognize any gain or loss, and such Holder's basis in the New Note will be the same as such Holder's basis in the Old Note. The Exchange Offer will result in no federal income tax consequences to a non-exchanging Holder. RESALES OF THE NEW NOTES Based on an interpretation by the staff of the Commission set forth in no-action letters issued to third parties, the Company believes that the New Notes issued pursuant to the Exchange Offer to a holder in exchange for Old Notes may be offered for resale, resold and otherwise transferred by such holder (other than (i) a broker-dealer who purchased Old Notes directly from the Company for resale pursuant to Rule 144A under the Securities Act or any other available exemption under the Securities Act or (ii) a person that is an affiliate of the Company within the meaning of Rule 405 under the Securities Act) without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that such holder is acquiring the New Notes in the ordinary course of business and is not participating, and has no arrangement or understanding with any person to participate, in the distribution of the New Notes. The Company has not requested or obtained an interpretive letter from the Commission staff with respect to this Exchange Offer, and the Company and the holders are not entitled to rely on interpretive advice provided by the staff to other persons, which advice was based on the facts and conditions represented in such letters. However, the Exchange Offer is being conducted in a manner intended to be consistent with the facts and conditions represented in such letters. If any holder acquires New Notes in the Exchange Offer for the purpose of distributing or participating in a distribution of the New Notes, such holder cannot rely on the position of the staff of the Commission enunciated in MORGAN STANLEY & CO., 40 INCORPORATED (available June 5, 1991) and EXXON CAPITAL HOLDINGS CORPORATION (available April 13, 1989), or interpreted in the Commission's letter to SHEARMAN AND STERLING (available July 2, 1993), or similar no-action or interpretive letters and must comply with the registration and prospectus delivery requirements of the Securities Act in connection with a secondary resale transaction, unless an exemption from registration is otherwise available. Each broker-dealer that receives New Notes as a result of market- making or other trading activities must acknowledge that it will deliver a prospectus in connection with any resale of such New Notes. See "Plan of Distribution." It is expected that the New Notes will be freely transferable by the holders thereof, subject to the limitations described in the immediately preceding paragraph. Sales of New Notes acquired in the Exchange Offer by holders who are "affiliates" of the Company within the meaning of the Securities Act will be subject to certain limitations on resale under Rule 144 of the Securities Act. Such persons will only be entitled to sell New Notes in compliance with the volume limitations set forth in Rule 144, and sales of New Notes by affiliates will be subject to certain Rule 144 requirements as to the manner of sale, notice and the availability of current public information regarding the Company. The foregoing is a summary only of Rule 144 as it may apply to affiliates of the Company. Any such persons must consult their own legal counsel for advice as to any restrictions that might apply to the resale of their Notes. 41 CAPITALIZATION The following table sets forth, as of April 3, 1998 (i) the consolidated capitalization of the Company and (ii) the pro forma combined capitalization of the Company after giving effect to the Transactions, including the Prior Offering, and the application of the proceeds therefrom. This table should be read in conjunction with "Description of Senior Notes," the Unaudited Pro Forma Combined Financial Statements and the notes thereto and the Consolidated Financial Statements of the Company and the notes thereto appearing elsewhere in this Prospectus.
APRIL 3, 1998 -------------------- HISTORICAL PRO FORMA --------- --------- (DOLLARS IN THOUSANDS) Short-term obligations (including current maturities of long-term obligations)........................................................ $ -- $ -- LONG-TERM OBLIGATIONS (NET OF CURRENT MATURITIES): Credit Facility(1).................................................. -- -- 10% Senior Notes due 2007........................................... 110,000 110,000 Floating Interest Rate Senior Notes due 2007........................ -- 30,000 --------- --------- Total long-term obligations......................................... 110,000 140,000 --------- --------- Redeemable Preferred Stock, no par value; 30,000 Series A shares designated; 16,000 Series A shares issued and outstanding; 5,000 Series B shares designated; 2,000 Series B shares issued and outstanding(2)(3)................................................... 16,652 16,652 SHAREHOLDERS' EQUITY: Convertible Preferred Stock, no par value; 3,000 shares authorized; no shares issued and outstanding; 3,000 shares issued, on a pro forma basis(3)............................................................ -- 3,000 Common stock, no par value; 20,000,000 shares authorized; 3,857,000 issued and outstanding(4)........................................... 25,464 25,464 Accumulated deficit................................................... (112,026) (112,026) --------- --------- Total shareholders' equity (deficit)................................ (86,562) (83,562) --------- --------- Total capitalization................................................ $ 40,090 $ 73,090 --------- --------- --------- ---------
- ------------------------ (1) The Company increased the amount available under the Credit Facility from $15.0 million to $25.0 million contemporaneously with the Prior Offering. See "Description of Credit Facility." (2) Net of $2,350 attributable to the Warrants and issuance costs of $106 and including $1,108 of accrued dividends-in-kind. Dividends on the Redeemable Preferred Stock are cumulative, accrue quarterly at the rate of 11 1/2% per annum on the stated value of $18,000 and are paid in-kind through July 15, 2000. See "Description of Capital Stock--Preferred Stock--Redeemable Preferred Stock." (3) The Company has an aggregate of 50,000 authorized shares of Preferred Stock, inclusive of the shares which have been designated as Redeemable Preferred Stock and Convertible Preferred Stock. (4) Excludes (i) 964,000 shares of Common Stock reserved for issuance pursuant to the Warrants, (ii) 300,000 shares of Common Stock reserved for issuance upon conversion of the Convertible Preferred Stock and (iii) 500,000 shares of Common Stock reserved for issuance under the Company's stock option plan. See "Prior Recapitalization," "Description of Capital Stock--Warrants" and "Management--Compensation Summary." 42 UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS The following Unaudited Pro Forma Combined Financial Statements (as defined below) of the Company are based on the audited and unaudited financial statements of the Company and Mercer appearing elsewhere in this Prospectus, as adjusted to illustrate the estimated effects of the Transactions and the Prior Recapitalization. The unaudited pro forma adjustments are based upon available information and certain assumptions that the Company believes are reasonable. The Unaudited Pro Forma Combined Financial Statements and accompanying notes should be read in conjunction with the historical financial statements of the Company and Mercer and other financial information pertaining to the Company and Mercer appearing elsewhere in this Prospectus including "The Transactions," "Capitalization" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." The following Unaudited Pro Forma Combined Statement of Income for Burke for the year ended January 2, 1998 and the three months ended April 4, 1997 give effect to the Prior Recapitalization as if it had occurred on January 4, 1997. The Unaudited Pro Forma Combined Financial Statements have been prepared to give effect to the Transactions, including the Prior Offering, and the application of the net proceeds therefrom as if such transactions had occurred on January 4, 1997 for the statement of income for the year ended January 2, 1998 and for the three months ended April 3, 1998 and the three months ended April 4, 1997 (the "Unaudited Pro Forma Combined Income Statements") and on April 3, 1998 for the balance sheet (the "Unaudited Pro Forma Combined Balance Sheet," which together with the Unaudited Pro Forma Combined Income Statements comprise the "Unaudited Pro Forma Combined Financial Statements"). The pro forma adjustments relating to the allocation of the purchase price of Mercer represent the Company's preliminary determinations of the purchase accounting and other adjustments and are based upon available information and certain assumptions the Company considers reasonable under the circumstances. Final amounts could differ from those set forth therein. The Mercer Acquisition will be treated as a purchase for financial accounting purposes. The Unaudited Pro Forma Combined Financial Statements do not purport to be indicative of what the Company's financial position or results of operation would actually have been had the Transactions and the Prior Recapitalization been completed on such date or at the beginning of the periods indicated or to project the Company's results of operations for any future date. 43 UNAUDITED PRO FORMA COMBINED BALANCE SHEET AS OF APRIL 3, 1998 (DOLLARS IN THOUSANDS)
HISTORICAL ------------------ PRO FORMA PRO FORMA BURKE MERCER ADJUSTMENTS(1) COMBINED --------- ------- -------------- ---------- ASSETS Current assets: Cash and cash equivalents................................................ $ 3,884 $ 436 $ (4,320)(2) $ -- Trade accounts receivable................................................ 12,561 2,952 15,513 Due from affiliated companies............................................ -- 813 (813)(3) -- Inventories.............................................................. 12,747 3,179 -- 15,926 Prepaid expenses and other current assets................................ 1,213 124 (97)(3) 1,240 Deferred income tax assets............................................... 2,845 9 (9)(3) 2,845 Refundable income taxes.................................................. 348 -- -- 348 --------- ------- -------------- ---------- Total current assets................................................... 33,598 7,513 (5,239) 35,872 Property, plant and equipment.............................................. 15,082 4,862 (197)(3) 19,747 Prepaid pension costs...................................................... 501 -- -- 501 Deferred financing costs, net.............................................. 5,183 1,772 1,228(2) 8,183 Goodwill, net.............................................................. 1,456 24,749 3,075(4) 29,280 Other assets............................................................... 95 -- -- 95 --------- ------- -------------- ---------- Total assets........................................................... $ 55,915 $38,896 $ (1,133) $ 93,678 --------- ------- -------------- ---------- --------- ------- -------------- ---------- LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Current liabilities: Trade accounts payable and accrued expenses.............................. $ 5,054 $ 1,534 $ 2,616(2) $ 9,204 Accrued compensation and related liabilities............................. 1,982 613 -- 2,595 Accrued interest......................................................... 1,527 -- -- 1,527 Payable to shareholders.................................................. 1,948 -- -- 1,948 Income taxes payable..................................................... 1,003 126 (126)(3) 1,003 --------- ------- -------------- ---------- Total current liabilities.............................................. 11,514 2,273 2,490 16,277 Existing Notes............................................................. 110,000 -- -- 110,000 Long-term debt due to Sovereign............................................ -- 30,000 (30,000)(3) -- Senior Notes............................................................... -- -- 30,000(2) 30,000 Other noncurrent liabilities............................................... 420 169 (169)(3) 420 Deferred income tax liabilities............................................ 3,891 175 (175)(3) 3,891 Redeemable Preferred Stock, no par value; 30,000 Redeemable Series A shares designated; 16,000 Series A shares issued and outstanding; 5,000 Series B shares designated; 2,000 Redeemable Series B shares issued and outstanding.............................................................. 16,652 -- -- 16,652 Shareholders' equity (deficit): Convertible Preferred Stock; 3,000 shares authorized; no shares issued and outstanding; 3,000 shares issued on a pro forma basis.............. -- -- 3,000(2) 3,000 Class A common stock, no par value; 20,000,000 shares authorized; 3,857,000 issued and outstanding....................................... 25,464 -- -- 25,464 Additional paid-in capital............................................... -- 6,105 (6,105)(3) -- Accumulated deficit...................................................... (112,026) 174 (174)(3) (112,026) --------- ------- -------------- ---------- Total shareholders' equity (deficit)................................... (86,562) 6,279 (3,279) (83,562) --------- ------- -------------- ---------- Total liabilities and shareholders' equity (deficit)................... $ 55,915 $38,896 $ (1,133) $ 93,678 --------- ------- -------------- ---------- --------- ------- -------------- ----------
The accompanying notes to the unaudited pro forma combined balance sheet are an integral part of this statement. 44 NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET (DOLLARS IN THOUSANDS) (1) For purposes of preparing the Unaudited Pro Forma Combined Balance Sheet, Mercer's assets and liabilities acquired or assumed have been recorded at their estimated fair values. A final determination of the required purchase price accounting adjustments and of the fair value of the assets acquired or assumed has not yet been made. Accordingly, the purchase accounting adjustments made in connection with the development of the unaudited pro forma financial information reflect the Company's best estimate based upon currently available information. Based upon Mercer's March 31, 1998 balance sheet, the purchase price allocation would be: Current Assets..................................................... $ 6,158 Plant and Equipment................................................ 4,665 Excess purchase price over net assets acquired..................... 27,824 Accounts payable and accrued expenses.............................. (2,147) --------- Total purchase price............................................... 36,500 Mercer Acquisition expenses........................................ (750) --------- Mercer Acquisition consideration................................... $ 35,750 --------- ---------
(2) Reflects the issuance of $30,000 of Senior Notes, the issuance of 3,000 shares of Convertible Preferred Stock, the use of $6,500 of Burke's cash to pay a portion of the Mercer Acquisition consideration and the capitalization of $3,000 of deferred financing costs; also reflects the elimination of $1,772 in deferred financing costs previously capitalized by Mercer and $436 in cash not contractually acquired in the Mercer Acquisition. (3) Reflects assets and liabilities, including certain property, plant and equipment not contractually acquired or assumed from Sovereign in the Mercer Acquisition. (4) Reflects the recording of goodwill under the purchase accounting method. Under the Stock Purchase Agreement, Burke and Sovereign have agreed to make elections under Section 338(g) and Section 338(h)(10) of the Internal Revenue Code and any state, local and foreign counterparts with respect to Mercer. 45 UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME FISCAL YEAR 1997 (DOLLARS IN THOUSANDS)
ADJUSTMENTS RELATED TO PRIOR PRO FORMA TRANSACTIONS PRO FORMA BURKE RECAPITALIZATION BURKE MERCER ADJUSTMENTS COMBINED ------- ---------------- --------- ------- ------------ --------- Net sales......................................... $90,228 $-- $90,228 $24,899 $-- $115,127 Cost of sales..................................... 62,917 -- 62,917 16,499 (600)(4) 78,995 179(5) ------- ------- --------- ------- ------------ --------- Gross profit...................................... 27,311 -- 27,311 8,400 421 36,132 Selling, general and administrative expenses...... 12,238 (279)(1) 11,959 4,803 1,070(5) 17,665 (167)(6) Transaction expenses.............................. 1,321 (1,321)(2) -- -- -- -- Stock option purchase............................. 14,105 (14,105)(2) -- -- -- -- ------- ------- --------- ------- ------------ --------- Income (loss) from operations..................... (353) 15,705 15,352 3,597 (482) 18,467 Interest expense.................................. 5,408 5,592(3) 11,000 1,661 1,505(7) 14,166 ------- ------- --------- ------- ------------ --------- Income (loss) before income taxes................. (5,761) 10,113 4,352 1,936 (1,987) 4,301 Income taxes...................................... (1,818) 3,602(8) 1,784 777 (798)(8) 1,763 ------- ------- --------- ------- ------------ --------- Net (loss) income................................. $(3,943) $ 6,511 $ 2,568 $ 1,159 $(1,189) $ 2,538 ------- ------- --------- ------- ------------ --------- ------- ------- --------- ------- ------------ ---------
The accompanying notes to the unaudited pro forma combined statement of income are an integral part of this statement. 46 NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME (DOLLARS IN THOUSANDS) PRIOR RECAPITALIZATION ADJUSTMENTS--FISCAL YEAR 1997 The pro forma financial data for Burke (excluding the Mercer Acquisition) have been derived from the Company's historical financial statements for the year ended January 2, 1998 as if the Prior Recapitalization occurred on January 4, 1997. The Prior Recapitalization has been accounted for as a recapitalization that has no impact on the historical basis of assets and liabilities. (1) Reflects the elimination of management fees paid to a director and to an affiliate of the prior principal shareholders of the Company prior to August 1997. (2) Includes the elimination of $14,105 representing the Company's cost to purchase options issued and outstanding under the Company's stock option plan in connection with the Prior Recapitalization. Also reflects the elimination of expenses of $1,321 incurred in connection with the Prior Recapitalization. (3) Reflects a full year of interest on the Existing Notes net of interest on prior debt repaid as follows: Interest expense on the Existing Notes............................. $ 11,000 Amortization of debt issuance costs (10 years)..................... 500 Less interest income............................................... (500) Less historical net interest of existing debt refinanced........... (5,408) --------- Incremental interest expense....................................... $ 5,592 --------- ---------
TRANSACTIONS ADJUSTMENTS--FISCAL YEAR 1997 The following adjustments reflect the Transactions, including the Prior Offering, as applied to the Company's pro forma results and Mercer's actual results as if the Transactions took place on January 4, 1997. (4) Reflects raw material cost savings of $600 primarily due to the shifting of raw material purchases away from Mercer's former affiliate and to lower cost, non-affiliated suppliers. (5) Adjustment to cost of sales reflects additional depreciation expense of $179 while adjustment to selling, general and administrative expenses reflects additional amortization expense of $1,070 calculated on a straight line basis over 15 years of the excess of purchase price over net assets acquired in the Mercer Acquisition, net of Mercer's prior amortization expense. (6) Reflects the elimination of management fees paid to a former controlling shareholder of Mercer. (7) Reflects interest on the Notes, net of interest on Mercer's debt not assumed: Interest on the Senior Notes....................................... $ 2,850 Amortization of debt issuance costs (9 1/2 years).................. 316 Less historical interest expense on Mercer's debt not assumed...... (1,661) --------- Incremental interest expense....................................... $ 1,505 --------- ---------
Each incremental 25 basis point increase or decrease in the assumed interest rate of the Senior Notes would increase or decrease annual interest expense on the Senior Notes by $75. (8) Reflects the income tax (benefit) provision arising from the pro forma adjustments discussed above based on the Company's pro forma estimated effective tax rate of 41% for the twelve months ended January 2, 1998. 47 UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME FOR THE THREE MONTHS ENDED APRIL 3, 1998 (DOLLARS IN THOUSANDS)
TRANSACTIONS PRO FORMA BURKE MERCER ADJUSTMENTS COMBINED ------- ------ ------------ --------- Net sales................................................... $22,943 $6,204 $-- $29,147 Cost of sales............................................... 16,180 3,923 17(1) 20,120 ------- ------ ----- --------- Gross profit................................................ 6,763 2,281 (17) 9,027 Selling, general and administrative expenses................ 3,256 1,294 239(1) 4,789 ------- ------ ----- --------- Income from operations...................................... 3,507 987 (256) 4,238 Interest expense............................................ 2,787 701 90(2) 3,578 ------- ------ ----- --------- Income before income taxes.................................. 720 286 (346) 660 Income taxes................................................ 288 114 (132)(3) 270 ------- ------ ----- --------- Net income.................................................. $ 432 $ 172 $(214) $ 390 ------- ------ ----- --------- ------- ------ ----- ---------
The accompanying notes to the unaudited pro forma combined statement of income are an integral part of this statement. 48 NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME (DOLLARS IN THOUSANDS) TRANSACTIONS ADJUSTMENTS--THREE MONTHS ENDED APRIL 3, 1998 The following adjustments reflect the Transactions, including the Prior Offering, as applied to the Company's and Mercer's actual results as if the Transactions took place on January 4, 1997. (1) Adjustment to cost of sales reflects additional depreciation expense of $17 while adjustment to selling, general and administrative expenses reflects additional amortization expense of $239 calculated on a straight line basis over 15 years of the excess of purchase price over net assets acquired in the Mercer Acquisition, net of Mercer's prior amortization expense. (2) Reflects interest on the Notes, net of interest on Mercer's debt not assumed: Interest on the Senior Notes......................................... $ 712 Amortization of debt issuance costs (9 1/2 years).................... 79 Less historical interest expense on Mercer's debt not assumed........ (701) --------- Incremental interest expense......................................... $ 90 --------- ---------
Each incremental 25 basis point increase or decrease in the assumed interest rate of the Senior Notes would increase or decrease annual interest expense on the Senior Notes by $75. (3) Reflects the income tax (benefit) arising from the pro forma adjustments discussed above based on the Company's pro forma estimated effective tax rate of 41% for the three months ended April 3, 1998. 49 UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME FOR THE THREE MONTHS ENDED APRIL 4, 1997 (DOLLARS IN THOUSANDS)
ADJUSTMENTS RELATED TO PRO PRIOR FORMA TRANSACTIONS PRO FORMA BURKE RECAPITALIZATION BURKE MERCER ADJUSTMENTS COMBINED ------- ---------- ------- ------ ------------ --------- Net sales................................................... $23,124 $-- $23,124 $5,998 $-- $29,122 Cost of sales............................................... 16,419 -- 16,419 4,042 (150)(3) 20,337 26(4) ------- ---------- ------- ------ ----- --------- Gross profit................................................ 6,705 -- 6,705 1,956 124 8,785 Selling, general and administrative expenses................ 3,182 (105 (1) 3,077 1,293 300(4) 4,598 (72)(5) ------- ---------- ------- ------ ----- --------- Income from operations...................................... 3,523 105 3,628 663 (104) 4,187 Interest expense............................................ 498 2,252 (2) 2,750 228 563(6) 3,541 ------- ---------- ------- ------ ----- --------- Income before income taxes.................................. 3,025 (2,147 ) 878 435 (667) 646 Income taxes................................................ 1,209 (849 (7) 360 174 (269)(7) 265 ------- ---------- ------- ------ ----- --------- Net income.................................................. $ 1,816 ($1,298 ) $ 518 $ 261 $(398) $ 381 ------- ---------- ------- ------ ----- --------- ------- ---------- ------- ------ ----- ---------
The accompanying notes to the unaudited pro forma combined statement of income are an integral part of this statement. 50 NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME (DOLLARS IN THOUSANDS) PRIOR RECAPITALIZATION ADJUSTMENTS--THREE MONTHS ENDED APRIL 4, 1997 The pro forma financial data for Burke (excluding the Mercer Acquisition) have been derived from the Company's historical financial statements for the three months ended April 4, 1997 as if the Prior Recapitalization occurred on January 4, 1997. The Prior Recapitalization has been accounted for as a recapitalization that has no impact on the historical basis of assets and liabilities. (1) Reflects the elimination of management fees paid to a director and to an affiliate of the prior principal shareholders of the Company during the three months ended April 4, 1997. (2) Reflects three months of interest on the Existing Notes net of interest on prior debt repaid as follows: Interest expense on the Existing Notes.............................. $ 2,750 Amortization of debt issuance costs (10 years)...................... 125 Less interest income................................................ (125) Less historical net interest of existing debt refinanced............ (498) --------- Incremental interest expense........................................ $ 2,252 --------- ---------
TRANSACTIONS ADJUSTMENTS--THREE MONTHS ENDED APRIL 4, 1997 The following adjustments reflect the Transactions, including the Prior Offering, as applied to the Company's pro forma results and Mercer's actual results as if the Transactions took place on January 4, 1997. (3) Reflects raw material cost savings of $150 primarily due to the shifting of raw material purchases away from Mercer's former affiliate and to lower cost, non-affiliated suppliers. (4) Adjustment to cost of sales reflects additional depreciation expense of $26 while adjustment to selling, general and administrative expenses reflects additional amortization expense of $300 calculated on a straight line basis over 15 years of the excess of purchase price over net assets acquired in the Mercer Acquisition, net of Mercer's prior amortization expense. (5) Reflects the elimination of management fees paid to a former controlling shareholder of Mercer. (6) Reflects interest on the Senior Notes, net of interest on Mercer's debt not assumed: Interest on the Senior Notes......................................... $ 712 Amortization of debt issuance costs (9 1/2 years).................... 79 Less historical interest expense on Mercer's debt not assumed........ (228) --------- Incremental interest expense......................................... $ 563 --------- ---------
Each incremental 25 basis point increase or decrease in the assumed interest rate of the Senior Notes would increase or decrease annual interest expense on the Senior Notes by $75. (7) Reflects the income tax (benefit) provision arising from the pro forma adjustments discussed above based on the Company's pro forma estimated effective tax rate of 41% for the three months ended April 4, 1997. 51 SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA BURKE: The selected consolidated financial data below for the Company for each of the three years in the period 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 Prospectus. The selected consolidated financial data below for the Company for the year 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 selected financial data for the three months ended April 4, 1997 and April 3, 1998 and as of April 3, 1998 have been derived from the Company's Unaudited Consolidated Financial Statements for those periods included elsewhere in the Prospectus and the selected financial data as of April 4, 1997 have been derived from the Company's Unaudited Consolidated Financial Statements for that period, but are not included elsewhere herein and, in each case, include, in the opinion of management, all adjustments consisting of normal recurring adjustments, necessary for a fair presentation of the results for the unaudited interim periods. Results for the three months ended April 3, 1998 are not necessarily indicative of the results that may be expected for the entire year. 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 Prospectus. The data below reflect the acquisition by the Company of certain assets of Purosil in March 1993; of Silicone Fabrication Specialists, 52 Inc. ("SFS") in February 1995; of Haskon Corporation ("Haskon") in June 1995; of Kentile Corporation ("Kentile") in April 1996; and the effect of the Prior Recapitalization in August 1997.
THREE MONTHS ENDED FISCAL YEAR ---------------------- ------------------------------------------- APRIL 4, APRIL 3, 1993 1994 1995 1996 1997 1997 1998 ------- ------- ------- ------- ------- ----------- -------- (DOLLARS IN THOUSANDS) OPERATING DATA: Net sales.............................................. $36,431 $44,370 $68,411 $72,466 $90,228 $23,124 $22,943 Cost of sales.......................................... 25,355 29,998 49,226 49,689 62,917 16,419 16,180 ------- ------- ------- ------- ------- ----------- -------- Gross profit........................................... 11,076 14,372 19,185 22,777 27,311 6,705 6,763 Selling, general and administrative expenses(1)........ 9,215 8,152 10,212 11,610 12,238 3,182 3,256 Transaction expenses(2)................................ -- -- -- -- 1,321 -- -- Stock option purchase(3)............................... -- -- -- -- 14,105 -- -- ------- ------- ------- ------- ------- ----------- -------- Income (loss) from operations.......................... 1,861 6,220 8,973 11,167 (353) 3,523 3,507 Interest expense, net.................................. 2,897 2,812 3,007 2,668 5,408 498 2,787 ------- ------- ------- ------- ------- ----------- -------- Income (loss) from continuing operations before income tax provision (benefit), cumulative effect of accounting change and extraordinary loss and discontinued operation(4)............................ (1,036) 3,408 5,966 8,499 (5,761) 3,025 720 Income tax provision (benefit)......................... 146 1,395 3,393 3,466 (1,818) 1,209 288 ------- ------- ------- ------- ------- ----------- -------- Income (loss) from continuing operations before cumulative effect of accounting change and extraordinary loss and discontinued operation(4)..... $(1,182) $ 2,013 $ 2,573 $ 5,033 $(3,943) $ 1,816 $ 432 ------- ------- ------- ------- ------- ----------- -------- ------- ------- ------- ------- ------- ----------- -------- Net income (loss)(4)................................... $ (657) $ 1,502 $ 1,094 $ 4,101 $(3,943) $ 1,816 $ 432 ------- ------- ------- ------- ------- ----------- -------- ------- ------- ------- ------- ------- ----------- -------- OTHER DATA: EBITDA(5).............................................. $16,851(6) $ 3,872 $ 3,873 EBITDA margin(5)....................................... 18.7%(6) 16.7% 16.9% Depreciation and amortization.......................... $ 1,499 $ 349 $ 366 Capital expenditures................................... 1,454 419 419 Cash interest expense.................................. 2,059 498 2,639 Ratio of EBITDA to cash interest expenses.............. 8.2x 7.8x 1.5x Net cash used in operating activities.................. $(8,543) $ (928) $(4,275) Net cash provided by (used in) investing activities.... 2,852 (419) (419) Net cash provided by (used in) financing activities.... 17,254 1,347 (2,985) Ratio of earnings to fixed charges(7).................. -- 1.2x Ratio of earnings to combined fixed charges(8)......... -- --
AS OF AS OF FISCAL YEAR END ------------------- -------------------------------------------- APRIL 4, APRIL 3, 1993 1994 1995 1996 1997 1997 1998 ------- ------- ------- ------- -------- -------- -------- BALANCE SHEET DATA: Working capital......................... $ 4,932 $ 4,766 $ 5,402 $ 5,328 $ 21,678 $ 8,425 $ 22,084 Total assets............................ 30,535 28,551 39,729 40,673 62,837 44,599 55,915 Long-term obligations, less current portion............................... 20,011 16,937 21,803 18,126 110,000 19,579 110,000 Redeemable Preferred Stock.............. -- -- -- -- 16,148 -- 16,652 Shareholders' equity (deficit).......... (654) 849 340 4,283 (86,490) 6,099 (86,562)
- ------------------------ (1) Selling, general and administrative expenses include amortization of acquisition costs of $850 in 1993. (2) Reflects $1,321 of expenses associated with the Prior 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 Prior 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 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. 53 (5) EBITDA is the sum of income (loss) before 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 Prior Recapitalization and management fees paid to a former controlling shareholder. (7) 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 $5,790 for fiscal year ended 1997. The ratio of earnings to fixed charges has not been presented for periods prior to the Transactions as the Company believes the ratio is not material to investors. (8) In calculating the ratio of earnings to combined fixed charges, combined fixed charges consist of fixed charges, paid in kind dividends on the Redeemable Preferred Stock and accretion of the carrying value of the Redeemable Preferred Stock. Earnings were insufficient to cover combined fixed charges and preferred stock dividends by $6,968 for fiscal year 1997 and $129 for three months ended April 3, 1998. MERCER: The selected operating and balance sheet data below for Mercer for the year ended, and as of, December 31, 1996 have been derived from the Financial Statements of Mercer which have been audited by KPMG Peat Marwick LLP, independent auditors, and are included elsewhere in this Prospectus. The selected financial data below for Mercer for the year ended December 31, 1997 and for the periods from January 1, 1997 to August 4, 1997 and from August 5, 1997 to December 31, 1997, and as of August 4, 1997 and December 31, 1997, have been derived from the Financial Statements of Mercer which have been audited by Ernst & Young LLP, independent auditors, and are included elsewhere in this Prospectus. The selected operating and balance sheet data for the three months ended March 31, 1997 and 1998 and as of March 31, 1998 have been derived from the Company's Unaudited Financial Statements for those periods included elsewhere in the Prospectus and the balance sheet data as of March 31, 1997 have been derived from the Company's Unaudited Financial Statements for that period, but are not included elsewhere herein and, in each case, include, in the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the results for the unaudited interim periods. Results for the three months ended March 31, 1998 are not necessarily indicative of the results that may be expected for the entire year. 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 54 Operations--Mercer" and the Financial Statements of Mercer and the related notes included elsewhere in this Prospectus.
PERIOD(1) THREE MONTHS ENDED -------------------- ------------------------ FISCAL FISCAL YEAR 1/1/97 TO 8/5/97 TO YEAR(1) MARCH 31, MARCH 31, 1996 8/4/97 12/31/97 1997 1997 1998 ----------- --------- --------- ----------- ----------- ----------- (DOLLARS IN THOUSANDS) OPERATING DATA: Net sales............................ $ 24,558 $ 14,954 $ 9,945 $ 24,899 $ 5,998 $ 6,204 Cost of sales........................ 17,668 9,578 6,921 16,499 4,042 3,923 ----------- --------- --------- ----------- ----------- ----------- Gross profit......................... 6,890 5,376 3,024 8,400 1,956 2,281 Selling, general and administrative expenses........................... 4,668 2,904 1,899 4,803 1,293 1,294 ----------- --------- --------- ----------- ----------- ----------- Income from operations............... 2,222 2,472 1,125 3,597 663 987 Interest expense..................... 964 544 1,117 1,661 228 701 ----------- --------- --------- ----------- ----------- ----------- Income before income taxes........... 1,258 1,928 8 1,936 435 286 Income taxes......................... 675 771 6 777 174 114 ----------- --------- --------- ----------- ----------- ----------- Net income........................... $ 583 $ 1,157 $ 2 $ 1,159 $ 261 $ 172 ----------- --------- --------- ----------- ----------- ----------- ----------- --------- --------- ----------- ----------- ----------- OTHER DATA: EBITDA(2)............................ $ 4,748 $ 907 $ 1,384 EBITDA margin(2)..................... 19.1% 15.1% 22.3% Depreciation and amortization........ $ 1,151 $ 244 $ 397 Capital expenditures................. 97 18 12 Cash interest expense................ 1,548 228 631 Ratio of EBITDA to cash interest expense............................ 3.1x 4.0x 2.2x Net cash (used in) provided by operating activities............... $ 3,125 $ (373) $ (53) Net cash used in investing activities......................... (97) (18) (12) Net cash (used in) provided by financing activities............... (2,919) 341 -- BALANCE SHEET DATA (AT PERIOD END): Working capital...................... $ 2,649 $ 3,793 $ 4,679 $ 4,679 $ 3,901 $ 5,240 Total assets......................... 17,218 16,968 38,364 38,364 17,237 38,896 Long-term obligations, less current portion............................ 4,655 4,777 30,000 30,000 4,996 30,000 Shareholders' equity................. 9,238 9,170 6,107 6,107 9,499 6,279
- ------------------------ (1) Mercer's selected financial data for 1997 have been presented in two periods because Mercer was purchased by Sovereign from Laporte plc on August 5, 1997 and Mercer's financial data was reported by Laporte plc prior to August 5, 1997 and by Sovereign for the remainder of the year. The total fiscal year 1997 data reflect the effects of the acquisition of Mercer by Sovereign since August 5, 1997 and accordingly, does not purport to be indicative of what Mercer's results of operations for fiscal 1997 would actually have been had the acquisition by Sovereign been completed as of January 1, 1997. (2) EBITDA is the sum of income before income tax provision 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. 55 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS BURKE 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 Prospectus. 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 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. 56 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. 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; and the three months ended April 4, 1997 and April 3, 1998:
FISCAL YEAR ENDED THREE MONTHS ENDED ---------------------------------------------------------- ------------------------------------------ PERCENTAGE PERCENTAGE PERCENTAGE PERCENTAGE PERCENTAGE OF NET OF NET OF NET APRIL 4, OF NET APRIL 3, OF NET 1995 SALES 1996 SALES 1997 SALES 1997 SALES 1998 SALES ------- ---------- ------- ---------- ------- ---------- -------- ---------- -------- ---------- (DOLLARS IN THOUSANDS) Net sales: Aerospace Products... $23,254 34.0% $24,622 34.0% $31,225 34.6% $ 7,911 34.2% $ 9,551 41.6% Flooring Products... 19,693 28.8 20,546 28.4 23,475 26.0 5,893 25.5 5,842 25.5 Commercial Products... 25,464 37.2 27,298 37.6 35,528 39.4 9,320 40.3 7,550 32.9 ------- ----- ------- ----- ------- ----- -------- ----- -------- ----- Total net sales.... 68,411 100.0 72,466 100.0 90,228 100.0 23,124 100.0 22,943 100.0 Cost of sales........ 49,226 72.0 49,689 68.6 62,917 69.7 16,419 71.0 16,180 70.5 ------- ----- ------- ----- ------- ----- -------- ----- -------- ----- Gross profit... 19,185 28.0 22,777 31.4 27,311 30.3 6,705 29.0 6,763 29.5 Selling, general and administrative expenses..... 10,212 14.9 11,610 16.0 12,238 13.6 3,182 13.8 3,256 14.2 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) 3,523 15.2 3,507 15.3 Interest expense, net.......... 3,007 4.4 2,668 3.7 5,408 6.0 498 2.1 2,787 12.1 ------- ----- ------- ----- ------- ----- -------- ----- -------- ----- Income (loss) before income tax provision (benefit), extraordinary loss and discontinued operation.... 5,966 8.7 8,499 11.7 (5,761) (6.4) 3,025 13.1 720 3.2 Income tax (benefit) provision.... 3,393 5.0 3,466 4.8 (1,818) (2.0) 1,209 5.2 288 1.3 ------- ----- ------- ----- ------- ----- -------- ----- -------- ----- Income (loss) from continuing operations before extraordinary loss and discontinued operation.... $ 2,573 3.7% $ 5,033 6.9% $(3,943) (4.4)% 1,816 7.9 432 1.9 ------- ----- ------- ----- ------- ----- -------- ----- -------- ----- ------- ----- ------- ----- ------- ----- -------- ----- -------- ----- Net (loss) income....... $ 1,094 1.6% $ 4,101 5.7% $(3,943) (4.4)% $ 1,816 7.9 $ 432 1.9 ------- ----- ------- ----- ------- ----- -------- ----- -------- ----- ------- ----- ------- ----- ------- ----- -------- ----- -------- -----
THREE MONTHS ENDED APRIL 3, 1998 VERSUS THREE MONTHS ENDED APRIL 4, 1997 NET SALES. Total net sales decreased 0.8% from $23.1 million for the three month period ended April 4, 1997 to $22.9 million for the same period in 1998. Aerospace product sales grew 20.7% from $7.9 million for the three month period ended April 4, 1997 to $9.6 million for the same period in 1998, due to 57 increased commercial aircraft build rates. Flooring products sales decreased 0.9% from $5.9 million for the three month period ended April 4, 1997 to $5.8 million for the same period on 1998, due to the impact of weather-related delays in general construction activity in the western part of the United States. Commercial products sales decreased 19.0%, from $9.3 million for the three month period ended April 4, 1997 to $7.5 million for the same period in 1998, primarily because the first quarter of 1997 included a liner project order that favorably affected results for that period. COST OF SALES. Cost of sales decreased 1.5%, from $16.4 million for the three month period ended April 4, 1997 to $16.2 million for the same period in 1998. As a percentage of net sales, gross profit increased from 29.0% for the three month period ended April 4, 1997 to 29.5% for the same period in 1998. The increase in profit percentage was primarily due to the fact that membrane products, which have a lower gross profit margin than the Company's other product lines, constituted a smaller portion of total net sales for the three month period ended April 3, 1998 compared to the same period in 1997. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased 2.3%, from $3.2 million for the three month period ended April 4, 1997 to $3.3 million for the same period in 1998. The increase was due to general cost increases. INCOME FROM OPERATIONS. As a result of the above factors, income from operations was unchanged, at $3.5 million for the three month periods ended April 3, 1998 and April 4, 1997. As a percentage of net sales, income from operations increased from 15.2% for the three month period ended April 4, 1997 to 15.3% for the same period in 1998. INTEREST EXPENSE. Interest expense increased from $0.5 million for the three month period ended April 4, 1997 to $2.8 million for the same period in 1998. The increase was due to the issuance of an aggregate principle amount of $110.0 million Senior Notes due 2007 on August 20. 1997. NET INCOME. As a result of the above factors, net income decreased from $1.8 million for the three month periods ended April 4, 1997 to $0.4 million for the same period in 1998. 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. 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 Prior Recapitalization. 58 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 Prior 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 Existing 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%, decreases in the cost of raw materials used in the Company's Flooring Products of 0.9% and general pricing, operational, and overhead absorption improvements of 0.9%. 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. INCOME TAX PROVISION For the three months ended April 3, 1998, the Company recorded an income tax provision of 40.0% which represents the effective tax rate projected for the full fiscal year 1998. This effective tax rate differs from the federal statutory rate primarily due to state income tax (net of federal benefit) and is consistent with the effective tax rate for the three months ended April 4, 1997. 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 59 federal benefit) and in 1997 due to an 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. 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. MERCER INTRODUCTION The following discussion and analysis should be read in conjunction with the "Selected Historical Consolidated Financial Data" and the audited Financial Statements of Mercer and the notes thereto included elsewhere in this Prospectus. 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 mouldings, corners, stair treads and other accessories. Mercer also sells a range of related adhesive products and is a leading supplier to the vinyl cove base and moulding products markets, with a particularly strong sales presence in the eastern United States. Historically, revenues in Mercer's business have been driven by both new commercial construction and the continuous repair and remodeling of existing commercial space. Operations have been concentrated in the eastern United States and Mercer has sold primarily extruded plastic and vinyl products. Mercer's Uni-color system offers a complete selection of vinyl flooring accessories to ensure product and color compatibility throughout all flooring projects. 60 RESULTS OF OPERATIONS The following table sets forth certain income statement information for Mercer for the years ended December 31, 1996 and 1997, and the three months ended March 31, 1997 and 1998:
FISCAL YEAR ENDED THREE MONTHS ENDED ---------------------------------------------- -------------------------------------------------- PERCENTAGE PERCENTAGE PERCENTAGE PERCENTAGE OF NET OF NET MARCH 31, OF NET MARCH 31, OF NET 1996 SALES 1997(1) SALES 1997 SALES 1998 SALES --------- ----------- --------- ----------- ----------- ----------- ----------- ----------- (DOLLARS IN THOUSANDS) Net sales................ $ 24,558 100.0% $ 24,899 100.0% $ 5,998 100.0% $ 6,204 100.0% Cost of sales............ 17,668 71.9 16,499 66.3 4,042 67.4 3,923 63.2 --------- ----- --------- ----- ----------- ----- ----------- ----- Gross profit............. 6,890 28.1 8,400 33.7 1,956 32.6 2,281 36.8 Selling, general and administrative expenses............... 4,668 19.1 4,803 19.3 1,293 21.6 1,294 20.9 --------- ----- --------- ----- ----------- ----- ----------- ----- Income from operations... 2,222 9.0 3,597 14.4 663 11.0 987 15.9 Interest expense......... 964 3.9 1,661 6.6 228 3.8 701 11.3 --------- ----- --------- ----- ----------- ----- ----------- ----- Income before income taxes.................. 1,258 5.1 1,936 7.8 435 7.2 286 4.6 Income taxes............. 675 2.7 777 3.1 174 2.9 114 1.8 --------- ----- --------- ----- ----------- ----- ----------- ----- Net income............... $ 583 2.4% $ 1,159 4.7% $ 261 4.3% $ 172 2.8% --------- ----- --------- ----- ----------- ----- ----------- ----- --------- ----- --------- ----- ----------- ----- ----------- -----
- ------------------------ (1) Mercer's selected financial data for 1997 have been presented in two periods because Mercer was purchased by Sovereign from Laporte plc on August 5, 1997 and Mercer's financial data was reported by Laporte plc prior to August 5, 1997 and by Sovereign for the remainder of the year. The total fiscal year 1997 data reflect the effects of the acquisition of Mercer by Sovereign since August 5, 1997 and accordingly, does not purport to be indicative of what Mercer's results of operations for fiscal 1997 would actually have been had the acquisition by Sovereign been completed as of January 1, 1997. THREE MONTHS ENDED MARCH 31, 1998 VERSUS MARCH 31, 1997 NET SALES. Net sales increased 3.4% from $6.0 million for the three month period ended March 31, 1997 to $6.2 million for the same period in 1998. The increase was primarily due to increased prices. COST OF SALES. Cost of sales decreased 3.0% from $4.0 million for the three month period ended March 31, 1997 to $3.9 million for the same period in 1998. As a percentage of net sales, gross profit increased from 32.6% to 36.8%. The increase in profit percentage was primarily due to the shifting of raw material purchases away from a manufacturing process. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses were unchanged, at $1.3 million for the three month periods ended March 31, 1997 and 1998. INCOME FROM OPERATIONS. As a result of the above factors, income from operations increased 48.9% from $0.7 million for the three month period ended March 31, 1997 to $1.0 million for the same period in 1998. INTEREST EXPENSE. Interest expense increased 207.5% from $0.2 million for the three month period ended March 31, 1997 to $0.7 million for the same period in 1998. The increase was due to the interest charged on long-term debt to the parent company recorded in the August, 1997 acquisition of Mercer by Sovereign. NET INCOME. As a result of the above factors, net income decreased 34.1% from $0.3 million for the three month period ended March 31, 1997 to $0.2 million for the same period in 1998. 61 YEAR ENDED DECEMBER 31, 1997 VERSUS YEAR ENDED DECEMBER 31, 1996 NET SALES. Total net sales increased 1.4%, from $24.6 million in 1996 to $24.9 million in 1997. The increase was primarily due to increased prices. COST OF SALES. Cost of sales decreased 6.6%, from $17.7 million in 1996 to $16.5 million in 1997. As a percentage of net sales, gross profit increased from 28.1% to 33.7%. The increase in profit percentage was primarily due to the shifting of raw material purchases away from a former affiliate, and secondarily to the vertical integration of a portion of the manufacturing process. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased 2.9%, from $4.7 million in 1996 to $4.8 million in 1997. The increase is primarily due to advertising and promotion costs, net of reduced bad debt expense and administrative headcount. INCOME FROM OPERATIONS. As a result of the above factors, income from operations increased 61.9%, from $2.2 million in 1996 to $3.6 million in 1997. INTEREST EXPENSE. Interest expense increased 72.3%, from $1.0 million in 1996 to $1.7 million in 1997. The increase was due to the interest charged on long-term debt to Mercer's parent company recorded in the August 1997 acquisition of Mercer by Sovereign. NET INCOME. As a result of the above factors, net income increased 98.8%, from $0.6 million in 1996 to $1.2 million in 1997. COMBINED 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. Contemporaneously with the consummation of the Prior Offering, the Company amended the Credit Facility to increase the allowable revolving credit borrowings from $15.0 million to $25.0 million. The Credit Facility will mature in August 2002. Interest on loans under the Credit Facility will 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. Loans under the Credit Facility will be secured by security interests in substantially all of the assets of the Company and will be 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 provide that a "change of control" will constitute an event of default. For a more complete description of the Credit Facility, see "Risk Factors--Significant Leverage and Debt Service," "--Ranking of Senior Notes; Asset Encumbrance," "--Restrictive Covenants" and "Description of Credit Facility." 62 The Company anticipates that its principal use of cash following the Mercer Acquisition 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 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. 63 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, respectively ("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. On April 21, 1998, the Company acquired all of the outstanding capital stock of Mercer from Sovereign pursuant to a Stock Purchase Agreement among the Company, Sovereign and Mercer, dated March 5, 1998. Mercer is a leading manufacturer of extruded plastic and vinyl flooring products such as vinyl cove base, transitional and finish mouldings, corners, stair treads and other accessories. On a pro forma basis, after giving effect to the Mercer Acquisition as if it had occurred on January 4, 1997, Burke would have generated $115.1 million and $22.4 million in revenues and EBITDA, respectively, in 1997. See "Acquisition of Mercer" and "Unaudited Pro Forma Combined Financial Statements." Mercer represents the fifth acquisition completed by Burke's current management team over the last five years. Burke's integration of these acquisitions has led to a dominant position in the aerospace seals market, opened new markets for its Flooring Business, improved operating efficiencies, consolidated overhead and strengthened technical capabilities. Management intends to continue to evaluate potential acquisitions as a way to augment Burke's internal growth and expand and strengthen existing product lines and its distribution and technological capabilities. 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. 64 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, to $31.2 million in 1997, accounting for approximately 34.6% 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. See "Risk Factors-- Importance of Key Customers to the Aerospace Products Business." 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. The acquisition of Mercer significantly expands Burke's product offerings and distribution capabilities given Mercer's historically strong presence as a manufacturer of vinyl cove base and other vinyl-based flooring accessories in the eastern United States. Both Burke's and Mercer'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. Management believes that the Company's acquisition of Mercer, which is already well established as a leading supplier of vinyl wall base and moulding products lines in the eastern United States, will enable it to increase revenues through the increased penetration of existing markets and the expansion of its product line to markets where vinyl cove base is more popular than rubber cove base, such as the midwestern and eastern United States. 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. 65 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. Pursuant to the Mercer Acquisition, the Company will also be acquiring Mercer's strong relationships with distributors in the eastern United States and Mercer's trade name Uni-Color-Registered Trademark- color matching system, which is a strong brand name in the flooring business. 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 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 66 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 and by capitalizing on the strong presence in vinyl flooring products that Mercer has already established in the eastern United States. - 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. In addition, the Company intends to capitalize on the strong brand name established by Mercer in the flooring business with Mercer's unique Uni-Color-Registered Trademark- color matching system. 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. 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 initiative includes 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, such as the Mercer Acquisition, 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. 67 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 the Prior Recapitalization pursuant to which the Company was recapitalized by means of a merger and JFLEI and its affiliates became the owners of approximately 65% of the common equity of the Company, without giving effect to shares issuable upon conversion of Convertible Preferred Stock and the exercise of certain options issued to management of the Company. See "The Prior Recapitalization." 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 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. In addition, on March 5, 1998, the Company entered into a Stock Purchase Agreement with Sovereign pursuant to which the Company agreed to acquire from Sovereign all of the outstanding capital stock of Mercer for an aggregate of $35,750,000, subject to working capital and other adjustments. Through the Mercer acquisition, the Company will add significant depth to its already strong product and distribution lines and product development capabilities. In particular, management believes that Mercer's highly successful vinyl wall base and moulding product lines and strong presence in the eastern United States will complement the Company's position as the dominant producer of rubber cove base and floor covering accessories in the western United States. 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. 68 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 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. 69 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. See "Risk Factors--Government Procurement Policies." 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. 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 70 continuation of what many industry analysts believe is a prolonged industry upturn. See "Risk Factors-- Importance of Key Customers to the Aerospace Products Business." 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. Burke is continuing the trend of extending its Flooring Products lines beyond rubber products through 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 wall base, transitional and finish mouldings, 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 wall base and moulding products markets and has a particularly strong sales presence in the eastern United States. The Mercer Acquisition will result in many synergies including strengthening the Company's presence in the eastern United States in both the rubber and vinyl flooring products markets, as well as providing for economies of scale and shared resources. The integration of Burke's newly acquired vinyl cove base products from Kentile and Mercer significantly enhances Burke's national market position in flooring accessories given vinyl's broad appeal in 71 geographic regions where rubber products have traditionally been less popular. See "Acquisition of Mercer." 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, and the Mercer Acquisition further complements Burke's Flooring Products line and geographic distribution. 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 creates 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. The Mercer Acquisition adds significant depth to Burke's already strong product lines. With over thirty years of extrusion experience, Mercer has developed a strong brand name in the flooring business. Among other things, Mercer has been a pioneer in the market for flooring profiles with its unique Uni-Color color matching system. In addition, Mercer possesses a unique coextrusion process which lowers manufacturing costs while maintaining a high level of quality in its products. In total, Mercer manufactures and sells approximately 116 products including: - STANDARD VINYL: Standard wall bases and corners extruded in vinyl. - MOULDINGS: Used on floors for transition between carpets, wood and cement. - RUBBER BASE: Low gloss and rubber-like base products which are similar to vinyl and rubber base products. 72 - STAIR TREADS AND NOSINGS: Stair treads, various edgings and non-slip surfaces. - MIRROR FINISH: High-gloss finish products which are sold principally to large retail outlets. - MARINE/OTHER: Marine bumpers, waterstop products, complementary adhesive products. MARKETS AND CUSTOMERS Prior to the Mercer Acquisition, Burke's Flooring Products have been 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. 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 Products sales in 1997. 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 combined with Burke's acquisition of Mercer, with its already established vinyl base products lines and significant market share in the eastern United States, are expected to create significant opportunities beyond Burke's traditional product line and geographic territories. Mercer's customers are wholesale, full-line, and supply flooring distributors and select national and export accounts. Mercer's customer base includes 255 distributors nationwide, the top ten of which enjoy long-standing relationships with Mercer. Geographically, Mercer's sales are distributed throughout the United States with approximately 67% in the eastern and central United States and approximately 15% internationally in 1997. Mercer's sales were $24.9 million in 1997. 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. The Mercer Acquisition increases Burke's competitive advantage by adding several new vinyl-based product lines that have significant brand awareness and customer loyalty in the eastern United States. Both Burke's and Mercer'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 by capitalizing on Mercer's already strong presence in the eastern United States in the vinyl wall base and moulding products markets. The continued development of the Company's own vinyl product line, in combination with the Mercer Acquisition, 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 Burke adds new distributors who have established long-standing relationships with Mercer in the eastern United States and as new distributors in the western United States 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. 73 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, and its acquisition of Mercer, 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 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. 74 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. 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. 75 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. Burke's acquisition of Mercer's already established 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. Mercer has 16 direct sales representatives and its customer base includes 255 distributors nationwide. 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. 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 76 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. 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 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. Complementing Burke's manufacturing and distribution facilities in the western United States are Mercer's counterparts in the eastern United States. Eustis, Florida serves as the corporate headquarters and manufacturing facility for Mercer's business. In addition, Mercer leases and operates large distribution centers in Rancho Cucamonga, California and South Kearny, New Jersey. 77 As of February 28, 1998, Mercer's manufacturing and distribution facilities were as follows:
SQUARE LOCATION FOOTAGE OWNERSHIP FUNCTION - ------------------------------ --------- ----------- -------------------------------------- Eustis, FL.................... 96,500 Owned Manufacturing, Engineering, Distribution, Headquarter Offices Rancho Cucamonga, CA.......... 22,000 Leased Warehouse, Distribution South Kearny, NJ.............. 25,000 Leased Warehouse, Distribution
The Company believes that Burke's and Mercer's facilities are in good condition and that the facilities, together with anticipated capital improvements and additions, are adequate for the Company's operating needs for the foreseeable future. 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. EMPLOYEES BURKE. 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. MERCER. Mercer employed at December 31, 1997, 125 employees at its three locations, including 103 involved in manufacturing and manufacturing support and 16 involved in product sales. Employees at Mercer's three locations receive comparable insurance and benefit programs. 78 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 and Mercer's intellectual property rights is as follows: BURKE PATENTS
PATENT NO. TITLE GATT EXPIRY - ---------- ------------------------------------------------------------------- ------------ 4,608,792 Roof membrane holdown system....................................... 11/12/08 4,603,790 Tensioned reservoir cover, rainwater run-off enhancement system.... 3/11/05
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
MERCER TRADEMARKS
MARK EXPIRATION - ---------------------------------------------------------------------------------- ----------- DOCKSIDERS & DESIGN............................................................... 11/26/05 MAXXI-TREAD....................................................................... 8/20/05 MERCER FRICTION GRIP.............................................................. 12/03/08 MERCER & DESIGN................................................................... 12/14/03 MERCER............................................................................ 8/30/04 MIRROR-FINISH..................................................................... 7/20/03 RUBBERLYTE........................................................................ 2/14/09 RUBBERMYTE........................................................................ 7/23/01 UNICOLOR.......................................................................... 4/05/04
ENVIRONMENTAL LIABILITY The Company and Mercer are 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 Prior Recapitalization, JFLEI conducted certain investigations (including, in some cases, reviewing environmental reports prepared by others) of the Company's operations and its compliance with 79 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 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 Prior Recapitalization. See "The Prior 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. In connection with the Mercer Acquisition, the Company conducted an environmental review of Mercer's operations and its compliance with applicable environmental laws. The review included a site visit to Mercer's manufacturing facility in Eustis, Florida and interviews with facility personnel regarding environmental matters. In addition, the Company reviewed existing environmental reports that included Phase I assessments, audits and limited soil and ground water sampling data. The environmental review revealed that Mercer's facilities have had, or may have had, releases of hazardous substances that may require remediation. Pursuant to the Stock Purchase Agreement, the former shareholders of Mercer have agreed to indemnify the Company against certain environmental liabilities incurred prior to the purchase provided the Company makes a written claim for indemnification against the former shareholders of Mercer prior to the 90th day after receipt by the Company of audited financial statements of Mercer for the fiscal year ending December 31, 1999, but in no event later than June 30, 2000, and subject to a maximum cap on liability of $5,000,000 or the adjusted purchase price for Mercer. Based, in part, on the environmental review conducted by the Company and the indemnification provisions of the Stock Purchase Agreement 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. 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. A lawsuit has been 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 such shareholder's shares prior to the Prior Recapitalization. The Company believes that such claims are without merit and intends to vigorously defend such action. ACQUISITION OF MERCER On April 21, 1998, the Company acquired all of the outstanding capital stock of Mercer from Sovereign pursuant to a Stock Purchase Agreement among the Company, Sovereign and Mercer, dated March 5, 1998, for an aggregate consideration of $35,750,000, subject to working capital and other adjustments. Through the Mercer Acquisition, the Company will significantly enhance its already strong product and distribution lines and product development capabilities. In particular, management believes that Mercer's highly successful vinyl cove base and moulding product lines, and strong presence in the 80 eastern United States, will complement the Company's position as the dominant producer of rubber cove base and floor covering accessories in the western United States. Management also believes that the Mercer Acquisition will serve as an excellent platform from which to pursue complementary acquisitions in the highly fragmented market niches in which the Company currently competes. Mercer manufactures its products in a 96,500 square foot manufacturing facility located in Eustis, Florida. With over thirty years of extrusion experience, Mercer has developed a strong brand name in the flooring business. Among other things, Mercer has been a pioneer in the market for flooring profiles with its unique Uni-Color-Registered Trademark- color matching system. In addition, Mercer possesses a unique coextrusion process which lowers manufacturing costs while maintaining a high level of quality in its products. In total, Mercer manufactures and sells approximately 116 products including: - STANDARD VINYL: Standard wall bases and corners extruded in vinyl. - MOULDINGS: Used on floors for transition between carpets, wood and cement. - RUBBER BASE: Low gloss and rubber-like base products which are similar to vinyl and rubber base products. - STAIR TREADS AND NOSINGS: Stair treads, various edgings and non-slip surfaces. - MIRROR FINISH: High-gloss finish products which are sold principally to large retail outlets. - MARINE/OTHER: Marine bumpers, waterstop products, complementary adhesive products. Mercer leases and operates a 22,000 square foot distribution center in Rancho Cucamonga, California, and a 25,000 square foot distribution center in South Kearny, New Jersey. Mercer's customers are wholesale, full-line, and supply flooring distributors and select national and export accounts. Mercer's customer base includes 255 distributors nationwide, the top ten of which enjoy long-standing relationships with Mercer. Geographically, sales are distributed throughout the United States with approximately 67% in the eastern and central United States and approximately 15% internationally in 1997. The Stock Purchase Agreement 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. CONSENT SOLICITATION In connection with the Prior Offering, pursuant to the Consent Solicitation, the Company solicited the Consents of holders of its Existing Notes to the Amendments to the Existing Indenture which, among other things, (i) permitted the issuance of the Senior Notes and permit the incurrence of indebtedness represented by the Senior Notes, (ii) increased certain of the permitted indebtedness and permitted investment baskets contained in the indebtedness and restricted payment covenants in the Existing Indenture, (iii) modified the lien covenant to enhance the Company's ability to use assets as collateral for new financings and (iv) made certain other amendments of a non-substantive nature to the Existing Indenture. Pursuant to the Consent Solicitation, the Company made certain payments to holders thereof who properly furnished their Consents to the Amendments. 81 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The following table sets forth the name, age and position of each person who is a director or executive officer of the Company. 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................. 67 Chairman of the Board Oliver C. Boileau, Jr......... 71 Director Donald Glickman............... 65 Director Bruce D. Gorchow.............. 40 Director John F. Lehman................ 55 Director Keith Oster................... 36 Director, Secretary 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 largest producer of garden bedding flowers. For five years prior to joining Color Spot, Inc., Mr. Carnes held senior 82 sales and marketing positions with Levelor 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. Mr. Sawyer is also a director of Elgar Holdings, Inc. and Blacklight Power Inc. OLIVER C. BOILEAU, JR. became a director of the Company upon consummation of the Prior 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, who became a director of the Company upon consummation of the Prior Recapitalization, 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. Mr. Glickman is also chairman of the board of directors of Elgar Holdings, Inc. BRUCE D. GORCHOW, who became a director of the Company upon consummation of the Prior Recapitalization, is a member of the investment advisory board of Lehman. Since 1991, Mr. Gorchow has 83 been Executive Vice President and head of the Private Finance Group of PPM America, Inc. Mr. Gorchow is also a Director of Global Imaging Systems, Inc., Leiner Health Products, Inc., Tomah Products, Inc., Elgar Holdings, 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, who became a director of the Company upon consummation of the Prior Recapitalization, 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, Elgar Holdings, Inc. 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, Secretary of the Company, also became a director of the Company upon consummation of the Prior Recapitalization, 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. Mr. Oster is also a director of Elgar Holdings, Inc. THOMAS G. POWNALL, who became a director of the Company upon consummation of the Prior Recapitalization, 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, who became a director of the Company in February 1998, 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. Mr. Stroud is also a director of Elgar Holdings, Inc. 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. See "Description of Capital Stock--Preferred Stock-- Redeemable Preferred Stock--Voting Rights." 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. 84 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:
SECURITIES ANNUAL COMPENSATION(1) UNDERLYING -------------------------------------- OPTIONS OTHER LONG-TERM NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY ($) BONUS ($)(2) ($)(3) COMPENSATION - ----------------------------------------------- ------------- ----------- ------------ ----------- ------------- Rocco C. Genovese ............................. 1997 196,925 317,500 5,579,314 150,000 President and Chief Executive Officer 1996 180,050 150,000 -- 336,000 1995 189,614 120,000 -- 0 Reed C. Wolthausen ............................ 1997 148,800 237,000 3,201,004 100,000 Senior Vice President and General 1996 141,378 100,000 -- 224,000 Manager--Silicone Products 1995 133,664 60,000 -- 0 Robert F. Pitman .............................. 1997 103,808 77,500 584,815 7,500 Vice President and Technical Director--San 1996 90,750 27,500 -- 0 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 Products 1996 89,342 25,000 -- 0 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 Prior Recapitalization. 85 The following table summarizes options granted in 1997 to the Named Executive Officers. OPTIONS GRANTED IN 1997
PERCENTAGE OF SHARES TOTAL OPTIONS EXERCISE UNDERLYING GRANTED TO PRICE PER NAME OPTIONS EMPLOYEES SHARE EXPIRATION DATE - ----------------------------------------------------------- ----------- --------------- ----------- --------------- INDIVIDUAL GRANTS(1) Rocco C. Genovese.......................................... 150,000 40.5% $ 6.50 12/19/2007 Reed C. Wolthausen......................................... 100,000 27.0% $ 6.50 12/19/2007 David E. Worthington....................................... 10,000 2.7% $ 6.50 12/19/2007 Robert F. Pitman........................................... 7,500 2.0% $ 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 Prior Recapitalization were canceled and converted into the right to receive approximately $9.33 per share (the "Recapitalization Consideration") less the applicable exercise price. 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 Prior 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. 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. 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 86 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. 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 February 28, 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 OF PERCENTAGE OF NAME OF INDIVIDUAL OR ENTITY(1) SHARES(2) SHARES 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% (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 warrants. The calculations do not include shares issuable upon conversion of Convertible Preferred Stock or upon exercise of certain options granted to management of the Company that are not exercisable within 60 days after consummation of the Transactions. (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 87 (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 the Warrants. See "The Prior Recapitalization" and "Description of Capital Stock--Warrants." CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS MANAGEMENT AGREEMENT Pursuant to the terms of the Management Agreement (the "Management Agreement") entered into between Lehman and the Company, (i) upon consummation of the Prior Recapitalization, the Company paid Lehman fees in the amount of $1.5 million, (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 on October 1, 1998 and be payable in arrears on a quarterly basis commencing on January 1, 1999 and (iii) upon consummation of the Prior Offering, the Company paid Lehman a transaction fee in the amount of $500,000. SHAREHOLDERS AGREEMENT In connection with the Prior 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 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. 88 "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. 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- 89 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. MANAGEMENT PARTICIPATION IN THE PRIOR RECAPITALIZATION The executive officers and directors of the Company received a total of approximately $12.8 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 "Management--Executive Compensation" and "Security Ownership of Certain Beneficial Owners and Management." 90 DESCRIPTION OF NOTES Except as otherwise indicated below, the following summary applies to both the Old Notes and the New Notes. As used herein, the term "Noes" shall mean the Old Notes and the New Notes, unless otherwise indicated. The form and terms of the New Notes are substantially identical to the form and terms of the Old Notes, except that the New Notes (i) will be registered under the Securities Act, (ii) will not provide for payment of penalty interest as Liquidated Damages, which terminate upon consummation of the Exchange Offer and (iii) will not bear any legends restricting transfer thereof. The New Notes will be issued solely in exchange for an equal principal amount of Old Notes. As of the date hereof, $30.0 million aggregate principal amount of Old Notes is outstanding. See "The Exchange Offer." GENERAL The Old Notes were issued and the New Notes offered hereby will be issued under an indenture dated as of April 21, 1998 (the "Indenture") among the Company, as issuer, the Subsidiary Guarantors referred to below and United States Trust Company of New York, trustee (the "Trustee"), a copy of which will be made available to prospective purchasers of the Notes upon request. The terms of the Notes include those stated in the Indenture and those made a part of the Indenture by reference to the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"). The Notes are subject to all such terms, and Holders of Notes are referred to the Indenture and the Trust Indenture Act for a statement thereof. The following summary of the material provisions of the Indenture is materially complete but is qualified in its entirety by, reference to the provisions of the Indenture, including the definitions of certain terms contained therein and those terms made part of the Indenture by reference to the Trust Indenture Act. As used in this Section, the term "Fixed Rate Notes" refers to the Company's Existing Notes. For definitions of certain other capitalized terms used in the following summary, see "--Certain Definitions" below. PRINCIPAL, MATURITY AND INTEREST The Notes will mature on August 15, 2007, will initially be limited to $30 million aggregate principal amount and will be senior unsecured obligations of the Company. The Indenture provides for the issuance of up to $20 million aggregate principal amount of additional Notes having identical terms and conditions to the Senior Notes offered hereby (the "Additional Notes"), subject to compliance with the covenants contained in the Indenture. Any Additional Notes will be part of the same issue as the New Notes offered hereby and will vote on all matters with the New Notes offered hereby. For purposes of this "Description of Notes," reference to the Notes does not include Additional Notes. The Notes will bear interest at a rate per annum, reset semi-annually, equal to LIBOR (as defined) plus 400 basis points, as determined by the Calculation Agent (the "Calculation Agent"), which shall initially be the Trustee. Interest will be payable semi-annually in arrears on February 15 and August 15 of each year, or if any such day is not a Business Day, on the next succeeding Business Day, commencing on August 15, 1998 (each, an "Interest Payment Date") to holders of record on the immediately preceding February 1 and August 1. "LIBOR," with respect to an Interest Period, will be the rate (expressed as a percentage per annum) for deposits in United States dollars for a six-month period beginning on the second London Banking Day (as defined) after the Interest Determination Date (as defined) that appears on Telerate Page 3750 (as defined) as of 11:00 a.m., London time, on the Interest Rate Determination Date. If Telerate Page 3750 does not include such a rate or is unavailable on an Interest Rate Determination Date, LIBOR for the Interest Period shall be the arithmetic mean of the rates (expressed as a percentage per annum) for deposits in a Representative Amount (as defined) in United States dollars for a six-month period beginning on the second London Banking Day after the Interest Rate Determination Date that appears on Reuters Screen LIBO Page (as defined) as of 11:00 a.m., London time, on the Interest Rate Determination 91 Date. If Reuters Screen LIBO Page does not include two or more rates or is unavailable on an Interest Rate Determination Date, the Calculation Agent will request the principal London office of each of four major banks in the London interbank market, as selected by the Calculation Agent, to provide such bank's offered quotation (expressed as a percentage per annum), as of approximately 11:00 a.m., London time, on such Interest Rate Determination Date, to prime banks in the London interbank market for deposits in a Representative Amount in United States dollars for a six-month period beginning on the second London Banking Day after the Interest Rate Determination Date. If at least two such offered quotations are so provided, LIBOR for the Interest Period will be the arithmetic mean of such quotations. If fewer than two such quotations are so provided, the Calculation Agent will request each of three major banks in New York City, as selected by the Calculation Agent, to provide such bank's rate (expressed as a percentage per annum), as of approximately 11:00 a.m., New York City time, on such Interest Rate Determination Date, for loans in a Representative Amount in United States dollars to leading European banks for a six-month period beginning on the second London Banking Day after the Interest Rate Determination Date. If at least two such rates are so provided, LIBOR for the Interest Period will be the arithmetic mean of such rates. If fewer than two such rates are so provided, then LIBOR for the Interest Period will be LIBOR in effect with respect to the immediately preceding Interest Period. "Interest Period" means the period from and including a scheduled Interest Payment Date through the day next preceding the following scheduled Interest Payment Date, with the exception that the first Interest Period shall commence on and include April 21, 1998 and end on and include August 14, 1998. "Interest Rate Determination Date" means, with respect to each Interest Period, the second London Banking Day prior to the first day of such Interest Period. "London Banking Day" is any day in which dealings in United States dollars are transacted or, with respect to any future date, are expected to be transacted in the London interbank market. "Representative Amount" means a principal amount of not less than U.S. $1,000,000 for a single transaction in the relevant market at the relevant time. "Reuters Screen LIBO Page" means the display designated as page "LIBO" on the Reuter Monitor Money Rates Service (or such other page as may replace the LIBO page on that service for the purpose of displaying London Interbank Offered Rates of leading banks). "Telerate Page 3750" means the display designated as "Page 3750" on the Dow Jones Telerate Service (or such other page as may replace Page 3750 on that service for the purpose of displaying London Interbank Offered Rates of leading banks) or any successor service. The amount of interest for each day that the Notes are outstanding (the "Daily Interest Amount") will be calculated by dividing the interest rate in effect for such day by 360 and multiplying the result by the principal amount of the Notes outstanding. The amount of interest to be paid on the Notes for each Interest Period will be calculated by adding the Daily Interest Amounts for each day in the Interest Period. All percentages resulting from the above calculations will be rounded, if necessary, to the nearest one-hundred-thousandth of a percentage point, with five one-millionths of a percentage point being rounded upwards (e.g., 9.876545% (or 0.09876545) being rounded to 9.87655% (or 0.0987655)) and all dollar amounts used in or resulting from the calculations will be rounded to the nearest cent (with one-half cent being rounded upwards). The interest rate on the Notes will in no event be higher than the maximum rate permitted by New York law as the same may be modified by United States law of general application. Under current New York law, the maximum rate of interest is 25% per annum on a simple interest basis. This limit may not apply to Notes in which $2,500,000 or more has been invested. The Calculation Agent will, upon request of the holder of any Note, provide the interest rate then in effect with respect to the Notes. All calculations made by the Calculation Agent in the absence of manifest 92 error will be conclusive for all purposes and binding on the Company, the Subsidiary Guarantors and the holders of the Notes. The principal of and premium, if any, and interest on the Notes will be payable, and the Notes will be exchangeable and transferable, at the office or agency of the Company in The City of New York maintained for such purposes (which initially will be the office of the Trustee located at 114 W. 47th Street, New York, N.Y., 10036-1532) 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 appears in the security register; PROVIDED that all payments with respect to Global Notes and Certificated Notes (as such terms are defined below under the caption "--Book Entry, Delivery and Form") 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. The Notes will be issued only in registered form without coupons and only in denominations of $1,000 and any integral multiple thereof. No service charge will 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 therewith. Old 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 the Indenture. The Notes will not be entitled to the benefit of any sinking fund. NOTE GUARANTEES Payment of the principal of (and premium, if any) and interest on the Notes, when and as the same become due and payable, will be guaranteed, jointly and severally, on a senior unsecured basis (the "Note Guarantees") by the Subsidiary Guarantors referred to below. The obligations of the Subsidiary Guarantors under the Note Guarantees will be limited so as not to constitute a fraudulent conveyance under applicable law. See "Risk Factors--Fraudulent Conveyance and Preference Considerations." The Company's Restricted Subsidiaries will be Subsidiary Guarantors and will consist of Burke Rubber Company, Inc., Burke Flooring Products, Inc., Burke Custom Processing, Inc. and Mercer. However, under certain circumstances, the Company will be able to designate current or future Subsidiaries as Unrestricted Subsidiaries. Unrestricted Subsidiaries will not be subject to the restrictive covenants set forth in the Indenture. The Indenture will require that each Restricted Subsidiary organized within the United States and certain other Restricted Subsidiaries issue a Note Guarantee. See "Certain Covenants-- Limitations on Guarantees of Indebtedness by Restricted Subsidiaries." The Indenture provides that, in the event of any sale, exchange or transfer (including by way of merger of such Restricted Subsidiary) 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 the Indenture), 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 the "Limitation on Certain Asset Sales" covenant to the extent required thereby. In addition, any Subsidiary Guarantor that is designated as an Unrestricted Subsidiary in accordance with the terms of the Indenture may be released and relieved of its obligations under its Note Guarantee. RANKING The Notes will be senior unsecured obligations of the Company and will rank PARI PASSU in right of payment with all other existing and future senior obligations of the Company, including the Fixed Rate Notes and indebtedness under the Bank Credit Agreement. Loans under the Bank Credit Agreement will be secured by substantially all of the Company's assets. Accordingly, while the Notes rank PARI PASSU in right of payment with the loans under the Bank Credit Agreement, the Notes will be effectively subordinated to the loans outstanding under the Bank Credit Agreement to the extent of the value of the assets securing such loans. Subject to certain limitations, the Company and its Restricted Subsidiaries may incur additional Indebtedness in the future. 93 Each Note Guarantee will be a senior unsecured obligation of the respective Subsidiary Guarantor, ranking PARI PASSU in right of payment with all existing and future senior obligations of such Subsidiary Guarantor. Loans under the Bank Credit Agreement are guaranteed by the Subsidiary Guarantors, which guarantees are secured by substantially all of the assets of the Subsidiary Guarantors. Accordingly, while a Note Guarantee will rank PARI PASSU in right of payment with such Subsidiary's guarantee under the Bank Credit Agreement, such Note Guarantee will be effectively subordinated to such Subsidiary's guarantee under the Bank Credit Agreement to the extent of the value of the assets securing such guarantee. REDEMPTION OPTIONAL REDEMPTION. The Notes will be redeemable at any time, at the option of the Company, in whole or in part, on not less than 30 nor more than 60 days' prior notice at 105.00% of the principal amount thereof, plus accrued and unpaid interest thereon to, but excluding the date of redemption, if redeemed prior to February 15, 1999 and at the redemption prices (expressed as percentages of principal amount) set forth below if redeemed during the twelve-month period beginning on February 15 of the years indicated below (subject to the right of holders of record on the relevant record date to receive interest due on an interest payment date):
REDEMPTION YEAR PRICE - --------------------------------------------------------------------------------- ----------- 1999............................................................................. 104.00% 2000............................................................................. 103.00 2001............................................................................. 102.00 2002............................................................................. 101.00 2003............................................................................. 100.00
and thereafter at 100% of the principal amount, together with accrued interest, if any, to the redemption date. If less than all the Notes are to be redeemed, the particular Notes to be redeemed will be selected not more than 60 days prior to the redemption date by the Trustee by such method as the Trustee deems fair and appropriate. PURCHASE OF NOTES UPON CHANGE OF CONTROL OR ASSET SALE. Each holder of the Notes will have certain rights to require the Company to purchase such holder's Notes upon the occurrence of a Change of Control. See "Certain Covenants--Purchase of Senior Notes upon Change of Control" below. Under certain circumstances, the Company will be required to make an offer to purchase all or a portion of the Notes with proceeds received from an Asset Sale. See "--Certain Covenants--Limitation on Certain Asset Sales" below. CERTAIN COVENANTS The Indenture contains, among others, the following covenants: LIMITATION ON INDEBTEDNESS AND ISSUANCE OF DISQUALIFIED STOCK. The Company will not, and will 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 2.0 to 1.0. In making the foregoing calculation for any four-quarter period that includes the Closing Date, pro forma effect will be given to the Mercer Transactions and Prior Recapitalization, as if such transactions had 94 occurred at the beginning of such four-quarter period. In addition (but without duplication), in making the foregoing calculation, pro forma effect will 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 will 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 will 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) $25 million or (y) the amount of the Borrowing Base, less any amounts applied to the permanent reduction of such credit facilities pursuant to the "--Limitation on Certain Asset Sales" covenant; (ii) Indebtedness of the Company or any Restricted Subsidiary outstanding on the Closing Date (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 Senior 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 Fixed Rate Notes (other than additional Fixed Rate Notes issued under the Fixed Rate Notes Indenture after August 20, 1998 ("Additional Fixed Rate Notes")) 95 and the Fixed Rate Note Guarantees (including any Fixed Rate Note Guarantees issued pursuant to Section 1021 of the Fixed Rate Note Indenture); (v) Indebtedness represented by the Notes (other than the Additional Notes) and the Note Guarantees (including any Note Guarantees issued pursuant to "--Limitation on Guarantees of Indebtedness by Restricted Subsidiaries"); (vi) Indebtedness of the Company or any Restricted Subsidiary under Hedging Obligations incurred in the ordinary course of business; (vii) 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; (viii) 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 (whether through the direct acquisition of such property or assets or indirectly through the acquisition of the Capital Stock of any Person owning such property or assets), 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 Indebtedness under clauses (A) and (B) does not exceed $10.0 million at any one time outstanding; (ix) 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 $15.0 million at any one time outstanding; (x) 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 (xi) 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), (vi), (vii), (viii), (ix) or (x) 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. 96 LIMITATION ON RESTRICTED PAYMENTS The Company will not, and will 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 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 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 the "Limitation on Indebtedness and Issuance of Disqualified Stock" covenant 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 October 1, 1997 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 (B) 100% of the aggregate net cash proceeds received by the Company after August 20, 1997 from (x) the issuance or sale (other than to a Restricted Subsidiary) of either (1) Qualified Equity Interests of the Company or (2) Indebtedness or Disqualified Stock (other than the Series A Preferred Stock and any refinancings thereof) 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. For purposes of this "--Limitation on Restricted Payments" covenant, the accrual of dividends on the Series C Preferred Stock shall not be treated as a Restricted Payment. Notwithstanding the foregoing, the Company and its Restricted Subsidiaries may take the following actions, so long as (other than with respect 97 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 (xi) 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 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; (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 August 20, 1997; 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 August 20, 1997), 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 will 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 covenant and the actions described in clauses (a), (d) and (f)(i) of this paragraph will be Restricted Payments that will 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 covenant. For the purpose of making any calculations under the Indenture (i) if a Restricted Subsidiary is designated an Unrestricted Subsidiary, the Company will be deemed to have made an Investment in an 98 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 will be conclusive, (ii) any property transferred to or from an Unrestricted Subsidiary will 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 will be conclusive and (iii) subject to the foregoing, the amount of any Restricted Payment, if other than cash, will be determined by the Board of Directors of the Company, whose good faith determination will 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 will 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 will 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 will 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 will 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. PURCHASE OF NOTES UPON A CHANGE OF CONTROL. If a Change of Control occurs at any time, then, each holder of Notes or Additional Notes will 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 and Liquidated Damages, if any, 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 the other procedures set forth in the Indenture. Within 30 days following any Change of Control, the Company will 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, among other things, (i) the purchase price and the purchase date, which will 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; (ii) that any Note or Additional Note not tendered will continue to accrue interest; (iii) 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 will cease to accrue interest after the Change of Control purchase date; and (iv) certain other procedures that a holder of 99 Notes or Additional Notes must follow to accept a Change of Control Offer or to withdraw such acceptance. If a Change of Control Offer is made, there can be no assurance that the Company will have available funds sufficient to pay the purchase price for all of the Notes and Additional Notes that might be tendered by holders of the Notes and Additional Notes seeking to accept the Change of Control Offer. The failure of the Company to make or consummate the Change of Control Offer or pay the applicable Change of Control purchase price when due would result in an Event of Default and would give the Trustee and the holders of the Notes and Additional Notes the rights described under "--Events of Default." One of the events that constitutes a Change of Control under the Indenture, subject to exceptions, is the disposition of "all or substantially all" of the Company's assets. This term has not been interpreted under New York law (which is the governing law of the Indenture) to represent a specific quantitative test. As a consequence, in the event holders of the Notes or Additional Notes elect to require the Company to purchase the Notes or Additional Notes and the Company elects to contest such election, there can be no assurance as to how a court interpreting New York law would interpret the phrase in many circumstances. The existence of a holder's right to require the Company to purchase such holder's Notes or Additional Notes upon a Change of Control may deter a third party from acquiring the Company in a transaction that constitutes a Change of Control. The definition of "Change of Control" in the Indenture is limited in scope. The provisions of the Indenture may not afford holders of Notes or Additional Notes the right to require the Company to repurchase such Notes or Additional Notes in the event of a highly leveraged transaction or certain transactions with the Company's management or its affiliates, including a reorganization, restructuring, merger or similar transaction involving the Company (including, in certain circumstances, an acquisition of the Company by management or its affiliates) that may adversely affect holders of the Notes or Additional Notes, if such transaction is not a transaction defined as a Change of Control. See "--Certain Definitions" below for the definition of "Change of Control." A transaction involving the Company's management or its affiliates, or a transaction involving a recapitalization of the Company, would result in a Change of Control if it is the type of transaction specified in such definition. The Company will 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 covenant, the Company will comply with such securities laws and regulations and will not be deemed to have breached its obligations under this covenant by virtue thereof. The Company's Bank Credit Agreement contains prohibitions of certain events that would constitute a Change of Control and provides that such events constitute events of defaults thereunder. LIMITATION ON CERTAIN ASSET SALES. (a) The Company will not, and will 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 will 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 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). 100 (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 will 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 will, within 30 days thereafter, make an offer to purchase from all holders of Notes and Additional Notes, PRO RATA in proportion to the respective amounts outstanding of the Notes and Fixed Rate Notes, in accordance with the procedures set forth in the Indenture, the maximum principal amount (expressed as a multiple of $1,000) of Notes and Additional Notes that may be purchased out of 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 will be selected on a pro rata basis. Upon completion of such offer to purchase, the amount of Excess Proceeds will be reset to zero. (d) The Company will 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 covenant, the Company will comply with such securities laws and regulations and will not be deemed to have breached its obligations under this covenant by virtue thereof. LIMITATION ON TRANSACTIONS WITH AFFILIATES. The Company will not, and will 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 will not restrict 101 (a) transactions among the Company and/or its Restricted Subsidiaries; (b) transactions (including Permitted Investments) permitted by the provisions of the "--Limitations on Restricted Payments" covenant; (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; (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 Prior Recapitalization and the Mercer Transactions; 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 a schedule thereto 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. LIMITATION ON DIVIDENDS AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED SUBSIDIARIES. The Company will not, and will 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 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 102 imposed by such amendments, modifications, restatements, renewals, increases, supplements, refundings, 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. LIMITATION ON ISSUANCES AND SALES OF PREFERRED STOCK OF RESTRICTED SUBSIDIARIES. The Company will not permit any Restricted Subsidiary to issue any Preferred Stock. PAYMENTS FOR CONSENT. The Indenture will provide that neither the Company nor any of its Restricted Subsidiaries will, directly or indirectly, pay or cause to be paid any consideration, whether by way of interest, fee or otherwise, to any Holder of any Senior Notes for or as an inducement to any consent, waiver or amendment of any of the terms or provisions of the Indenture or the Senior Notes unless such consideration is offered to be paid or is paid to all Holders of the Senior 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. LIMITATION ON GUARANTEES OF INDEBTEDNESS BY RESTRICTED SUBSIDIARIES. The Company will 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 Senior 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 Senior Notes at least to the same extent as such Subordinated Indebtedness is subordinated to the Senior Notes. Any Note Guarantee by a Restricted Subsidiary of the Notes pursuant to the preceding paragraph will provide by its terms that it will be automatically and unconditionally released and discharged upon (i) 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 the Indenture), (ii) the release or discharge of the guarantee that resulted in the creation of such guarantee of the Notes, except a discharge or release by or as a result of payment under such guarantee or (iii) the designation of such Restricted Subsidiary as an Unrestricted Subsidiary in accordance with the terms of the Indenture. ISSUANCES OF GUARANTEES BY CERTAIN NEW RESTRICTED SUBSIDIARIES. The Company will 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. LINE OF BUSINESS. The Company will not and will 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). 103 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 the "Limitation on Restricted Payments" covenant, (iv) neither the Company nor any Restricted Subsidiary has a contract, agreement, arrangement, understanding or obligation of any kind, whether written or oral, 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 the "--Limitation on Indebtedness and Issuance of Disqualified Stock" covenant (treating any Debt of such Unrestricted Subsidiary as the incurrence of Debt by a Restricted Subsidiary). LIMITATION ON LIENS. The Company will not, and will 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 Senior 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 Senior 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 aggregate principal amount of the outstanding Indebtedness permitted by clauses (i) and (ix) 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 (a) Notes, any Additional Notes or any Note Guarantee or (b) any Fixed Rate Notes, any Additional Fixed Rate Notes or any Fixed Rate Note Guarantees, provided the Notes or any related Note Guarantee and the Fixed Rate Notes and any Fixed Rate Note Guarantees are secured equally and ratably with the obligation or liability secured by such Lien; (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 the "--Limitation on Indebtedness and Issuance of Disqualified Stock" covenant; 104 (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 (vi) of the definition of "Permitted Indebtedness"; (viii) Liens securing Indebtedness permitted to be incurred under paragraph (viii) of the definition of "Permitted Indebtedness" in the covenant described under the caption "--Limitation on Indebtedness and Issuance of Disqualified Stock"; (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; (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; 105 (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. 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 will 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 will also be required (a) to 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 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. CONSOLIDATION, MERGER AND SALE OF ASSETS 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 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 Senior 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; 106 (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 the "--Limitation on Indebtedness and Issuance of Disqualified Stock" covenant; (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 Senior 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 the "Limitation on Liens" covenant 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 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 the Indenture. The Indenture will provide that 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 substantially as an entity to any other person (other than the Company or another Subsidiary Guarantor) unless: (a) such Subsidiary Guarantor is released from its Note Guarantees pursuant to the terms of the Indenture (see "Note Guarantees" above) or (b)(i) subject to the provisions of the following paragraph, 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. 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. In the event of any transaction described in and complying with the conditions listed in the first paragraph of this covenant 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. 107 EVENTS OF DEFAULT The following will be "Events of Default" under the Indenture: (a) 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; (b) default in the payment of the principal of (or premium, if any, on) any Note when due; (c) failure to perform or comply with the Indenture provisions described under the captions "--Consolidation, Merger and Sale of Assets," "--Covenants--Limitation on Indebtedness and Issuance of Disqualified Stock" and "--Limitation on Restricted Payments" 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; (d) 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 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; (e) (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 million ("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; (f) 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 million, which judgment or judgments are not paid, discharged or stayed for a period of 60 days; (g) 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); or (h) the occurrence of certain events of bankruptcy, insolvency or reorganization with respect to the Company or any Significant Subsidiary. If an Event of Default (other than as specified in clause (h) 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 clause (h) 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 have become due otherwise than by such declaration of acceleration and 108 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. 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. 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. If a Default or an Event of Default occurs and is continuing and is known to the Trustee, the Trustee will 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. The Company is required to furnish to the Trustee annual statements as to the performance by the Company and the Subsidiary Guarantors of their obligations under the Indenture and as to any default in such performance. The Company is also required to notify the Trustee within five days of any Default. DEFEASANCE OR COVENANT DEFEASANCE OF INDENTURE The Company may, at its option and at any time, terminate the obligations of the Company and the Subsidiary Guarantor with respect to the outstanding Notes, the Note Guarantees and the Indenture ("defeasance"). Such defeasance means that the Company will be deemed to have paid and discharged the entire Indebtedness represented by the outstanding Notes, except for (i) 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, (ii) 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, (iii) the rights, powers, trusts, duties and immunities of the Trustee and (iv) the defeasance provisions of the Indenture. In addition, the Company may, at its option and at any time, elect to terminate the obligations of the Company and any Subsidiary Guarantor with respect to certain covenants set forth in the Indenture, including those described under "--Certain Covenants" above, and any omission to comply with such obligations would not constitute a Default or an Event of Default with respect to the Notes ("covenant defeasance"). In order to exercise either defeasance or covenant defeasance, (a) 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 109 Obligations (as defined in the Indenture) that through the scheduled payment of principal and interest thereon will 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; (b) 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 clause (h) of "--Events of Default" above is concerned, at any time during the period ending on the 91st day after the date of such deposit; (c) such defeasance or covenant defeasance may not result in a breach or violation of, or constitute a default under, the Indenture or any material agreement or instrument to which the Company or any Subsidiary Guarantor is a party or by which it is bound; (d) 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; (e) in the case of covenant defeasance, the Company must have delivered to the Trustee an opinion of counsel to the effect that the Holders of the Notes outstanding will not recognize income, gain or loss for federal income tax purposes as a result of such covenant 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 covenant defeasance had not occurred; and (f) 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. SATISFACTION AND DISCHARGE 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 in the Indenture) 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 destroyed, lost or stolen Notes that have been replaced or paid and Notes that have been subject to defeasance under "--Defeasance or Covenant Defeasance of Indenture") 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 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 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. AMENDMENTS AND WAIVERS Modifications and amendments of the Indenture, the Notes and any Note Guarantee may be made by the Company, any affected Subsidiary Guarantor and the Trustee with the consent of the holders of a majority in aggregate outstanding principal amount of the Notes (including, without limitation, consents obtained in connection with a purchase of, or tender offer or exchange offer for, Notes); provided, 110 however, that no such modification or amendment 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. The holders of a majority in aggregate principal amount of the Notes outstanding may waive compliance with certain restrictive covenants and provisions of the Indenture. Without the consent of any holders, the Company and the Trustee, at any time and from time to time, may enter into one or more indentures supplemental to the Indenture for any of the following purposes: (1) 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 Senior Notes; or (2) 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 any Subsidiary Guarantor; or (3) to add additional Events of Defaults; or (4) to provide for uncertificated Notes in addition to or in place of the Certificated Notes; or (5) to evidence and provide for the acceptance of appointment under the Indenture by a successor Trustee; or (6) to secure the Senior Notes or any Note Guarantee; or (7) 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 (8) 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 (9) 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). THE TRUSTEE United States Trust Company of New York, the Trustee under the Indenture, will be the initial paying agent and registrar for the Notes. The Indenture provides that, except during the continuance of an Event of Default, the Trustee will perform only such duties as are specifically set forth in the Indenture. Under the Indenture, the holders of a majority in outstanding principal amount of the Notes will have the right to direct the time, method and place of conducting any proceeding for exercising any remedy available to the Trustee, subject to certain exceptions. If an Event of Default has occurred and is continuing, the Trustee will 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. The Indenture and provisions of the Trust Indenture Act incorporated by reference therein, contain limitations on the rights of the Trustee thereunder, should it become a creditor of the Company, to obtain payment of claims in certain cases or to realize on certain property received by it in respect of any such 111 claims, as security or otherwise. The Trustee is permitted to engage in other transactions; PROVIDED, HOWEVER, that, if it acquires any conflicting interest (as defined), it must eliminate such conflict upon the occurrence of an Event of Default or else resign. GOVERNING LAW The Indenture and the Notes will be governed by, and construed in accordance with, the laws of the State of New York. ADDITIONAL INFORMATION Anyone who receives this Prospectus may obtain a copy of the Indenture by writing to Burke Industries, Inc., 2250 South Tenth Street, San Jose, CA 95112, Attention: Chief Financial Officer. BOOK-ENTRY, DELIVERY AND FORM Except as set forth in the next succeeding paragraph, the Notes to be resold as set forth herein will initially be issued in the form of one global note ("the Global Note"). The Global Note will be deposited on the Closing Date with, or on behalf of, The Depository Trust Company (the "Depositary") and registered in the name of Cede & Co., as nominee of the Depositary (such nominee being referred to herein as the "Global Note Holder"). Notes that were (i) originally issued to, or transferred to, institutional "accredited investors" who are not "Qualified Institutional Buyers" (as such terms are defined under "Notices to Investors" elsewhere herein (the "Non-Global Purchasers"), or (ii) issued as described below under "Certificated Notes" will be issued in registered, definitive, certificated form (the "Certificated Notes"). Upon the transfer to a Qualified Institutional Buyer of Certificated Notes initially issued to a Non-Global Purchaser, such Certificated Notes may, unless the Global Note has previously been exchanged in whole for Certificated Notes, be exchanged for an interest in the Global Note representing the principal amount of the Senior Notes being transferred. The Depositary is a limited-purpose trust company that was created to hold securities for its participating organizations (collectively, the "Participants" or the "Depositary's Participants") and to facilitate the clearance and settlement of transactions in such securities between Participants through electronic book-entry changes in accounts of its Participants. The Depositary's Participants include securities brokers and dealers (including the Initial Purchasers), banks and trust companies, clearing corporations and certain other organizations. Access to the Depositary's system is also available to other entities such as banks, brokers, dealers and trust companies (collectively, the "Indirect Participants" or the "Depositary's Indirect Participants") that clear through or maintain a custodial relationship with a Participant, either directly or indirectly. Persons who are not Participants may beneficially own securities held by or on behalf of the Depositary only through the Depositary's Participants or the Depositary's Indirect Participants. The Company expects that pursuant to procedures established by the Depositary (i) upon deposit of the Global Note, the Depositary will credit the accounts of Participants designated by the Initial Purchasers with portions of the principal amount of the Global Note and (ii) ownership of the Notes evidenced by the Global Note will be shown on, and the transfer of ownership thereof will be effected only through, records maintained by the Depositary (with respect to the interests of the Depositary's Participants), the Depositary's Participants and the Depositary's Indirect Participants. Prospective purchasers are advised that the laws of some states require that certain persons take physical delivery in definitive form of securities that they own. Consequently, the ability to own, transfer or pledge Notes evidenced by the Global Note will be limited to such extent. For certain other restrictions on the transferability of the Notes, see "Notice to Investors." 112 So long as the Global Note Holder is the registered owner of any Notes, the Global Note Holder will be considered the sole Holder under the Indenture of any Notes evidenced by the Global Note. Beneficial owners of Notes evidenced by the Global Note will not be considered the owners or Holders thereof under the Indenture for any purpose, including with respect to the giving of any directions, instructions or approvals to the Trustee thereunder. Neither the Company nor the Trustee will have any responsibility or liability for any aspect of the records of the Depositary or for maintaining, supervising or reviewing any records of the Depositary relating to the Notes. Payments in respect of the principal of, premium, if any, and interest on any Notes registered in the name of the Global Note Holder on the applicable record date will be payable by the Trustee to or at the direction of the Global Note Holder in its capacity as the registered Holder under the Indenture. Under the terms of the Indenture, the Company and the Trustee may treat the persons in whose names Notes, including the Global Note, are registered as the owners thereof for the purpose of receiving such payments. Consequently, neither the Company nor the Trustee has or will have any responsibility or liability for the payment of such amounts to beneficial owners of Notes. The Company believes, however, that it is currently the policy of the Depositary to immediately credit the accounts of the relevant Participants with such payments, in amounts proportionate to their respective holdings of beneficial interests in the relevant security as shown on the records of the Depositary. Payments by the Depositary's Participants and the Depositary's Indirect Participants to the beneficial owners of Notes will be governed by standing instructions and customary practice and will be the responsibility of the Depositary's Participants or the Depositary's Indirect Participants. Transfers between Participants in DTC will be effected in accordance with DTC rules and will be settled in immediately available funds. If a holder requires physical delivery of a Certificated Note for any reason, including to sell Notes to persons in states which require physical delivery of such securities or to pledge such securities, such holder must transfer its interest in the Global Note in accordance with the normal procedures of DTC and in accordance with the procedures set forth in the Indenture. CERTIFICATED NOTES Any beneficial owner of Notes evidenced by the Global Note may obtain Notes in the form of registered definitive Notes ("Certified New Notes"). 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. Neither the Company nor the Trustee will be liable for any delay by the Global Note Holder or the Depositary in identifying the beneficial owners of Senior Notes and the Company and the Trustee may conclusively rely on, and will be protected in relying on, instructions from the Global Note Holder or the Depositary for all purposes. 113 SAME-DAY SETTLEMENT AND PAYMENT The Indenture requires that payments in respect of the Notes represented by the Global Note (including principal, premium, if any, and interest) be made by wire transfer of immediately available funds to the accounts specified by the Global Note Holder. With respect to Certificated Notes, the Company will make all payments of principal, premium, if any, and interest by wire transfer of immediately available funds to the accounts specified by the Holders thereof or, if no such account is specified, by mailing a check to each such Holder's registered address. Secondary trading in long-term notes and debentures of corporate issuers is generally settled in clearinghouse or next-day funds. In contrast, the Notes represented by the Global Note are eligible to trade in the PORTAL market and to trade in the Depositary's Same-Day Funds Settlement System, and any permitted secondary market trading activity in such Notes will, therefore, be required by the Depositary to be settled in immediately available funds. The Company expects that secondary trading in the Certificated Notes will also be settled in immediately available funds. CERTAIN DEFINITIONS "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. "Additional Fixed Rate Notes" means up to $75.0 million aggregate principal amount of additional Fixed Rate Notes issued under the Fixed Rate Notes Indenture after August 10, 1997. "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 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. "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 the provisions of the Indenture described under "--Consolidation, Merger and Sale of Assets", (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 the covenant described above under the caption "--Certain Covenants--Limitation on Restricted Payments" (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 Code 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 114 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 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 entered into on August 20, 1997 among the Company, the Banks and NationsBank, N.A., as agent, as such agreement may be amended, restated, supplemented, refinanced, replaced or otherwise modified from time to time (including any such refinancing or replacement agented by a different institution). "Banks" means the banks and other financial institutions that from time to time are lenders under the Bank Credit Agreement. "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 purposes of calculating the Borrowing Base. "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. "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); 115 (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 provisions described under "--Consolidation, Merger and Sale of Assets". "Closing Date" means the date on which the Old Notes were originally issued under the Indenture. "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 the covenant described under "--Certain Covenants--Limitation on Restricted Payments," 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 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 116 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 FASB Statement of Financial Accounting Standards No. 52). "Default" means any event that is, or after notice or passage of time or both would be, an Event of Default. "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 Senior 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 the "--Certain Covenants--Limitation on Certain Asset Sales" and "--Redemption--Purchase of Notes upon a Change of Control or Asset Sale" covenants described herein 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 Senior Notes as are required to be repurchased pursuant to the "--Certain Covenants--Limitation on Certain Asset Sales" and "--Redemption--Purchase of Notes upon a Change of Control or Asset Sale" covenants described herein. "Dollar Equivalent" means, with respect to any monetary amount in a currency other than the US dollar, at any time for the determination thereof, the amount of US Dollars obtained by converting such foreign currency involved in such computation into US Dollars at the spot rate for the purchase of US Dollars with the applicable foreign currency as quoted by Reuters at approximately 11:00 a.m. (New York time) on the date not more than two Business Days prior to the determination. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "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 117 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. "Fixed Rate Note Guarantee" means any guarantee of the Fixed Rate Notes issued by a Restricted Subsidiary of the Company pursuant to the Fixed Rate Notes Indenture. "Fixed Rate Note Indenture" means the Indenture dated as of August 20, 1997 between the Company and United States Trust Company of New York, as Trustee, as it may from time to time be supplemented or amended. "Fixed Rate Notes" means the Company's existing 10% Senior Notes due 2007. "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. "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 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. "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 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 118 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. "Mercer Acquisition" means the acquisition by the Company of all of the outstanding capital stock of Mercer Products Company, Inc. pursuant to a Stock Purchase Agreement dated March 5, 1998 among the Company, Mercer and Sovereign Specialty Chemicals, Inc. "Mercer Transactions" means (i) the Prior Offering and (ii) the Mercer Acquisition and the related financing transactions in connection therewith. "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 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. "Permitted Business" means any business in which the Company or a Restricted Subsidiary is permitted to engage under the covenant described under the caption "--Certain Covenants--Line of Business." "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, 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 the "--Certain Covenants-- Limitation on Certain Asset Sales" covenant; 119 (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 in any Person, a majority of the equity ownership and voting stock of which is owned, directly or indirectly, by the Company and/or one or more of the Subsidiaries of the Company, that do not exceed $7.5 million in the aggregate at any time outstanding. "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. "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). "Qualified Stock" of any person means any and all Capital Stock of such person, other than Disqualified Stock. "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. "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. "Series A Preferred Stock" means, collectively, the Series A Cumulative Redeemable Preferred Stock of the Company, no par value, and the Series B Cumulative Redeemable Preferred Stock of the Company, no par value, in each case, issued on August 20, 1997. "Series C Preferred Stock" means the Convertible Preferred Stock of the Company issued on the Closing Date. "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 120 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. "Stated Maturity" means, when used with respect to any Senior Note or any installment of interest thereon, the date specified in such Senior 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 the Indenture. "Unrestricted Subsidiary" means (a) any Subsidiary that is designated by the Board of Directors of the Company as an Unrestricted Subsidiary in accordance with the "Unrestricted Subsidiaries" covenant and (b) any Subsidiary of an Unrestricted Subsidiary. "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. DESCRIPTION OF NEW CREDIT FACILITY GENERAL Upon the consummation of the Prior Recapitalization, the Company entered into a Loan and Security Agreement, as amended from time to time (the "Credit Agreement"), with NationsBank, N.A., as administrative agent (the "Agent"), and other lending institutions party thereto (the "Banks"), which agreement provided the Company with a $15.0 million revolving credit facility, guaranteed by Burke Rubber Company, Inc., Burke Flooring Products, Inc. and Burke Custom Processing, Inc. (in this context, the "Credit Agreement Guarantors"). See "Use of Proceeds." Upon consummation of the Prior Offering, the Company and the lenders under the Credit Agreement amended the Credit Agreement to, among other things, (i) increase the Company's revolving credit facility from $15.0 million to $25.0 million (as amended, the "Credit Facility") (ii) add Mercer as a Borrowing Subsidiary (as defined in the Credit Agreement), (iii) increase certain of the baskets contained in the restrictive covenants to reflect the increased size of the Company after the closing of the Mercer Acquisition and (iv) waive any default or event of default that may otherwise result from the consummation of the Prior Offering and the Mercer Acquisition. This information relating to the Credit Facility is qualified in its entirety by reference to the complete text of the documents entered into in connection therewith. The following is a description of the general terms of the Credit Facility. 121 SECURITY Indebtedness of the Company under the Credit Agreement is secured by (i) a first priority security interest in substantially all of the personal property (including, without limitation, accounts receivable, inventory, machinery, equipment, contracts and contract rights, trademarks, copyrights, patents, license agreements and general intangibles) of the Company and its domestic subsidiaries, whether now owned or hereafter acquired, (ii) a first priority perfected pledge of 100% of the capital stock of its domestic subsidiaries and (iii) a mortgage lien on the presently owned real property of the Company and its domestic subsidiaries. INTEREST Indebtedness under the Credit Facility bears interest at a floating rate of interest equal to, at the Company's option, the Eurodollar Rate (as defined in the Credit Agreement) for one, two, three or six months, plus 2.50% or NationsBank, N.A.'s Prime Rate. The "Prime Rate" is a fluctuating interest rate equal to the rate of interest announced publicly by the Agent as its prime rate. Interest based on the Prime Rate shall be payable monthly in arrears. Interest based on the Eurodollar Rate shall be payable in arrears at the earlier of the (a) end of the applicable interest period and (b) the first day of the month in which the Interest Payment Date occurs. BORROWING BASE Pursuant to the terms of the Credit Agreement, advances under the Credit Facility are to be limited to the lesser of (a) $15 million, or $25 million if the Credit Agreement is amended, 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 under the Credit Facility plus the aggregate amount of any unreimbursed drawings under any outstanding letters of credit. MATURITY Loans made pursuant to the Credit Agreement may be borrowed, repaid and reborrowed from time to time until the fifth anniversary of the Closing Date, subject to the satisfaction of certain conditions on the date of any such borrowing. FEES The Company is required to pay to the Banks in the aggregate a commitment fee equal to .50% per annum, payable in arrears on a quarterly basis, on the committed undrawn amount of the Credit Facility. The Agent and the Banks receive such other fees as have been separately agreed upon with the Agent, including, without limitation, in respect of letters of credit issued under the letter of credit subfacility. LETTERS OF CREDIT SUBFACILITY The Credit Facility includes a subfacility for the issuance of letters of credit up to a maximum aggregate amount at any one time outstanding not to exceed $1.0 million. If any letter of credit is outstanding after the termination of the Credit Facility, the Company would be required to post a standby letter of credit or deposit cash collateral in an amount sufficient to reimburse the Banks for amounts drawn under any such outstanding letter of credit. CONDITIONS TO CLOSING AND EXTENSIONS OF CREDIT The obligation of the Banks to make loans or extend letters of credit under the Credit Facility is subject to the satisfaction of certain customary conditions including, but not limited to, the absence of a default or event of default under the Credit Agreement, all representations and warranties under the 122 Credit Agreement being true and correct in all material respects and the absence of a material adverse change. COVENANTS The Credit Agreement contains customary covenants of the Company and the subsidiary guarantors, including, without limitation, restrictions on (i) the incurrence of debt, (ii) the sale of assets, (iii) mergers, acquisitions and other business combinations, (iv) voluntary prepayment of other debt of the Company, (v) transactions with affiliates (as defined in the Credit Agreement), (vi) investments, (vii) liens and (viii) guarantees, as well as prohibitions on the payment of dividends to, or the repurchase or redemption of stock from, shareholders. In addition, the Credit Agreement contains various financial covenants, including covenants requiring the maintenance of fixed charge coverage and maximum funded debt to EBITDA ratios. EVENTS OF DEFAULT; REMEDIES The Credit Agreement contains customary events of default under the Credit Facility, including the non-payment of principal or interest when due under the notes issued in connection with the Credit Facility or, subject to applicable grace periods in certain circumstances, upon the non-fulfillment of the covenants described above, certain changes in control of the ownership of the Company, cross-defaults to certain other indebtedness, certain events of bankruptcy and insolvency, ERISA, judgment defaults and failure of any guaranty or security agreement supporting the Credit Agreement to be in full force and effect. If any such event of default occurs, the Agent will be entitled, on behalf of the Banks, to take all actions permitted to be taken by a secured creditor under the Uniform Commercial Code and to accelerate the amounts due under the Credit Facility and may require all such amounts outstanding thereunder to be immediately paid in full. INDEMNIFICATION Under the Credit Agreement, the Company agrees to indemnify the Agent, the Banks and related persons from and against any and all losses, liabilities, claims, damages or expenses (including, without limitations, fees and disbursements of counsel) that may be incurred by or asserted against any such indemnified party in connection with any investigation, litigation or other proceeding relating to the Credit Agreement or related documents, provided that the Company is not liable for any such losses, liabilities, claims, damages or expenses resulting from such indemnified party's own gross negligence or willful misconduct. Finally, the Credit Agreement contains customary provisions protecting the Banks in the event of unavailability of funding, illegality, capital adequacy requirements, increased costs, withholding taxes and funding losses. 123 DESCRIPTION OF CAPITAL STOCK The authorized capital stock of the Company consists of 20,000,000 shares of Common Stock, without par value, and 50,000 shares of Preferred Stock, without par value. The following statements are summaries of certain provisions applicable to the Company's capital stock. COMMON STOCK As of January 2, 1998, there were 3,857,000 shares of Common Stock issued and outstanding, held of record by 13 shareholders. The holders of Common Stock are entitled to one vote per share on all matters submitted to a vote of shareholders. Holders of Common Stock are entitled to receive ratably such dividends as may be declared by the Board of Directors out of funds legally available therefor. In the event of liquidation, dissolution or winding up of the Company, holders of Common Stock would be entitled to share ratably in the Company's assets remaining after payment of liabilities, and after provision is made for each class of stock, if any, having preference over the Common Stock (including, as of the date of this Offering Memorandum, the Company's 6% Convertible Preferred Stock to be issued in connection with the Transactions (the "Convertible Preferred Stock") and the Series A and Series B 11 1/2% Cumulative Redeemable Stock that was issued on the closing date of the Prior Recapitalization (collectively, the "Redeemable Preferred Stock") described below). Except as provided in the Shareholders' Agreement, holders of Common Stock have no preemptive, subscription, redemption or conversion rights. All of the outstanding shares of Common Stock are fully paid and nonassessable. PREFERRED STOCK The Board of Directors has the authority, without further action by the shareholders, to issue up to 50,000 shares of Preferred Stock (which includes the 35,000 shares which have already been designated as Redeemable Preferred Stock and the 3,000 shares which has been designated as Convertible Preferred Stock) in one or more series and to fix the powers, designations, rights, preferences, privileges, qualifications and restrictions thereof, including dividend rights, conversion rights, voting rights, rights and terms of redemption, liquidation preferences and sinking fund terms, any or all of which may be greater than the rights of the Common Stock. The Board of Directors, without shareholder approval, can issue Preferred Stock with voting, conversion and other rights which could adversely affect the voting power and other rights of the holders of Common Stock. CONVERTIBLE PREFERRED STOCK. In connection with the Mercer Acquisition, JFLEI, together with the other shareholders and warrantholders of the Company who elected to participate, purchased 3,000 shares of Series C Convertible Preferred Stock issued by the Company. RANKING. The Convertible Preferred Stock shall, with respect to rights on bankruptcy, liquidation, winding up and dissolution, rank (i) junior to the Redeemable Preferred Stock and (ii) senior to the Company's Common Stock, and to all other classes and series of stock of the Company now or hereafter authorized, issued or outstanding, other than any class or series of stock of the Company expressly designated as being on a parity with ("Parity Securities") or senior to the Convertible Preferred Stock. Such other classes or series of stock of the Company not expressly designated as being on a parity with or senior to the Convertible Preferred Stock are referred to hereafter as "Junior Securities." The rights of holders of shares of the Convertible Preferred Stock are subordinate to the rights of the Company's general creditors, including the holders of the Existing Notes and the Senior Notes. DIVIDEND RIGHTS. Dividends on the Convertible Preferred Stock, will accrue at the annual rate per share of 6% times the sum of (i) $1,000 and (ii) accrued but unpaid dividends as of the immediately preceding Convertible Preferred Dividend Payment Date (as defined below). The holders of shares of the Convertible Preferred Stock will be entitled to receive, when, as and if declared by the Board of Directors, 124 out of funds legally available therefor, dividends payable semi-annually in arrears on April 15 and October 15 of each year (each such date, a "Convertible Preferred Dividend Payment Date"). Notwithstanding the foregoing, no dividends on shares of Convertible Preferred Stock will be authorized, declared, paid or set apart for payment at such time as and to the extent that the terms and provisions of any agreement of the Company, including any agreement relating to its indebtedness, prohibits such authorization, declaration, payment or setting apart for payment. The declaration or payment of dividends on the Convertible Preferred Stock would be restricted under the Indenture and the Existing Indenture. See "Description of Senior Notes--Limitation on Restricted Payments". In the event that the Company elects to redeem all or any portion of the shares of the Convertible Preferred Stock or upon a redemption of the Convertible Preferred Stock upon a Change of Control, the Company shall pay, out of funds legally available therefor, all accrued but unpaid dividends to the holders thereof. See "--Optional Redemption" and "--Redemption Upon Change of Control." Dividends are also payable to holders of the Convertible Preferred Stock, out of funds legally available therefor, if declared by the Board of Directors of the Company. So long as any shares of the Convertible Preferred Stock are outstanding, the Company shall not, without the prior consent of the holders of at least fifty-one percent (51%) of the shares of outstanding Convertible Preferred Stock, (i) make any payment on account of, or set apart for payment money for a sinking or other similar fund for, the purchase, redemption or retirement of, any Junior Securities (other than dividends or distributions payable in additional shares of Junior Securities to holders of Junior Securities); (ii) permit any corporation or other entity directly or indirectly controlled by the Corporation to purchase or redeem any Junior Securities; (iii) declare, pay or set apart for payment, or permit any corporation or other entity directly or indirectly controlled by the Corporation to declare, pay or set apart for payment, any dividend or make any distribution or payment on any Junior Securities or Parity Securities, whether directly or indirectly and whether in cash, obligations or shares of the Company or other property (other than dividends or distributions payable in additional shares of Junior Securities to holders of Junior Securities); or (iv) make any payment on account of, or set apart for payment money for a sinking or other similar fund for, the purchase, redemption or retirement of, any Parity Securities whether directly or indirectly, and whether in cash, obligations, shares of the Company or other property (other than payments solely of Junior Securities), and shall not permit any corporation or other entity directly or indirectly controlled by the Company to purchase or redeem any Parity Securities, unless prior to or at the time of such payment or setting apart for payment, the Company shall have repurchased, redeemed or retired shares of the Convertible Preferred Stock on a PRO RATA basis with the Parity Securities as to which such sinking fund or similar fund payment, or such purchase, redemption or retirement, is being effected. LIQUIDATION PREFERENCE. Holders of shares of Convertible Preferred Stock are entitled to receive the stated liquidation value of $1,000 per share ($3.0 million in the aggregate based on 3,000 shares of Convertible Preferred Stock to be issued on the date of issuance), plus an amount per share equal to any dividends accrued but unpaid (whether or not declared by the Board of Directors of the Company), without interest (the "Liquidation Preference"), in the event of any liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, out of or to the extent of the net assets of the Company legally available for distribution, before any distributions are made with respect to any Common Stock of the Company or any other Junior Securities. After payment of the full amount of the Liquidation Preference, holders of shares of Convertible Preferred Stock will not be entitled to any further participation in any distribution of assets of the Company. CONVERSION. Each holder of shares of Convertible Preferred Stock will have the right, at such holder's option at any time following a Triggering Event (as defined below) to convert all of such shares into Common Stock at the conversion price of $10.00 per share of Convertible Preferred Stock, subject to adjustments pursuant to certain anti-dilution provisions from time to time. A Triggering Event shall include (i) a Change of Control (as defined in the Certificate of Determination for the Convertible 125 Preferred Stock), (ii) an initial public offering of any class of equity securities of the Company pursuant to the Securities Act of 1933, as amended, (iii) the delivery of a notice from the Company to each holder of the Convertible Preferred Stock that the Company intends to redeem the Convertible Preferred Stock or (iv) the fifth anniversary of the date of issuance. For purposes of such conversion, each share of Convertible Preferred Stock will be valued at $1,000. Upon conversion of the Convertible Preferred Stock, holders of shares of Convertible Preferred Stock shall not be entitled to receive any accrued but unpaid dividends. OPTIONAL REDEMPTION. The Company may, at its option, redeem at any time, out of funds legally available therefor, all or any portion of the shares (in whole shares only) of the Convertible Preferred Stock on a PRO RATA basis, at a redemption price per share equal to 100% of the Liquidation Preference thereof on the date of redemption, including dividends accrued through the Convertible Preferred Dividend Payment Date immediately preceding the redemption date, but not including any dividends for any period after such Convertible Preferred Dividend Payment Date. REDEMPTION UPON CHANGE OF CONTROL. Upon the occurrence of a Change of Control, the Convertible Preferred Stock shall be redeemable at the option of the holders thereof, in whole or in part, at a redemption price per share equal to 100% of the Liquidation Preference on the date of redemption, including dividends accrued through the Convertible Preferred Dividend Payment Date immediately preceding the redemption date, but not including any dividends for any period after such Convertible Preferred Dividend Payment Date; provided, however, that the Company will not be obligated to redeem any Convertible Preferred Stock upon a Change of Control prior to repurchase or redemption of such Existing Notes, Notes and Redeemable Preferred Stock then outstanding as the Company is required to repurchase or has called for redemption in connection with Change of Control pursuant to the terms of the indentures for the Existing Notes and the Notes or the Company's Amended and Restated Articles of Incorporation, as the case may be. VOTING RIGHTS. The holders of shares of Convertible Preferred Stock are not entitled to any voting rights, except as required by applicable law and except as set forth in the next sentence. Without the consent of the holders of at least 51% of the outstanding shares of Convertible Preferred Stock, the Company may not amend its Amended and Restated Articles of Incorporation in any way that would adversely alter or change the powers, preferences or special rights of the Convertible Preferred Stock. PIGGYBACK REGISTRATION RIGHTS. The holders of the Convertible Preferred Stock are not entitled to any "demand" registration rights. However, the holders of the Convertible Preferred Stock are entitled to unlimited "piggyback" registration rights with respect to the shares of common stock of the Company issuable upon conversion of the Convertible Preferred Stock after the date of the Company's initial public offering of its common stock, subject to customary rights and limitations. TRANSFER RESTRICTIONS. There are no restrictions on the transferability of the Convertible Preferred Stock, except as required by applicable securities laws. REDEEMABLE PREFERRED STOCK. In connection with the consummation of the Prior Recapitalization, 18,000 shares of Redeemable Preferred Stock (also referred to herein as the "Series A" or "Series B" Preferred Stock), and warrants to purchase approximately 964,000 shares of common stock of MergerCo at an initial exercise price of $4.67 per share were issued by MergerCo to MassMutual, Paribas and Jackson National. Upon consummation of the Prior Recapitalization, the Redeemable Preferred Stock became the Redeemable Preferred Stock of the Company and the Warrants became Warrants to purchase Common Stock of the Company. RANKING. The Redeemable Preferred Stock ranks (i) senior to the Convertible Preferred Stock and (ii) prior to the Company's Common Stock with respect to dividend rights and rights on liquidation, 126 winding up or dissolution of the Company, and to all other classes and series of equity securities of the Company as may hereafter be issued, other than any class or series of equity securities of the Company expressly designated as being on a parity with or senior to the Redeemable Preferred Stock. The rights of holders of shares of the Redeemable Preferred Stock are subordinate to the rights of the Company's general creditors, including the holders of the Existing Notes and the Senior Notes. The Company may not create or issue other classes of stock ranking on a parity with or senior to the Redeemable Preferred Stock unless it receives approval or consent of the holders of at least a two-thirds of the Redeemable Preferred Stock. See "--Voting Rights" below. DIVIDEND RIGHTS. Dividends are payable to holders of Redeemable Preferred Stock, out of funds legally available therefor, at the annual rate per share of 11.5% times the sum of (i) $1,000 and (ii) accrued but unpaid dividends as of the immediately preceding Dividend Payment Date (as defined below). Dividends are payable (A) at the annual rate per share of .115 shares of Redeemable Preferred Stock per share of Redeemable Preferred Stock from the original issue date of the Redeemable Preferred Stock (the "Issue Date") through July 15, 2000 and (B) in cash after July 15, 2000. Dividends on the Redeemable Preferred Stock are payable quarterly on each January 15, April 15, July 15 and October 15 of each year (each a "Dividend Payment Date") and commenced on October 15, 1997. If at any time after July 15, 2000, the cash dividends payable on the Redeemable Preferred Stock are 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 of Redeemable Preferred Stock at the annual rate of 13.5% times the sum of (i) $1,000 per share and (ii) 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. So long as any shares of the Redeemable Preferred Stock are outstanding, the Company shall not, without the prior consent of the holders of two-thirds of the outstanding shares of Redeemable Preferred Stock, (i) make any payment on account of, or set apart for payment money for a sinking or other similar fund for, the purchase, redemption or retirement of, any Junior Securities (other than dividends or distributions payable in additional shares of Junior Securities to holders of Junior Securities); (ii) permit any corporation or other entity directly or indirectly controlled by the Company to purchase or redeem any Junior Securities; (iii) declare, pay or set apart for payment, or permit any corporation or other entity directly or indirectly controlled by the Company to declare, pay or set apart for payment, any dividend or make any distribution or payment on any Junior Securities or Parity Securities, whether directly or indirectly and whether in cash, obligations or shares of the Company or other property (other than dividends or distributions payable in additional shares of Junior Securities to holders of Junior Securities); or (iv) make any payment on account of, or set apart for payment money for a sinking or other similar fund for, the purchase, redemption or retirement of, any Parity Securities, whether directly or indirectly, and whether in cash, obligations, shares of the Company or other property (other than payments solely of Junior Securities), and shall not permit any corporation or other entity directly or indirectly controlled by the Company to purchase or redeem any Parity Securities, unless prior to or at the time of such payment or setting apart for payment, the Company shall have repurchased, redeemed or retired shares of Redeemable Preferred Stock on a PRO RATA basis with the Parity Securities as to which such sinking fund or similar fund payment, or such purchase, redemption or retirement, is being effected. LIQUIDATION PREFERENCE. Holders of shares of Redeemable Preferred Stock are entitled to receive the stated liquidation value of $1,000 per share ($18.0 million in the aggregate based on 18,000 shares of Redeemable Preferred Stock to be issued on the Issue Date), plus an amount per share equal to any dividends accrued but unpaid, without interest (the "Liquidation Preference"), in the event of any liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, out of or to the extent of the net assets of the Company legally available for distribution, before any distributions are made with respect to any Common Stock of the Company or any other Junior Securities. After payment of the 127 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. OPTIONAL REDEMPTION. The Company may, at its option, redeem at any time, out of funds legally available therefor, all or any portion of the shares (in whole shares only) of the Redeemable Preferred Stock on a PRO RATA basis, at a redemption price per share equal to 100% of the Liquidation Preference thereof on the date of redemption. MANDATORY REDEMPTION. On the date that is the one hundred and twenty-sixth (126th) month anniversary of the Issue Date, the Company shall redeem any and all outstanding shares of Redeemable Preferred Stock, out of funds legally available therefor, at a redemption price per share equal to 100% of the Liquidation Preference thereof on such date. REDEMPTION UPON CHANGE OF CONTROL. Upon the occurrence of a Change of Control (as defined in the Certificate of Determination for the Redeemable Preferred Stock), the Redeemable Preferred Stock shall be redeemable at the option of the holders thereof, in whole or in part, at a redemption price per share equal to 100% of the Liquidation Preference on the date of redemption provided, however, that the Company will not be obligated to redeem any Redeemable Preferred Stock upon a Change of Control prior to repurchase or redemption of the Existing Notes then outstanding as the Company is required to repurchase or has called for redemption in connection with Change of Control pursuant to the terms of the Existing Indenture. VOTING RIGHTS. The holders of shares of Redeemable Preferred Stock are not entitled to any voting rights, except as required by applicable law and except as set forth below. Without the consent of the holders of at least two-thirds of the outstanding shares of Redeemable Preferred Stock, the Company may not (i) amend its Articles of Incorporation in any way that would adversely alter or change the powers, preferences, special rights or economics of the Redeemable Preferred Stock, (ii) create, authorize or issue any shares of capital stock ranking senior to or on a parity with the Redeemable Preferred Stock or (iii) create, authorize or issue any shares of capital stock constituting Junior Securities, unless such Junior Securities are expressly subordinate in right of payment to the Redeemable Preferred Stock and such Junior Securities have no additional rights (directly or indirectly) upon the Company's failure to redeem such shares or to pay or declare a dividend or make a distribution with respect thereto. In addition, without the consent of the holders of at least two-thirds of the outstanding shares of Series A Redeemable Preferred Stock, the Company may not enter into any agreement which limits or otherwise adversely affects the Company's ability to comply with its mandatory redemption obligations described above, including, without limitation, any such agreement or plan entered into with respect to (a) the sale of all or substantially all of the assets of the Company, (b) the voluntary liquidation, dissolution or winding up of the Company or (c) the consolidation or merger of the Company with any one or more other corporations, other than a consolidation or merger in which the shareholders of the Company immediately prior to such transaction will hold more than 50% of the equity securities of the surviving entity immediately after the consummation of such transaction. TRANSFER RESTRICTIONS. There are no restrictions on the transferability of the Redeemable Preferred Stock, except as required by applicable securities laws. WARRANTS The Warrants issued in connection with the Prior Recapitalization entitle the holders thereof to purchase in the aggregate up to approximately 964,000 shares of Common Stock of the Company (the "Warrant Shares"), or 20% of the outstanding Common Stock of the Company on a fully diluted basis. The Warrants are currently exercisable until February 20, 2008 at an exercise price per share equal to $4.67, payable in cash or by tendering shares of Redeemable Preferred Stock. The exercise price and number of 128 Warrant Shares are both subject to adjustment in certain events. The Warrants are transferable separately from the Redeemable Preferred Stock. There are no restrictions on the transferability of the Warrants, except as required by applicable securities laws and as may be set forth in the Shareholders' Agreement. Unless and until the Warrants are exercised, the holders of the Warrants have no right to vote on matters submitted to the shareholders of the Company. The holders of the Warrants have no right to receive dividends; provided, however, that upon exercise of the Warrants, the exercise price therefor shall be reduced by an amount equal to the dividends in respect of the Common Stock that the holder of the Warrants would have received had the Warrants been exercised on the Issue Date. The holders of the Warrants are not entitled to share in the assets of the Company in the event of liquidation or dissolution of the Company or the winding up of the Company's affairs; PROVIDED, HOWEVER, that the holders of the Warrants are entitled to receive at least 30 days' prior written notice of any such liquidation, dissolution or winding up of affairs and shall be afforded the opportunity to exercise the Warrants prior to such liquidation, dissolution or winding up of affairs. REGISTRATION RIGHTS. The holders of the Warrant Shares are entitled to one "demand" registration right at any time on or after the later of (i) August 20, 2000 and (ii) the 181st day after completion of the initial public offering by the Company of its Common Stock, subject to additional customary rights and limitations. In addition, the holders of the Warrant Shares are entitled to unlimited "piggyback" registration rights after the date of the Company's initial public offering of its Common Stock, subject to customary rights and limitations. PLAN OF DISTRIBUTION Each broker-dealer that receives New 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 New 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 New Notes received in exchange for Old Notes where such Old 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 180 days 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 , 1998, all dealers effecting transactions in the New Notes may be required to deliver a prospectus. The Company will not receive any proceeds from any sales of New Notes by broker-dealers. New Notes received by broker-dealers for their own account pursuant to the Exchange Offer may be sold from time to time in one or more transactions in the over-the-counter market, in negotiated transactions, through the writing of options on the New Notes or a combination of such methods of resale, at market prices prevailing at the time of resale, at prices related to such prevailing market prices or negotiated prices. Any such resale may be made directly to purchasers or to or through brokers or dealers who may receive compensation in the form of commissions or concessions from any such broker-dealer and/or the purchasers of any such New Notes. Any broker-dealer that resells New Notes that were received by it pursuant to the Exchange Offer and any broker or dealer that participates in a distribution of such New Notes may be deemed to be an "underwriter" within the meaning of the Securities Act and any profit of any such resale of New Notes and any commissions or concessions received by such persons may be deemed to be underwriting compensation under the Securities Act. The Letter of Transmittal states that by acknowledging that it will deliver 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. For a period of 180 days after the Expiration Date, the Company will promptly send additional copies of this Prospectus and any amendment or supplement to this Prospectus to any broker-dealer that requests such documents in the Letter of Transmittal. The Company has agreed to pay all expenses incident to the 129 Exchange Offer (including the expenses of one counsel for the holders of the Notes) other than commissions or concessions of any brokers or dealers and will indemnify the holders of the Notes (including any broker-dealers) against certain liabilities, including liabilities under the Securities Act. LEGAL MATTERS The legality of the New Notes will be passed on for the Company by Gibson, Dunn & Crutcher LLP, Los Angeles, California. EXPERTS The consolidated financial statements of Burke Industries, Inc. as of January 2, 1998 and January 3, 1997, and for each of the three fiscal years in the period ended January 2, 1998, appearing in this Prospectus and Registration Statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their reports thereon appearing elsewhere herein, and are included in reliance upon such reports given upon the authority of such firm as experts in accounting and auditing. The financial statements of Mercer Products Company, Inc. as of August 4, 1997 and December 31, 1997, and for the periods from January 1, 1997 to August 4, 1997 and from August 5, 1997 (date of acquisition by Sovereign Specialty Chemicals, Inc.) to December 31, 1997 appearing in this Prospectus and Registration Statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their reports thereon appearing elsewhere herein, and are included in reliance upon such reports given upon the authority of such firm as experts in accounting and auditing. The financial statements of Mercer as of December 31, 1996, and for the year then ended, have been included herein and in the Registration Statement in reliance upon the report of KPMG Peat Marwick LLP, independent certified public accountants appearing elsewhere herein and upon the authority of said firm as experts in accounting and auditng. 130 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 Condensed Consolidated Statements of Income for the three months ended April 4, 1997 and April 3, 1998 (unaudited).............................................................................................. F-19 Condensed Consolidated Balance Sheets at January 2, 1998 and April 3, 1998 (unaudited)..................... F-20 Condensed Consolidated Statements of Cash Flows for the three months ended April 4, 1997 and April 3, 1998 (unaudited).............................................................................................. F-21 Notes to Condensed Consolidated Financial Statements (unaudited)........................................... F-22 MERCER PRODUCTS COMPANY, INC. Report of KPMG Peat Marwick LLP, Independent Auditors...................................................... F-24 Statement of Earnings and Retained Earnings for the year ended December 31, 1996........................... F-25 Balance Sheet at December 31, 1996......................................................................... F-26 Statement of Cash Flows for the year ended December 31, 1996............................................... F-27 Notes to Financial Statements.............................................................................. F-28 Report of Ernst & Young LLP, Independent Auditors--January 1, 1997 to August 4, 1997....................... F-33 Balance Sheet at August 4, 1997............................................................................ F-34 Statement of Operations and Retained Earnings for the period from January 1, 1997 to August 4, 1997........ F-35 Statement of Cash Flows for the period from January 1, 1997 to August 4, 1997.............................. F-36 Notes to Financial Statements.............................................................................. F-37 Report of Ernst & Young LLP, Independent Auditors--August 5, 1997 to December 31, 1997..................... F-42 Balance Sheet at December 31, 1997......................................................................... F-43 Statement of Income for the period from August 5, 1997 to December 31, 1997................................ F-44 Statement of Stockholder's Equity for the period from August 5, 1997 to December 31, 1997.................. F-45 Statement of Cash Flows for the period from August 5, 1997 to December 31, 1997............................ F-46 Notes to Financial Statements.............................................................................. F-47 Condensed Statements of Operations for the three months ended March 31, 1997 and 1998 (unaudited).......... F-52 Condensed Balance Sheets at December 31, 1997 and March 31, 1998 (unaudited)............................... F-53 Condensed Statements of Cash Flows for the three months ended March 31, 1997 and 1998 (unaudited).......... F-54 Notes to Condensed Financial Statements (unaudited)........................................................ F-55
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. ERNST & YOUNG LLP San Jose, California 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 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. F-7 BURKE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) A lawsuit has been 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 such shareholder's shares prior to the Prior Recapitalization. The Company believes that such claims are without merit and intends to vigorously defend such action. 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 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. F-8 BURKE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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. 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 F-9 BURKE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. GOODWILL AND LONG-LIVED ASSETS (CONTINUED) 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 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. F-10 BURKE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. LONG-TERM DEBT AND LEASE OBLIGATIONS (CONTINUED) 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 --------- --------- --------- --------- --------- ---------
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 --------- ---------
F-11 BURKE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. LONG-TERM DEBT AND LEASE OBLIGATIONS (CONTINUED) 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 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 F-12 BURKE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. REDEEMABLE PREFERRED STOCK (CONTINUED) 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. 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. 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 totaling $14.1 million and the Company recorded $14.1 million in compensation expense. All unvested options were canceled in connection with the Recapitalization. F-13 BURKE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. SHAREHOLDERS' EQUITY (CONTINUED) 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 $ 6.500 Exercised.......................................... (22) $ 0.425 Canceled........................................... (1,578) $ 0.846 ----------- Balance at fiscal year ended 1997.................. 370 $ 6.500 ----------- -----------
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 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 F-14 BURKE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. SHAREHOLDERS' EQUITY (CONTINUED) 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 --------- --------- --------- --------- 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 --------- --------- --------- --------- --------- ---------
F-15 BURKE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. PENSION AND RETIREMENT PLANS (CONTINUED) 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. 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 --------- --------- --------- --------- --------- ---------
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 F-16 BURKE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. INCOME TAXES (CONTINUED) 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 April 21, 1998, the Company acquired all of the issued and outstanding capital stock of Mercer Products Company, Inc. ("Mercer"), from Sovereign Specialty Chemicals, Inc., for an aggregate purchase price of $35,750,000, subject to working capital adjustments. Financing for this acquisition and related expenses was provided, in large part, from the sale of $30 million principal amount of Floating Interest Rate Senior Notes Due 2007 ("Senior Notes"). The balance of the financing was provided with $3.0 million from the sale of 3,000 shares of the Company's 6% Series C Cumulative Convertible Preferred Stock and cash on hand. F-17 BURKE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 11. SUBSEQUENT EVENT (UNAUDITED) (CONTINUED) The Senior Notes mature on August 15, 2007, with interest on the notes payable semi-annually on February 15 and August 15, commencing August 15, 1998. The Senior Notes bear interest at a rate per annum equal to LIBOR plus 400 basis points, with the interest rate reset semiannually. The Senior Notes are unconditionally guaranteed on a joint and several basis by each of the Company's subsidiaries, including Mercer. Upon a change of control of the Company, the Company will be required to make an offer to repurchase all outstanding Senior Notes at 101% of the aggregate principal amount thereof plus accrued and unpaid interest thereon at the date of repurchase. The Company also amended its existing bank credit facility to increase the revolving credit facility from $15 million to $25 million and revise certain of its restrictive covenants. F-18 BURKE INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (DOLLARS IN THOUSANDS)
FOR THE THREE MONTH PERIOD ENDED ------------------------ APRIL 3, APRIL 4, 1998 1997 ----------- ----------- (UNAUDITED) Net sales............................................................ $ 22,943 $ 23,124 Costs and expenses: Cost of sales...................................................... 16,180 16,419 Selling, general and administrative................................ 3,256 3,182 ----------- ----------- Income from operations............................................... 3,507 3,523 Interest expense, net................................................ 2,787 498 ----------- ----------- Income before income tax provision................................... 720 3,025 Income tax provision................................................. 288 1,209 ----------- ----------- Net income........................................................... $ 432 $ 1,816 ----------- ----------- ----------- -----------
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements. F-19 BURKE INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET (DOLLARS IN THOUSANDS)
JANUARY 2, 1998 (DERIVED FROM APRIL 3, AUDITED 1998 FINANCIAL (UNAUDITED) STATEMENTS) ------------ -------------- ASSETS Current assets: Cash and cash equivalents.......................................................... $ 3,884 $ 11,563 Restricted cash.................................................................... -- 1,070 Trade accounts receivable, less allowance of $375 as of April 3, 1998 and $334 as of January 2, 1998............................................................... 12,561 11,186 Inventories........................................................................ 12,747 11,187 Other current assets............................................................... 4,406 5,540 ------------ -------------- Total current assets............................................................... 33,598 40,546 Property, plant and equipment...................................................... 25,975 25,556 Accumulated depreciation and amortization.......................................... 10,893 10,536 ------------ -------------- Net property, plant and equipment.................................................. 15,082 15,020 Goodwill, net...................................................................... 1,456 1,465 Other assets....................................................................... 5,779 5,806 ------------ -------------- Total assets..................................................................... $ 55,915 $ 62,837 ------------ -------------- ------------ -------------- LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Current liabilities: Trade accounts payable and accrued expenses........................................ $ 5,054 $ 5,489 Other current liabilities.......................................................... 6,460 13,379 ------------ -------------- Total current liabilities.......................................................... 11,514 18,868 Senior notes....................................................................... 110,000 110,000 Other noncurrent liabilities....................................................... 4,311 4,311 Preferred stock, no par value; 50,000 shares authorized; 30,000 Redeemable Series A shares designated; 16,000 Redeemable Series A shares issued and outstanding; 5,000 Redeemable Series B shares designated; 2,000 Redeemable Series B shares issued and outstanding........................................................... 16,652 16,148 Shareholders' equity (deficit): Class A common stock, no par value: Authorized shares--20,000,000 Issued and outstanding shares--3,857,000....................................... 25,464 25,464 Accumulated deficit.............................................................. (112,026) (111,954) ------------ -------------- Total shareholders' equity (deficit)............................................... (86,562) (86,490) ------------ -------------- Total liabilities and shareholders' equity (deficit)............................. $ 55,915 $ 62,837 ------------ -------------- ------------ --------------
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements. F-20 BURKE INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (DOLLARS IN THOUSANDS)
FOR THE THREE MONTH PERIOD ENDED ------------------------ APRIL 3, APRIL 4, 1998 1997 ----------- ----------- (UNAUDITED) OPERATING ACTIVITIES Net Income......................................................... $ 432 $ 1,816 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization: Property, plant and equipment.................................. 357 340 Goodwill....................................................... 9 9 Other adjustments to reconcile net income to net cash used in operating activities: changes in operating assets and liabilities.................................................... (5,073) (3,093) ----------- ----------- Net cash used in operating activities.............................. (4,275) (928) INVESTING ACTIVITIES Purchases of property, plant and equipment......................... (419) (419) FINANCING ACTIVITIES Restricted cash.................................................... 1,070 -- Borrowings of long-term debt....................................... -- 2,029 Repayments and settlement of long-term debt and capital lease obligations...................................................... -- (587) Payable to shareholders............................................ (3,934) -- Deferred financing costs........................................... (121) -- Other financing activities......................................... -- (95) ----------- ----------- Net cash provided by (used in) financing activities................ (2,985) 1,347 ----------- ----------- Change in cash..................................................... (7,679) -- Cash at beginning of period........................................ 11,563 -- ----------- ----------- Cash at end of period.............................................. $ 3,884 $ -- ----------- ----------- ----------- -----------
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements. F-21 BURKE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION The accompanying condensed consolidated financial statements of the Company have been prepared without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. The condensed consolidated balance sheet as of January 2, 1998 was derived from audited financial statements. The accompanying condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the fiscal year ended January 2, 1998 included elsewhere in the Prospectus. The financial information included herein reflects all adjustments (consisting of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the results for the interim period. The results of operations for the three months ended April 3, 1998 are not necessarily indicative of the results to be expected for the full year. The Company uses a 52 to 53-week fiscal year ending on the Friday closest to December 31. The Company also follows a thirteen week quarterly cycle. The three-month periods ended on April 4, 1997 and April 3, 1998. As of January 1, 1998, the Company adopted Statement of Financial Accounting No. 130, "Reporting Comprehensive Income" (FAS 130) which establishes new rules for the reporting and display of comprehensive income and its components. The adoption of FAS 130 had no impact on the Company's net income or shareholders' equity. 2. INVENTORIES Inventories consist of the following:
APRIL 3, JANUARY 2, 1998 1998 ----------- ------------- (IN THOUSANDS) Raw materials...................................... $ 5,458 $ 4,626 Work-in-process.................................... 2,150 1,593 Finished goods..................................... 5,139 4,968 ----------- ------------- $ 12,747 $ 11,187 ----------- ------------- ----------- -------------
3. SUBSEQUENT EVENTS On April 21, 1998, the Company acquired all of the issued and outstanding capital stock of Mercer Products Company, Inc. ("Mercer"), from Sovereign Specialty Chemicals, Inc., for an aggregate purchase price of $35,750,000, subject to working capital adjustments. Financing for this acquisition and related expenses was provided, in large part, from the sale of $30 million principal amount of Floating Interest Rate Senior Notes Due 2007 ("Senior Notes"). The balance of the financing was provided with $3.0 million from the sale of 3,000 shares of the Company's 6% Series C Cumulative Convertible Preferred Stock and cash on hand. The Senior Notes mature on August 15, 2007, with interest on the notes payable semi-annually on February 15 and August 15, commencing August 15, 1998. The Senior Notes bear interest at a rate per F-22 BURKE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 3. SUBSEQUENT EVENTS (CONTINUED) annum equal to LIBOR plus 400 basis points, with the interest rate reset semiannually. The Senior Notes are unconditionally guaranteed on a joint and several basis by each of the Company's subsidiaries, including Mercer. Upon a change of control of the Company, the Company will be required to make an offer to repurchase all outstanding Senior Notes at 101% of the aggregate principal amount thereof plus accrued and unpaid interest thereon at the date of repurchase. The Company also amended its existing bank credit facility to increase the revolving credit facility from $15 million to $25 million and revise certain of its restrictive covenants. F-23 REPORT OF KPMG PEAT MARWICK LLP, INDEPENDENT AUDITORS The Board of Directors Mercer Products Company, Inc.: We have audited the accompanying balance sheet of Mercer Products Company, Inc. (a wholly owned subsidiary of Laporte plc) as of December 31, 1996, and the related statements of earnings and retained earnings and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit 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 audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Mercer Products Company, Inc. as of December 31, 1996, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Orlando, Florida January 31, 1997 F-24 MERCER PRODUCTS COMPANY, INC. STATEMENT OF EARNINGS AND RETAINED EARNINGS FOR THE YEAR ENDED DECEMBER 31, 1996 (IN THOUSANDS) Net sales.......................................................................... $ 24,558 Cost of sales...................................................................... 17,668 --------- Gross profit..................................................................... 6,890 Selling, general and administrative expenses....................................... 4,668 --------- Operating income................................................................. 2,222 Interest expense................................................................... 964 --------- Earnings before income taxes..................................................... 1,258 Income taxes....................................................................... 675 --------- Net earnings..................................................................... 583 Retained earnings at December 31, 1995............................................. 8,715 Dividends paid..................................................................... (60) --------- Retained earnings at December 31, 1996............................................. $ 9,238 --------- ---------
See accompanying notes to financial statements. F-25 MERCER PRODUCTS COMPANY, INC. BALANCE SHEET DECEMBER 31, 1996 (IN THOUSANDS) ASSETS Current assets: Cash............................................................................. $ 392 Accounts receivable: Trade, less allowance for doubtful accounts of $130............................ 2,929 Affiliates..................................................................... 93 Inventories, net................................................................. 2,407 Prepaid expenses and other assets................................................ 48 Deferred income taxes............................................................ 105 --------- Total current assets........................................................... 5,974 Property and equipment, net........................................................ 3,578 Goodwill, net of accumulated amortization.......................................... 7,243 Deferred income taxes.............................................................. 423 --------- Total assets..................................................................... $ 17,218 --------- --------- LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities: Accounts payable: Trade.......................................................................... $ 991 Affiliates..................................................................... 1,219 Accrued expenses................................................................. 499 Income taxes payable............................................................. 616 --------- Total current liabilities...................................................... 3,325 Loan due to affiliated company..................................................... 4,655 --------- Total liabilities.............................................................. 7,980 Stockholder's equity: Common stock, $0.1 par value, 1,000 shares authorized, 10 shares issued and outstanding.................................................................... -- Retained earnings................................................................ 9,238 --------- Total liabilities and stockholder's equity..................................... $ 17,218 --------- ---------
See accompanying notes to financial statements. F-26 MERCER PRODUCTS COMPANY, INC. STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1996 (IN THOUSANDS) Cash flows from operating activities: Net earnings..................................................................... $ 583 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization.................................................... 953 Deferred income taxes............................................................ 151 Cash provided by (used for) changes in: Accounts receivable............................................................ (49) Inventories.................................................................... 330 Prepaid expenses and other current assets...................................... 123 Income taxes................................................................... 402 Accounts payable and accrued expenses.......................................... 328 --------- Net cash provided by operating activities.................................... 2,821 --------- Cash flows from investing activities: Additions to property and equipment.............................................. (367) --------- Net cash used for investing activities....................................... (367) --------- Cash flows from financing activities: Repayments of intercompany loan.................................................. (2,308) Dividends paid................................................................... (60) --------- Net cash provided by financing activities.................................... (2,368) --------- Net increase in cash......................................................... 86 Cash at beginning of year.......................................................... 306 --------- Cash at end of year................................................................ $ 392 --------- --------- Supplemental disclosures of cash flow information: Cash paid during the year for: Interest....................................................................... $ 946 --------- --------- Income taxes................................................................... $ 98 --------- ---------
See accompanying notes to financial statements. F-27 MERCER PRODUCTS COMPANY, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996 (IN THOUSANDS) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (A) ORGANIZATION Mercer Products Company, Inc. (the "Company") has been in business for 39 years in Eustis, Florida. The Company is a manufacturer of extruded plastic products and sells mainly to wholesale distributors. The major product line is carpet and stairway moldings and trim for the construction industry. (B) INVENTORIES Inventories are stated at the lower of cost or market, with cost being determined on the first-in, first-out basis. Obsolescence is identified through quarterly inventory counts and any items appearing on more than two consecutive counts are reviewed and, if necessary, prepared for re-grinding. (C) PROPERTY AND EQUIPMENT Property and equipment are stated at cost less accumulated depreciation and amortization. The Company provides for depreciation and amortization on the straight-line method over the estimated useful lives as follows:
YEARS --------- Building............................................................................... 50 Machinery and equipment................................................................ 7-10 Furniture and fixtures................................................................. 3-5 Leasehold improvements................................................................. 15
(D) GOODWILL Goodwill, which represents the excess of purchase price over fair value of net assets acquired, is amortized on a straight-line basis over the expected periods to be benefited, which is 15 years. Accumulated amortization of goodwill and covenants not to compete at December 31, 1996 was approximately $6,200. The Company assesses the recoverability of this intangible asset by determining whether the amortization of the goodwill balance over its remaining life can be recovered through undiscounted future operating cash flows of the acquired operation. The amount of goodwill impairment, if any, is measured based on projected discounted future operating cash flows using a discount rate reflecting the Company's average cost of funds. The assessment of the recoverability of goodwill will be impacted if estimated future operating cash flows are not achieved. (E) INCOME TAXES The Company is included within the consolidated Federal income tax return of Laporte Inc. in the United States. Income tax expense is calculated using the enacted rates in the United States as if the Company had been an independent entity. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are F-28 MERCER PRODUCTS COMPANY, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 (IN THOUSANDS) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rate is recognized in income in the period that includes the enactment date. (F) USE OF ESTIMATES The preparation of these financial statements in conformity with generally accepted accounting principles required management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (G) FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts reported in the Company's balance sheet for cash, trade accounts receivable, due from affiliated companies, accounts payable, accrued expenses, due to affiliated companies and other liabilities approximate their fair value because of the short-term maturity of these instruments. It is not practical to determine the fair value of long-term payable to parent and affiliated companies because such amounts, bearing interest during the period from January 1, 1996 to December 31, 1996, have no stated maturity which makes it difficult to estimate fair value with precision. (H) CONCENTRATION OF CREDIT RISK The Company manufactures extruded plastic and vinyl products and markets these products to wholesale, specialty, full line, and supply flooring distributors and select national and export accounts. As a result, the Company grants unsecured credit to customers who deal primarily in the industry. Such risk is limited due to the large number of customers, generally short payment terms, and their dispersion across geographic areas. However, economic factors affecting the industry would have a direct impact on the Company and its exposure to credit risk. One customer accounted for approximately 10% of the Company's sales during 1996, and no account receivable from any customer exceeded 10% of the Company's accounts receivable balance at December 31, 1996. The Company estimates an allowance for doubtful accounts based on the credit worthiness of its customers and general economic conditions. Consequently, an adverse change in these factors would affect the Company's estimate of bad debts. (2) INVENTORIES A summary of inventories at December 31, 1996 is as follows: Raw materials....................................................... $ 585 Finished goods...................................................... 1,822 --------- $ 2,407 --------- ---------
F-29 MERCER PRODUCTS COMPANY, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 (IN THOUSANDS) (3) PROPERTY AND EQUIPMENT Property and equipment at December 31, 1996 consists of the following: Land............................................................... $ 223 Buildings.......................................................... 2,484 Machinery and equipment............................................ 2,898 Leasehold improvements............................................. 20 Furniture and fixtures............................................. 339 Construction in progress........................................... 59 --------- 6,023 Less accumulated depreciation and amortization..................... (2,445) --------- $ 3,578 --------- ---------
(4) LEASES The Company is obligated under various noncancelable operating leases for buildings, machinery and equipment, and automobiles, which expire on various dates through 2000. Rent expense for operating leases was $509 for the year ended December 31, 1996. Future minimum annual lease payments under operating leases are as follows:
YEAR ENDING DECEMBER 31, OPERATING LEASES - ---------------------------------------------------------------------------- ----------------- 1997........................................................................ $ 358 1998........................................................................ 358 1999........................................................................ 348 2000........................................................................ 334 ------ Total minimum lease payments.............................................. $ 1,398 ------ ------
(5) RELATED PARTY TRANSACTIONS The Company entered into transactions in the ordinary course of business with the parent company and affiliates. (A) PURCHASES OF RAW MATERIALS Approximately 75% of the raw materials purchased during 1996 were from an affiliated company. Management considers that the terms for purchase were similar to the terms the Company would have obtained from a third party. (B) MANAGEMENT FEES Expenses of $255 that were incurred during the year related to services provided by Laporte plc to the Company. These services included general management, treasury, tax, financial audit, financial reporting, insurance and legal services. The Company has been charged for such services through corporate allocations. These expenses were allocated to the Company based on estimates of anticipated allocable F-30 MERCER PRODUCTS COMPANY, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 (IN THOUSANDS) (5) RELATED PARTY TRANSACTIONS (CONTINUED) costs incurred, less amounts charged as direct costs or expense rather than by allocation. Management believes that the allocation methods used on common expenses were reasonable, produce materially accurate results, and are indicative of the expenses that would have been incurred had the Company been operated as a stand-alone business. (C) INTEREST EXPENSE These financial statements include an allocation of the debt incurred by Laporte plc when it originally acquired the Company. Accordingly, interest expense at a rate of approximately 9% for 1996 associated with such debt has been reflected in these financial statements. (D) DUE FROM AFFILIATES Due from affiliates at December 31, 1996 amounts to $93. These receivables are noninterest bearing and represent amounts due from other subsidiaries of the parent. (E) DUE TO AFFILIATES Due to affiliates at December 31, 1996 amounts to $1,219. A total of $649 of this balance relates to raw materials purchased from AlphaGary Corporation for use in the Company's operations. The remaining balance relates to interest payable to the parent for the note outstanding. The payables are noninterest bearing. (F) NOTES PAYABLE TO PARENT These financial statements include an allocation of the debt incurred by Laporte plc when it originally acquired the Company. At December 31, 1996, the balance on the loan, net of a receivable from Laporte plc, was $4,655. (6) INCOME TAXES Income tax expense for the year ended December 31, 1996 consists of:
CURRENT DEFERRED TOTAL ----------- ----------- --------- Federal........................................................... $ 462 $ 135 $ 597 State............................................................. 62 16 78 ----- ----- --------- $ 524 $ 151 $ 675 ----- ----- --------- ----- ----- ---------
F-31 MERCER PRODUCTS COMPANY, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 (IN THOUSANDS) (6) INCOME TAXES (CONTINUED) The actual income tax expense for the year ended December 31, 1996 differs from the expected income tax expense computed by applying the federal statutory rate of 34% to earnings before income taxes as follows: Expected tax expense................................................. $ 427 Goodwill and other nondeductible items............................... 196 State income taxes, net of federal income tax benefit................ 52 --------- $ 675 --------- ---------
The types of temporary differences between the tax bases of assets and liabilities and their financial reporting amounts that give rise to the deferred tax assets and liabilities and their approximate tax effects are as follows: Deferred tax assets: Reserves and allowances............................................ $ 105 Goodwill........................................................... 652 --------- Total deferred tax assets............................................ 757 --------- Deferred tax liability: Depreciation....................................................... 229 --------- Total deferred tax liability..................................... 229 --------- Net deferred tax liability....................................... $ 528 --------- ---------
(7) EMPLOYEE BENEFIT PLANS The Company sponsors two defined-contribution plans (an IRS qualifying 401(k) plan and a money purchase pension plan). Participation in these plans is available to all salaried and hourly employees of the Company. Participating employees contribute to the 401(k) plan based on a percentage of their compensation. A percentage of employee contributions are matched by the Company. The Company further contributes an amount based on a percentage of employee's pay to the money purchase pension plan. The costs of these plans amounted to approximately $176 for 1996. F-32 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS Board of Directors Mercer Products Company, Inc. We have audited the accompanying balance sheet of Mercer Products Company, Inc. as of August 4, 1997 (wholly-owned subsidiary of Laporte plc), and the related statements of operations and retained earnings and cash flows for the period from January 1, 1997 to August 4, 1997. 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 audit. We conducted our audit 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 audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Mercer Products Company, Inc. as of August 4, 1997, and the results of its operations and its cash flows for the period from January 1, 1997 to August 4, 1997, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Chicago, Illinois November 21, 1997 F-33 MERCER PRODUCTS COMPANY, INC. BALANCE SHEET AUGUST 4, 1997 (DOLLARS IN THOUSANDS) Assets Current assets: Cash............................................................................. $ 63 Trade accounts receivable, less allowance for doubtful accounts of $200.......... 2,747 Inventories...................................................................... 3,456 Prepaid expenses and other current assets........................................ 187 Deferred income taxes............................................................ 273 --------- Total current assets............................................................... 6,726 Property, plant, and equipment, net................................................ 3,408 Goodwill, net...................................................................... 6,834 --------- Total assets....................................................................... $ 16,968 --------- --------- Liabilities and stockholders' equity Current liabilities: Accounts payable................................................................. $ 2,181 Accrued expenses................................................................. 485 Income taxes payable............................................................. 267 --------- Total current liabilities.......................................................... 2,933 Long-term payable--Parent and affiliated companies................................. 4,777 Deferred income taxes.............................................................. 88 Stockholders' equity: Common stock, $0.1 par value, 1,000 shares authorized, 10 shares issued and outstanding.................................................................... -- Retained earnings................................................................ 9,170 --------- Total stockholders' equity....................................................... 9,170 --------- Total liabilities and stockholders' equity......................................... $ 16,968 --------- ---------
See accompanying notes to financial statements. F-34 MERCER PRODUCTS COMPANY, INC. STATEMENT OF OPERATIONS AND RETAINED EARNINGS PERIOD FROM JANUARY 1, 1997 TO AUGUST 4, 1997 (DOLLARS IN THOUSANDS) Net sales.......................................................................... $ 14,954 Cost of goods sold................................................................. 9,578 --------- Gross profit....................................................................... 5,376 Selling, general, and administrative expenses...................................... 2,328 Management fees.................................................................... 167 Amortization of goodwill........................................................... 409 --------- Operating income................................................................... 2,472 Interest expense................................................................... 544 --------- Income before income taxes......................................................... 1,928 Income tax expense................................................................. 771 --------- Net income......................................................................... 1,157 Retained earnings at December 31, 1996............................................. 9,238 Dividends paid..................................................................... (1,225) --------- Retained earnings at August 4, 1997................................................ $ 9,170 --------- ---------
See accompanying notes to financial statements F-35 MERCER PRODUCTS COMPANY, INC. STATEMENT OF CASH FLOWS PERIOD FROM JANUARY 1, 1997 TO AUGUST 4, 1997 (DOLLARS IN THOUSANDS) OPERATING ACTIVITIES Net income......................................................................... $ 1,157 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization.................................................... 565 Deferred income taxes............................................................ 458 Loss on disposal of property, plant, and equipment............................... 74 Changes in operating assets and liabilities: Trade accounts receivable...................................................... 182 Inventories.................................................................... (1,019) Prepaid expenses and other current assets...................................... (138) Accounts payable............................................................... 1,109 Accrued expenses............................................................... (5) Income taxes payable........................................................... 267 --------- Net cash provided by operating activities.......................................... 2,650 INVESTING ACTIVITIES Capital expenditures............................................................... (60) --------- Net cash used in investing activities.............................................. (60) FINANCING ACTIVITIES Payments on long-term liabilities due to parent and affiliated companies, net...... (1,694) Dividends paid..................................................................... (1,225) --------- Net cash used in financing activities.............................................. (2,919) --------- Net decrease in cash............................................................... (329) Cash at beginning of period........................................................ 392 --------- Cash at end of period.............................................................. $ 63 --------- --------- Supplemental cash flow information: Cash paid for interest............................................................. $ 454 --------- --------- Cash paid for income taxes......................................................... $ 778 --------- ---------
See accompanying notes to financial statements F-36 MERCER PRODUCTS COMPANY, INC. NOTES TO FINANCIAL STATEMENTS PERIOD FROM JANUARY 1, 1997 TO AUGUST 4, 1997 (DOLLARS IN THOUSANDS) 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Mercer Products Company, Inc. (the Company) is a wholly owned subsidiary of Laporte plc. The Company is primarily a producer of rubber and vinyl products for sale to wholesale distributors, mainly in the construction, industrial, and flooring industry. The Company sells domestically to customers throughout the United States. A significant portion of the Company's sales are to customers in the construction, industrial, and flooring industry, and as such the company is affected by the well-being of that industry. The Company does not require collateral, and all their accounts receivable are unsecured; and while they believe their trade receivables will be collected, the Company anticipates that in the event of default they will follow normal collection procedures. Overall, credit risk related to the Company is limited due to a large number of customers in differing industries and geographic areas. Effective August 5, 1997, the Company was purchased by Sovereign Specialty Chemicals, Inc. INVENTORIES Inventories are stated at the lower of cost, using the first in, first out method, or market. PROPERTY, PLANT, AND EQUIPMENT Property, plant, and equipment are stated at cost. Depreciation on property, plant, and equipment is calculated on the straight-line method over the estimated useful lives of the assets. The following table summarizes the estimated useful lives of the Company's property, plant, and equipment:
YEARS ----- Building............................................................................... 40 Machinery and equipment................................................................ 15
GOODWILL Goodwill, which represents the excess of purchase price allocated to the Company over fair value of net assets acquired, is amortized on a straight-line basis over the expected periods to be benefited, which is 15 years. Accumulated amortization of goodwill at August 4, 1997, was $6,689. The Company assesses the recoverability of this intangible asset by determining whether the amortization of the goodwill balance over its remaining life can be recovered through undiscounted future operating cash flows of the acquired operation. The amount of goodwill impairment, if any, is measured based on projected discounted future operating cash flows using a discount rate reflecting the Company's average cost of funds. The assessment of the recoverability of goodwill will be impacted if estimated future operating cash flows are not achieved. INCOME TAXES The Company is included within the consolidated federal income tax return of Laporte plc in the United States. For the purposes of these financial statements income tax expense is calculated, using the enacted rates in the United States as if the Company had been an independent entity. F-37 MERCER PRODUCTS COMPANY, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) PERIOD FROM JANUARY 1, 1997 TO AUGUST 4, 1997 (DOLLARS IN THOUSANDS) 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. 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 amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts reported in the Company's balance sheet for cash, trade accounts receivable due from affiliated companies, accounts payable, accrued expenses, due to affiliated companies and other liabilities approximate their fair value because of the short-term maturity of these instruments. It is not practical to determine the fair value of long-term payable--parent and affiliated companies because such amounts, bearing interest during the period from January 1, 1997 to August 4, 1997, of 9%, have no stated maturity which makes it difficult to estimate fair value with precision. CONCENTRATION OF CREDIT RISK Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of trade accounts which are from its domestic and international customers. To minimize this risk, ongoing credit evaluations of customers' financial condition are performed, although collateral is not required. In addition, the Company maintains an allowance for potential credit losses. 2. INVENTORIES The components of inventories at August 4, 1997, are as follows: Finished goods..................................................... $ 2,526 Raw materials...................................................... 930 --------- Total inventories.................................................. $ 3,456 --------- ---------
F-38 MERCER PRODUCTS COMPANY, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) PERIOD FROM JANUARY 1, 1997 TO AUGUST 4, 1997 (DOLLARS IN THOUSANDS) 3. PROPERTY, PLANT, AND EQUIPMENT At August 4, 1997, property, plant, and equipment are summarized as follows: Land............................................................... $ 223 Buildings.......................................................... 2,568 Machinery and equipment............................................ 3,062 --------- 5,853 Less: Accumulated depreciation.................................... (2,445) --------- Property, plant, and equipment, net................................ $ 3,408 --------- ---------
4. OPERATING LEASES The Company is a lessee under several noncancelable operating leases for buildings and machinery and equipment, which expire on various dates through 2004. Rent expense was $110 for the period from January 1, 1997 through August 4, 1997. Future minimum annual lease payments under operating leases are as follows: Remainder of 1997................................................... $ 253 1998................................................................ 598 1999................................................................ 573 2000................................................................ 379 2001................................................................ 251 Later years......................................................... 130 --------- Total minimum lease payments........................................ $ 2,184 --------- ---------
5. INCOME TAXES Income tax expense consists of: U.S. federal......................................................... $ 250 State................................................................ 63 Deferred............................................................. 458 --------- $ 771 --------- ---------
F-39 MERCER PRODUCTS COMPANY, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) PERIOD FROM JANUARY 1, 1997 TO AUGUST 4, 1997 (DOLLARS IN THOUSANDS) 5. INCOME TAXES (CONTINUED) The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at August 4, 1997, are presented below: Deferred tax assets: Allowance for doubtful accounts.................................... $ 80 Inventory capitalization........................................... 9 Accrued compensation, vacation, and bonus accrual.................. 184 --------- Total deferred tax assets............................................ $ 273 Deferred tax liabilities: Accelerated depreciation........................................... $ (88) --------- ---------
6. RELATED PARTY TRANSACTIONS The company entered into transactions in the ordinary course of business with the parent company and affiliates. The following table summarized the company's most significant related party transactions for the period from January 1, 1997 to August 4, 1997: Purchases of raw materials(a)....................................... $ 2,925 Management fees(b).................................................. 167 Interest(c)......................................................... 544
- ------------------------ (a) Mercer Products Company, Inc. purchases raw materials from AlphaGary Corporation, an affiliated company, for use in production. The terms of the purchases were terms similar to the terms Mercer Products Company, Inc. would have obtained from a third party. (b) Laporte plc and Laporte Inc. provided services to the Company including general management, treasury, tax, financial audit, financial reporting, insurance and legal services. The Company has been charged for such services through corporate allocations. These expenses were allocated to the Company for the period from January 1, 1997 through August 4, 1997, based on estimates of anticipated allocable costs incurred, less amounts charged as direct costs or expense rather than by allocation. Management believes that the allocation methods used on common expenses were reasonable, produce materially accurate results, and are indicative of the expenses that would have been incurred had the Company been operated as a stand-alone business. (c) These financial statements include an allocation of the debt incurred by Laporte plc when it originally acquired the company. Accordingly, interest expense at a rate of 9% for the period from January 1, 1997 to August 4, 1997, associated with such debt has been reflected in these financial statements in addition to interest on funding balances as shown in Note 1. 7. EMPLOYEE BENEFIT PLANS The Company sponsors two defined-contribution plans (an IRS qualified 401(k) plan and a money purchase pension plan). Participation in these plans is available to all salaried and hourly employees of the F-40 MERCER PRODUCTS COMPANY, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) PERIOD FROM JANUARY 1, 1997 TO AUGUST 4, 1997 (DOLLARS IN THOUSANDS) 7. EMPLOYEE BENEFIT PLANS (CONTINUED) Company. Participating employees contribute to the 401(k) plan based on a percentage of their compensation which are matched, based on a percentage of employee contributions by the Company. The Company further contributes an amount based on a percentage of employee's pay to the money purchase pension plan. The Company recorded expense for approximately $358 for the period from January 1, 1997 to August 4, 1997. 8. CONCENTRATIONS OF CREDIT RISK One customer accounted for 10% of the Company's sales during the period from January 1, 1997 to August 4, 1997, and no accounts receivable from any customer exceeded 10% of the Company's gross accounts receivable balance at August 4, 1997. The Company estimates an allowance for doubtful accounts based on the credit worthiness of its customers as well as general economic conditions. Consequently, an adverse change in those factors could affect the Company's estimate of its bad debt. The Company relies on several vendors to supply raw materials needed for its products. Although there are a limited number of manufacturers capable of supplying these needs, the Company believes that other suppliers could provide for the Company's needs in comparable terms. Abrupt changes in the supply flow could, however, cause a delay in manufacturing and possible inability to meet sales commitments on schedule and a possible loss of sales, which would affect operating results adversely. F-41 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS Board of Directors Mercer Products Company, Inc. We have audited the accompanying balance sheet of Mercer Products Company, Inc. as of December 31, 1997, and the related statements of operations, stockholder's equity, and cash flows for the period from August 5, 1997 (date of acquisition by Sovereign Specialty Chemicals, Inc.) to December 31, 1997. 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 audit. We conducted our audit 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 audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Mercer Products Company, Inc. as of December 31, 1997 and the results of its operations and its cash flows for the period from August 5, 1997 to December 31, 1997, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Chicago, Illinois February 20, 1998 F-42 MERCER PRODUCTS COMPANY, INC. BALANCE SHEET DECEMBER 31, 1997 (DOLLARS IN THOUSANDS) ASSETS Current assets: Cash............................................................................. $ 501 Trade accounts receivable, less allowance for doubtful accounts of $170.......... 2,305 Due from affiliated companies.................................................... 815 Inventories...................................................................... 2,920 Prepaid expenses and other current assets........................................ 211 Deferred income taxes............................................................ 9 --------- Total current assets............................................................... 6,761 Property, plant, and equipment, net................................................ 4,952 Goodwill, net...................................................................... 24,809 Deferred financing costs, net...................................................... 1,842 --------- Total assets....................................................................... $ 38,364 --------- --------- LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities: Accounts payable................................................................. $ 1,276 Accrued expenses................................................................. 806 --------- Total current liabilities.......................................................... 2,082 Long-term debt--Parent Company..................................................... 30,000 Deferred income taxes.............................................................. 175 Stockholders' equity: Common stock, $0.1 par value, 1,000 shares authorized, 10 shares issued and outstanding.................................................................... -- Additional paid-in capital....................................................... 6,105 Retained earnings................................................................ 2 --------- Total stockholder's equity......................................................... 6,107 --------- Total liabilities and stockholder's equity......................................... $ 38,364 --------- ---------
The accompanying Notes to Financial Statements are an integral part of these statements. F-43 MERCER PRODUCTS COMPANY, INC. STATEMENT OF INCOME PERIOD FROM AUGUST 5, 1997 (DATE OF ACQUISITION) TO DECEMBER 31, 1997 (DOLLARS IN THOUSANDS) Net sales........................................................................... $ 9,945 Cost of goods sold.................................................................. 6,921 --------- Gross profit........................................................................ 3,024 Selling, general, and administrative expenses....................................... 1,478 Amortization of goodwill............................................................ 421 --------- Operating income.................................................................... 1,125 Interest expense.................................................................... 1,117 --------- Income before income taxes.......................................................... 8 Income taxes........................................................................ 6 --------- Net income.......................................................................... $ 2 --------- ---------
The accompanying Notes to Financial Statements are an integral part of these statements. F-44 MERCER PRODUCTS COMPANY, INC. STATEMENT OF STOCKHOLDER'S EQUITY PERIOD FROM AUGUST 5, 1997 (DATE OF ACQUISITION) TO DECEMBER 31, 1997 (DOLLARS IN THOUSANDS)
ADDITIONAL COMMON PAID-IN RETAINED STOCKHOLDER'S STOCK CAPITAL EARNINGS EQUITY ----------- ----------- ----------- ------------- Balance at August 5, 1997 (Date of Acquisition)................... $ -- $ 6,105 $ -- $ 6,105 Net income for the period from August 5, 1997 to December 31, 1997............................................................ -- -- 2 2 ----- ----------- ----- ------ Balance at December 31, 1997...................................... $ -- $ 6,105 $ 2 $ 6,107 ----- ----------- ----- ------ ----- ----------- ----- ------
The accompanying Notes to Financial Statements are an integral part of these statements. F-45 MERCER PRODUCTS COMPANY, INC. STATEMENT OF CASH FLOWS PERIOD FROM AUGUST 5, 1997 (DATE OF ACQUISITION) TO DECEMBER 31, 1997 (DOLLARS IN THOUSANDS) OPERATING ACTIVITIES Net Income........................................................................... $ 2 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization...................................................... 586 Amortization of deferred financing costs........................................... 113 Deferred income taxes.............................................................. 166 Changes in operating assets and liabilities: Trade accounts receivable.......................................................... 442 Due from affiliated companies...................................................... (815) Inventories........................................................................ 423 Prepaid expenses and other current assets.......................................... (176) Accounts payable................................................................... (792) Accrued expenses................................................................... 526 --------- Net cash provided by operating activities............................................ 475 INVESTING ACTIVITIES Capital expenditures................................................................. (37) --------- Net cash used in investing activities................................................ (37) --------- Net increase in cash................................................................. 438 Cash at beginning of period.......................................................... 63 --------- Cash at end of period................................................................ $ 501 --------- --------- Supplemental cash flow information: Cash paid for interest............................................................. $ 646 --------- ---------
The accompanying Notes to Financial Statements are an integral part of these statements. F-46 MERCER PRODUCTS COMPANY, INC. NOTES TO FINANCIAL STATEMENTS PERIOD FROM AUGUST 5, 1997 (DATE OF ACQUISITION) TO DECEMBER 31, 1997 (DOLLARS IN THOUSANDS) 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Mercer Products Company, Inc. (the Company) is a wholly-owned subsidiary of Sovereign Specialty Chemicals, Inc. (Sovereign or the Parent Company). Effective August 5, 1997, Sovereign acquired the Company from Laporte plc (Laporte). The Company was purchased along with two affiliated companies (affiliated wholly-owned subsidiaries of Laporte). The total purchase price of the acquisitions was $133.7 million, including $2 million in acquisition costs. The purchase price allocated to the Company, based on its estimated fair value was approximately $35.8 million. The acquisition was accounted for as a purchase. The Company is primarily a producer of rubber and vinyl products for sale to wholesale distributors, mainly in the construction, industrial, and flooring industry. The Company sells domestically to customers throughout the United States. A significant portion of the Company's sales are to customers in the construction, industrial, and flooring industry, and as such the company is affected by the well-being of that industry. The Company does not require collateral and all their accounts receivable are unsecured; and while they believe their trade receivables will be collected, the Company anticipates that in the event of default they will follow normal collection procedures. Overall, credit risk related to the Company is limited due to a large number of customers in differing industries and geographic areas. INVENTORIES Inventories are stated at the lower of cost, using the first in, first out method, or market. PROPERTY, PLANT, AND EQUIPMENT Property, plant, and equipment are stated at cost. Depreciation on property, plant, and equipment is calculated on the straight-line method over the estimated useful lives of the assets. The following table summarizes the estimated useful lives of the Company's property, plant, and equipment:
YEARS ----- Building............................................................................... 39 Machinery and equipment................................................................ 3-10
GOODWILL Goodwill, which represents the excess of purchase price allocated to the Company over fair value of net assets acquired, is amortized on a straight-line basis over the expected periods to be benefited, which is 25 years. Accumulated amortization of goodwill at December 31, 1997, was $421. The Company assesses the recoverability of this intangible asset by determining whether the amortization of the goodwill balance over its remaining life can be recovered through undiscounted future operating cash flows of the acquired operation. The amount of goodwill impairment, if any, is measured based on projected discounted future operating cash flows using a discount rate reflecting the Company's average cost of funds. The assessment of the recoverability of goodwill will be impacted if estimated future operating cash flows are not achieved. F-47 MERCER PRODUCTS COMPANY, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) PERIOD FROM AUGUST 5, 1997 (DATE OF ACQUISITION) TO DECEMBER 31, 1997 (DOLLARS IN THOUSANDS) 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) DEFERRED FINANCING COSTS Deferred financing costs are being amortized using the straight-line method over the term of the related debt of 7 years. Accumulated amortization was $113, at December 31, 1997. INCOME TAXES The Company will be included in the consolidated federal income tax return of Sovereign Specialty Chemicals, Inc. For the purposes of these financial statements, income tax expense has been calculated as if the Company had been an independent entity. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. 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 amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts reported in the Company's balance sheet for cash, trade accounts receivable, due from affiliated companies, accounts payable, accrued expenses, due to affiliated companies and other liabilities approximate their fair value because of the short-term maturity of these instruments. CONCENTRATION OF CREDIT RISK Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of trade accounts which are from its domestic and international customers. To minimize this risk, ongoing credit evaluations of customers' financial condition are performed, although collateral is not required. In addition, the Company maintains an allowance for potential credit losses. 2. INVENTORIES The components of inventories at December 31, 1997, are as follows: Finished goods...................................................... $ 2,126 Raw materials....................................................... 794 --------- Total inventories................................................... $ 2,920 --------- ---------
F-48 MERCER PRODUCTS COMPANY, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) PERIOD FROM AUGUST 5, 1997 (DATE OF ACQUISITION) TO DECEMBER 31, 1997 (DOLLARS IN THOUSANDS) 3. PROPERTY, PLANT, AND EQUIPMENT At December 31, 1997, property, plant, and equipment are summarized as follows: Land................................................................ $ 223 Buildings........................................................... 2,059 Machinery and equipment............................................. 2,835 --------- 5,117 Less: Accumulated depreciation...................................... 165 --------- Property, plant, and equipment, net................................. $ 4,952 --------- ---------
4. ACCRUED EXPENSES At December 31, 1997, accrued expenses are summarized as follows: Interest............................................................. $ 358 Compensation......................................................... 190 Other................................................................ 258 --------- $ 806 --------- ---------
5. OPERATING LEASES The Company is a lessee under several noncancelable operating leases for buildings and machinery and equipment, which expire on various dates through 2004. Rent expense was $103 for the period from August 5, 1997 to December 31, 1997. Future minimum annual lease payments under operating leases are as follows: 1998................................................................ $ 598 1999................................................................ 573 2000................................................................ 379 2001................................................................ 251 2002................................................................ 56 Later years......................................................... 74 --------- Total minimum lease payments........................................ $ 1,931 --------- ---------
F-49 MERCER PRODUCTS COMPANY, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) PERIOD FROM AUGUST 5, 1997 (DATE OF ACQUISITION) TO DECEMBER 31, 1997 (DOLLARS IN THOUSANDS) 6. INCOME TAXES Income tax expense (benefit) consists of: Current: Federal.............................................................. $ (124) State................................................................ (36) Deferred............................................................. 166 --------- $ 6 --------- ---------
The current tax benefits are reflected in the balance sheet as due from affiliated companies as the benefits will be used by the Parent Company in its consolidated tax returns. The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1997, are presented below: Deferred tax assets: Inventory capitalization........................................... $ 9 --------- Total deferred tax assets............................................ $ 9 --------- --------- Deferred tax liabilities: Accelerated depreciation........................................... (69) Amortization of goodwill........................................... (106) --------- Total deferred tax liabilities....................................... $ (175) --------- ---------
7. LONG-TERM DEBT--PARENT COMPANY In connection with the purchase of the Company by Sovereign, $30 million in debt was pushed down to the Company and is reflected as a long-term obligation to Sovereign. The debt bears interest at 8.25%. In addition, the Company has recorded $1,955 in deferred financing costs. 8. CORPORATE ALLOCATION OF EXPENSES Since its acquisition by Sovereign, the Company has operated as a stand-alone entity. As such, for the period from August 5, 1997 to December 31, 1997, expenses have been paid directly by the Company and no allocation of Corporate expenses were made by Sovereign. Management believes that the costs reflected by the Company for the period ended December 31, 1997, are indicative of the expenses that would have been incurred had the Company been a stand-alone entity. 9. EMPLOYEE BENEFIT PLANS The Company sponsors a defined-contribution plan (an IRS qualified 401(k) plan). Participation in this plan is available to all salaried and hourly employees of the Company. Participating employees contribute to the 401(k) plan based on a percentage of their compensation which are matched, based on a F-50 MERCER PRODUCTS COMPANY, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) PERIOD FROM AUGUST 5, 1997 (DATE OF ACQUISITION) TO DECEMBER 31, 1997 (DOLLARS IN THOUSANDS) 9. EMPLOYEE BENEFIT PLANS (CONTINUED) percentage of employee contributions by the Company. The Company recorded expense for approximately $48 for the period from August 5, 1997 to December 31, 1997. 10. RISK OF CREDIT CONCENTRATIONS One customer accounted for 10% of the Company's sales during the period from August 5, 1997 to December 31, 1997, and no accounts receivable from any customer exceeded 10% of the Company's gross accounts receivable balance at December 31, 1997. The Company estimates an allowance for doubtful accounts based on the credit worthiness of its customers as well as general economic conditions. Consequently, an adverse change in those factors could affect the Company's estimate of its bad debts. The Company relies on several vendors to supply raw materials needed for its products. Although there are a limited number of manufacturers capable of supplying these needs, the Company believes that other suppliers could provide for the Company's needs in comparable terms. Abrupt changes in the supply flow could, however, cause a delay in manufacturing and possible inability to meet sales commitments on schedule and a possible loss of sales, which would affect operating results adversely. 11. SUBSEQUENT EVENT (UNAUDITED) On March 5, 1998, Sovereign entered into a stock purchase agreement (the Agreement) for the sale of the Company to Burke Industries, Inc. The purchase price of the sale as stated in the Agreement is approximately $35.8 million and includes potential adjustments to the price based upon working capital measurements. Closing of the sale is anticipated to be prior to April 30, 1998. F-51 MERCER PRODUCTS COMPANY, INC. CONDENSED STATEMENTS OF INCOME (UNAUDITED) (DOLLARS IN THOUSANDS)
FOR THE THREE MONTH PERIOD ENDED MARCH 31 -------------------- 1998 1997 --------- --------- Net sales................................................................... $ 6,204 $ 5,998 Cost of goods sold.......................................................... 3,923 4,042 --------- --------- Gross profit................................................................ 2,281 1,956 Selling, general, and administrative expenses............................... 1,294 1,293 --------- --------- Operating income............................................................ 987 663 Interest expense............................................................ 701 228 --------- --------- Income before income taxes.................................................. 286 435 Income taxes................................................................ 114 174 --------- --------- Net income.................................................................. $ 172 $ 261 --------- --------- --------- ---------
The accompanying Notes to Condensed Financial Statements are an integral part of these statements. F-52 MERCER PRODUCTS COMPANY, INC. CONDENSED BALANCE SHEETS (DOLLARS IN THOUSANDS)
DECEMBER 31, 1997 (DERIVED FROM MARCH 31, AUDITED 1998 FINANCIAL (UNAUDITED) STATEMENTS) ----------- ----------- ASSETS Current Assets Cash............................................................... $ 436 $ 501 Trade accounts receivable, less allowance for doubtful accounts of $168 as of March 31, 1998 and $170 as of December 31, 1997....... 2,952 2,305 Due from affiliated companies...................................... 813 815 Inventories........................................................ 3,179 2,920 Prepaid expenses and other current assets.......................... 124 211 Deferred income taxes.............................................. 9 9 ----------- ----------- Total current assets................................................. 7,513 6,761 Property, plant, and equipment, net.................................. 4,862 4,952 Goodwill, net........................................................ 24,749 24,809 Deferred financing costs, net........................................ 1,772 1,842 ----------- ----------- Total assets......................................................... $ 38,896 $ 38,364 ----------- ----------- ----------- ----------- LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities: Accounts payable................................................... $ 1,534 $ 1,276 Accrued expenses................................................... 613 806 Taxes payable...................................................... 126 -- ----------- ----------- Total current liabilities............................................ 2,273 2,082 Long-term debt--Parent Company....................................... 30,000 30,000 Deferred income taxes................................................ 175 175 Other non-current liabilities........................................ 169 -- Stockholders' equity: Common stock, $0.1 par value, 1,000 shares authorized, 10 shares issued and outstanding -- -- Additional paid-in capital......................................... 6,105 6,105 Retained earnings.................................................. 174 2 ----------- ----------- Total stockholder's equity........................................... 6,279 6,107 ----------- ----------- Total liabilities and stockholder's equity........................... $ 38,896 $ 38,364 ----------- ----------- ----------- -----------
The accompanying Notes to Condensed Financial Statements are an integral part of these statements. F-53 MERCER PRODUCTS COMPANY, INC. CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) (DOLLARS IN THOUSANDS)
FOR THE THREE MONTH PERIOD ENDED MARCH 31 -------------------- 1998 1997 --------- --------- OPERATING ACTIVITIES Net Income................................................................. $ 172 $ 261 Adjustments to reconcile net income to cash used in operating activities: Depreciation............................................................. 102 69 Amortization............................................................. 295 175 Changes in operating assets and liabilities: Trade accounts receivable.............................................. (647) 111 Due from affiliated companies.......................................... 2 -- Inventories............................................................ (259) (299) Prepaid expenses and other current assets.............................. (78) 8 Accounts payable....................................................... 258 492 Accrued expenses....................................................... (193) (574) Taxes payable.......................................................... 126 (616) Other non-current liabilities.......................................... 169 -- --------- --------- TOTAL CASH USED IN OPERATING ACTIVITIES.................................... (53) (373) INVESTING ACTIVITIES Purchase of property, plant and equipment................................ (12) (18) NET CASH USED IN INVESTING ACTIVITIES...................................... (12) (18) FINANCING ACTIVITIES Increase in long-term payable -parent.................................... -- 341 --------- --------- NET CASH PROVIDED BY FINANCING ACTIVITIES.................................. -- 341 Increase (decrease) in cash in current period.............................. (65) (50) Cash at beginning of period................................................ 501 392 --------- --------- Cash at end of period...................................................... $ 436 $ 342 --------- --------- --------- ---------
The accompanying Notes to Condensed Financial Statements are an integral part of these statements. F-54 MERCER PRODUCTS COMPANY, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION The accompanying condensed financial statements of the Company have been prepared without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. The condensed balance sheet as of December 31, 1997 was derived from audited financial statements. The accompanying condensed financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included elsewhere in the Prospectus. The financial information included herein reflects all adjustments (consisting of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the results for the interim period. The results of operations for the three months ended March 31, 1998 are not necessarily indicative of the results to be expected for the full year. 2. INVENTORIES Inventories consist of the following:
MARCH 31, DECEMBER 31, 1998 1997 ----------- ------------- (IN THOUSANDS) Raw materials....................................................... $ 761 $ 794 Finished goods...................................................... 2,418 2,126 ----------- ------ $ 3,179 $ 2,920 ----------- ------ ----------- ------
3. SUBSEQUENT EVENT On April 21, 1998, the Company was acquired by Burke Industries, Inc. for an aggregate purchase price of $35,750,000, subject to working capital adjustments. F-55 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ALL TENDERED OLD NOTES, EXECUTED LETTERS OF TRANSMITTAL AND OTHER RELATED DOCUMENTS SHOULD BE DIRECTED TO THE EXCHANGE AGENT. QUESTIONS AND REQUESTS FOR ADDITIONAL COPIES OF THE PROSPECTUS, LETTER OF TRANSMITTAL AND OTHER RELATED DOCUMENTS SHOULD BE ADDRESSED TO THE EXCHANGE AGENT AS FOLLOWS: BY REGISTERED OR CERTIFIED MAIL: UNITED STATES TRUST COMPANY OF NEW YORK P.O. BOX 844 COOPER STATION NEW YORK, NY 10276-0844 ATTN: CORPORATE TRUST SERVICES BY FACSIMILE: (212) 420-6152 BY OVERNIGHT COURIER: UNITED STATES TRUST COMPANY OF NEW YORK 770 BROADWAY, 13TH FLOOR NEW YORK, NEW YORK 10003 ATTN: CORPORATE TRUST SERVICES BY HAND: UNITED STATES TRUST COMPANY OF NEW YORK 111 BROADWAY LOWER LEVEL NEW YORK, NEW YORK 10006 ATTN: CORPORATE TRUST SERVICES CONFIRM BY TELEPHONE 800-548-6565 (Originals of all documents submitted by facsimile should be sent promptly by hand, overnight courier, or registered or certified mail) NO BROKER DEALER OR OTHER PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFER MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE SECURITIES OFFERED HEREBY NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION TO SUCH PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. UNTIL , 1998 (90 DAYS FROM THE DATE OF THIS PROSPECTUS) ALL DEALERS EFFECTING TRANSACTIONS IN THE NEW NOTES, WHETHER OR NOT PARTICIPATING IN THIS EXCHANGE OFFER, MAY BE REQUIRED TO DELIVER A PROSPECTUS. OFFER TO EXCHANGE ALL OUTSTANDING FLOATING RATE SENIOR NOTES DUE 2007 ($30,000,000 PRINCIPAL AMOUNT) FOR FLOATING INTEREST RATE SENIOR NOTES DUE 2007. BURKE INDUSTRIES, INC. PAYMENT OF PRINCIPAL AND INTEREST UNCONDITIONALLY GUARANTEED BY SUBSTANTIALLY ALL OF ITS SUBSIDIARIES --------------------- PROSPECTUS --------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- INDEX TO FINANCIAL STATEMENT SCHEDULES
PAGE --------- Report of Independent Auditors............................................................................. S-2 Schedule II--Valuation and Qualifying Accounts............................................................. S-3
S-1 REPORT OF ERNST & YOUNG, LLP, INDEPENDENT AUDITORS The Board of Directors and Shareholders Burke Industries, Inc. and Subsidiaries 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 fiscal years in the period ended January 2, 1998, and have issued our report thereon dated February 26, 1998 included elsewhere in this Registration Statement. Our audits also included the financial statement schedule listed in Item 21(b) of this Registration Statement. 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. /s/ 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) Three months ended April 3, 1998........................... $ 334 $ 42 $ 1 $ 375 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 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS The Company is a California corporation. Section 317 of the California Corporations Code authorizes the indemnification by a California corporation of any person who was or is a party or is threatened to be made a party to any proceeding by reason of that person's status as an agent of the corporation; provided that no such indemnification may be provided for any person if he or she shall (i) have acted in good faith and in a manner the person reasonably believed to be in the best interests of the corporation, or (ii) in any criminal proceeding, not have had reasonable cause to believe his or her conduct was unlawful. In the case of actions brought by or in the right of the corporation, indemnification may only be provided if the person acted in good faith, and in a manner the person believe to be in the best interests of the corporation and its shareholders. Indemnification must be provided to the extent that an agent has been successful, on the merits or otherwise, in defense of an action of the type described in the first and second sentences of this paragraph. The Bylaws of the Company provide that it shall indemnify and hold harmless any person who is or was a director or officer of the Company, or who is or was serving at the request of the Board of Directors of the Company as a director, officer, employee or agent of another foreign or domestic corporation, partnership, joint venture, trust or other enterprise (an "Agent"), from and against any expenses, judgments, fines, settlements, and other amounts actually and reasonably incurred in connection with any "proceeding" (as defined in Section 317(a)) to the fullest extent permitted by applicable law. In the event of such person's death, the right of indemnification under the Bylaws of the Company shall extend to such person's legal representatives. The right of indemnification under the Company's ByLaws is not exclusive of any other rights such person may have whether by law or under any agreement, insurance policy, vote of directors or shareholders, or otherwise. ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (A) EXHIBITS.
EXHIBIT NO. DESCRIPTION - ------------- ----------------------------------------------------------------------------------------------------- 1.1 Purchase Agreement, dated April 17, 1998, between the Company and the Initial Purchaser. 2.1 Stock Purchase Agreement, dated as of March 5, 1998 among Burke, Sovereign and Mercer.(2) 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) 3.9 Articles of Incorporation of Mercer Products Company, Inc. 3.10 Bylaws of Mercer Products Company, Inc.
II-1
EXHIBIT NO. DESCRIPTION - ------------- ----------------------------------------------------------------------------------------------------- 4.1 Indenture among the Company, the Subsidiary Guarantors and United States Trust Company of New York, relating to the Notes, dated as of April 21, 1998. 4.2 First Supplemental Indenture, dated April 21, 1998, between the Company, the Subsidiary Guarantors and United States Trust Company of New York. 4.3 Form of Note (included in Exhibit 4.1). 4.4 Registration Rights Agreement, dated April 21, 1998, between the Company and the Holders. 5.1 Opinion of Gibson, Dunn & Crutcher LLP, including consent. 8.1 Opinion of Gibson, Dunn & Crutcher LLP with regard to federal income tax consequences of the Exchange Offer.(3) 10.1 Purchase Agreement, dated August 14, 1997, between the Company and the Initial Purchaser.(1) 10.2 Agreement and Plan of Merger, dated as of August 13, 1997, by and among the Company, the Company Shareholders, JFLEI and MergerCo.(1) 10.3 Indenture among the Company, the Subsidiary Guarantors and United States Trust Company of New York, relating to the Existing Notes, dated as of August 20, 1997.(1) 10.4 Registration Rights Agreement, dated August 20, 1997, between the Company and the Existing Note Holders.(1) 10.5 Loan and Security Agreement, dated August 20, 1997, between the Company, the Lenders and NationsBank, N.A.(1) 10.6 Amendment No. 1, Waiver Joinder Agreement to Loan Security Agreement, dated April 21, 1998, between the Company, Mercer and NationsBank, N.A. 10.7 Form of Revolving Note (included in Exhibit 10.6). 10.8 Subsidiary Guaranty, dated August 20, 1997, between the Company and the Subsidiaries.(1) 10.9 Subsidiary Security Agreement, dated August 20, 1997, between the Company and the Subsidiaries.(1) 10.10 Assignment for Security, dated April 21, 1998, by Mercer. 10.11 First Amendment to Deed of Trust with Absolute Assignment of Leases and Rents, Security Agreement and Fixture Filing, dated April 21, 1998, between the Company and NationsBank, N.A. 10.12 Florida Mortgage, Security Agreement and Assignment of Leases and Rents, dated April 21, 1998, between Mercer and NationsBank, N.A. (unrecorded) 10.13 Stock Pledge Agreement, dated August 20, 1997.(1) 10.14 Pledge Agreement, dated April 21, 1998, between the Company and NationsBank, N.A. 10.15 Consent Solicitation Statement dated March 30, 1998. 10.16 Form of Consent to Amendments to Indenture. 10.17 Investment Agreement, dated August 20, 1997, between the Company and preferred shareholders.(1) 10.18 Shareholders' Agreement, dated August 20, 1997, between the Company and the shareholders.(1) 10.19 Shareholders' Registration Rights Agreement, dated August 20, 1997, between the Company and the shareholders.(1)
II-2
EXHIBIT NO. DESCRIPTION - ------------- ----------------------------------------------------------------------------------------------------- 10.20 Warrantholders' Registration Rights Agreement, dated August 20, 1997, between the Company and the warrantholders.(1) 10.21 Form of Warrant Certificate.(1) 10.22 Form of Election Form for Series C Preferred Stock. 10.23 Management Agreement, dated August 20, 1997, between the Company and J. F. Lehman & Company.(1) 10.24 Lease Agreement, dated April 30, 1997 between the Company and Senter Properties, LLC for the premises at 2049 Senter Road, San Jose, CA.(1) 10.25 Lease Agreement, dated May 1, 1996, between the Company and SSMRT Bensenville Industrial Park (3), Inc. for the premises at 870 Thomas Drive, Bensenville, IL.(1) 10.26 Lease Agreement, dated October 20, 1995, between the Company and Lincoln Property Company for the premises at 13767 Freeway Drive, Santa Fe Springs, CA.(1) 10.27 Lease Agreement, dated April 25, 1983, between the Company and Donald M. Hypes for the premises at 14910 Carmenita Blvd., Norwalk, CA.(1) 10.28 Lease Agreement, dated March 29, 1996, between the Company and S&M Development Co., a general partnership for the premises at 13615 Excelsior Drive, Santa Fe Springs, CA.(1) 10.29 Lease Agreement, dated June 5, 1995, 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, MA.(1) 10.30 Consent to sale of all of the outstanding shares of Mercer Products Company, Inc. to Burke Industries, Inc., dated March 20, 1998 by Land Co. Leasing & New Development Co. and related Standard/Industrial Commercial Single-Tenant Lease-Gross, dated June 22, 1994, as amended, between The Childs Family Trust u/t/a of April 30, 1981 and The A.G. Gardner Trust u/t/a of March 5, 1981 dba Landco and Mercer. 10.31 Consent of Lessor dated April 21, 1998 and related Agreement of Lease dated December 1, 1998, as amended, between RTC Properties, Inc. and Mercer. 10.32 Sublease Agreement, dated February 20, 1992, between Burke Rubber Company for the premises at 107 South Riverside Drive, Modesto, CA.(1) 10.33 Servicing Agreement, dated April 26, 1996, between the Company and Westland Technologies.(1) 12.1 Statement re: Computation of Ratio of Earnings to Fixed Charges. 21.1 Subsidiaries of the Company. 23.1 Consent of Gibson, Dunn & Crutcher LLP (to be included in Exhibit 5.1) LLP. 23.2 Consent of Ernst & Young LLP. 23.3 Consent of KPMG Peat Marwick LLP. 24.1 Powers of Attorney (see pages II-6 through II-11 of this Registration Statement). 25.1 Statement of Eligibility of United States Trust Company of New York, as trustee under the Indenture filed as Exhibits 4.1 and 4.2, on Form T-1.
II-3
EXHIBIT NO. DESCRIPTION - ------------- ----------------------------------------------------------------------------------------------------- 27.1 Financial Data Schedule. 99.1 Form of Letter of Transmittal to be used in connection with the Notes Exchange Offer. 99.2 Notice of Guaranteed Delivery regarding Old Notes
- ------------------------ (1) Incorporated by reference to the Company's Registration Statement on Form S-4, File No. 333-36675. (2) Incorporated by reference to the Company's 1997 annual report on Form 10-K, File No. 333-36675. (B) FINANCIAL STATEMENT SCHEDULES The following financial statement schedules are filed with Part II of this Registration Statement:
SCHEDULE NUMBER DESCRIPTION OF SCHEDULE - ---------------- --------------------------------------- II Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the applicable instructions or are inapplicable and therefore have been omitted. ITEM 22. UNDERTAKINGS. The undersigned registrants hereby undertake with respect to the securities offered by them: 1. Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended (the "Act") may be permitted as to directors, officers and controlling persons of any Registrant pursuant to the provisions described in Item 20 or otherwise, the Registrants have been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Act and is, therefore unenforceable. In the event a claim for indemnification against such liabilities (other than the payment by any Registrant of expenses incurred or paid by a director, officer or controlling person of such Registrant in the successful defense of any action, suit, or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, such Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. 2. The undersigned Registrants hereby undertake to respond to requests for information that is incorporated by reference into the Prospectus pursuant to Items 4, 10(b), 11 or 13 of this Form, within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of the registration statement through the date of responding to the request. 3. The undersigned Registrants hereby undertake to supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the registration statement when it became effective. 4. To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if II-4 the dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high and of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20 percent change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement. (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement. 5. That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. 6. To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. II-5 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of San Jose, State of California on the 18th day of June, 1998. BURKE INDUSTRIES, INC. a California corporation By: /s/ ROCCO C. GENOVESE ----------------------------------------- Rocco C. Genovese CHIEF EXECUTIVE OFFICER AND PRESIDENT
POWER OF ATTORNEY Each person whose signature appears below constitutes and appoints Rocco C. Genovese and Davide E. Worthington his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as each of them might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or their substitute, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE - ------------------------------ -------------------------- ------------------- Director, Chief Executive /s/ ROCCO C. GENOVESE Officer and President - ------------------------------ (Principal Executive June 18, 1998 Rocco C. Genovese Officer) /s/ DAVID E. WORTHINGTON Vice President--Finance - ------------------------------ (Principal Financial and June 18, 1998 David E. Worthington Accounting Officer) /s/ REED C. WOLTHAUSEN - ------------------------------ Director June 18, 1998 Reed C. Wolthausen /s/ JOHN F. LEHMAN - ------------------------------ Director June 18, 1998 John F. Lehman
II-6
SIGNATURE TITLE DATE - ------------------------------ -------------------------- ------------------- /s/ DONALD GLICKMAN - ------------------------------ Director June 18, 1998 Donald Glickman /s/ GEORGE SAWYER - ------------------------------ Director June 18, 1998 George Sawyer /s/ KEITH OSTER - ------------------------------ Director June 18, 1998 Keith Oster /s/ OLIVER C. BOILEAU - ------------------------------ Director June 18, 1998 Oliver C. Boileau /s/ THOMAS G. POWNALL - ------------------------------ Director June 18, 1998 Thomas G. Pownall /s/ JOSEPH A. STROUD - ------------------------------ Director June 18, 1998 Joseph A. Stroud
II-7 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of San Jose, State of California on the 18th day of June, 1998. BURKE FLOORING PRODUCTS, INC. a California corporation By: /s/ ROCCO C. GENOVESE ----------------------------------------- Rocco C. Genovese PRESIDENT
POWER OF ATTORNEY Each person whose signature appears below constitutes and appoints Rocco C. Genovese his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent or his substitute, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated. SIGNATURE TITLE DATE - ------------------------------ -------------------------- ------------------- /s/ ROCCO C. GENOVESE President - ------------------------------ (Principal Executive June 18, 1998 Rocco C. Genovese Officer) /s/ DAVID E. WORTHINGTON Vice President--Finance - ------------------------------ (Principal Financial and June 18, 1998 David E. Worthington Accounting Officer) /s/ KEITH OSTER - ------------------------------ Director June 18, 1998 Keith Oster II-8 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of San Jose, State of California on the 18th day of June, 1998. BURKE RUBBER COMPANY, INC. a California corporation By: /s/ ROCCO C. GENOVESE ----------------------------------------- Rocco C. Genovese PRESIDENT
POWER OF ATTORNEY Each person whose signature appears below constitutes and appoints Rocco C. Genovese his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent or his substitute, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated. SIGNATURE TITLE DATE - ------------------------------ -------------------------- ------------------- /s/ ROCCO C. GENOVESE President - ------------------------------ (Principal Executive June 18, 1998 Rocco C. Genovese Officer) /s/ DAVID E. WORTHINGTON Vice President--Finance - ------------------------------ (Principal Financial and June 18, 1998 David E. Worthington Accounting Officer) /s/ KEITH OSTER - ------------------------------ Director June 18, 1998 Keith Oster II-9 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of San Jose, State of California on the 18th day of June, 1998. BURKE CUSTOM PROCESSING, INC. a California corporation By: /s/ ROCCO C. GENOVESE ----------------------------------------- Rocco C. Genovese PRESIDENT
POWER OF ATTORNEY Each person whose signature appears below constitutes and appoints Rocco C. Genovese his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent or his substitute, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated. SIGNATURE TITLE DATE - ------------------------------ -------------------------- ------------------- /s/ ROCCO C. GENOVESE President - ------------------------------ (Principal Executive June 18, 1998 Rocco C. Genovese Officer) /s/ DAVID E. WORTHINGTON Vice President--Finance - ------------------------------ (Principal Financial and June 18, 1998 David E. Worthington Accounting Office) /s/ KEITH OSTER - ------------------------------ Director June 18, 1998 Keith Oster II-10 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of San Jose, State of California on the 18th day of June, 1998. MERCER PRODUCTS COMPANY, INC. a Florida corporation By: /s/ ROCCO C. GENOVESE ----------------------------------------- Rocco C. Genovese PRESIDENT
POWER OF ATTORNEY Each person whose signature appears below constitutes and appoints Rocco C. Genovese his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent or his substitute, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated. SIGNATURE TITLE DATE - ------------------------------ -------------------------- ------------------- /s/ ROCCO C. GENOVESE President - ------------------------------ (Principal Executive June 18, 1998 Rocco C. Genovese Officer) /s/ DAVID E. WORTHINGTON Vice President--Finance - ------------------------------ (Principal Financial and June 18, 1998 David E. Worthington Accounting Office) /s/ KEITH OSTER - ------------------------------ Director June 18, 1998 Keith Oster II-11 REGISTRATION NO. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ EXHIBITS TO FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ BURKE INDUSTRIES, INC. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION - ----------- -------------------------------------------------------------------------------------------------------- 1.1 Purchase Agreement, dated April 17, 1998, between the Company and the Initial Purchaser. 2.1 Stock Purchase Agreement, dated as of March 5, 1998 among Burke, Sovereign and Mercer.(2) 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) 3.9 Articles of Incorporation of Mercer Products Company, Inc. 3.10 Bylaws of Mercer Products Company, Inc. 4.1 Indenture among the Company, the Subsidiary Guarantors and United States Trust Company of New York, relating to the Notes, dated as of April 21, 1998. 4.2 First Supplemental Indenture, dated April 21, 1998, between the Company, the Subsidiary Guarantors and United States Trust Company of New York. 4.3 Form of Note (included in Exhibit 4.1). 4.4 Registration Rights Agreement, dated April 21, 1998, between the Company and the Holders. 5.1 Opinion of Gibson, Dunn & Crutcher LLP, including consent. 8.1 Opinion of Gibson, Dunn & Crutcher LLP with regard to federal income tax consequences of the Exchange Offer.(3) 10.1 Purchase Agreement, dated August 14, 1997, between the Company and the Initial Purchaser.(1) 10.2 Agreement and Plan of Merger, dated as of August 13, 1997, by and among the Company, the Company Shareholders, JFLEI and MergerCo.(1) 10.3 Indenture among the Company, the Subsidiary Guarantors and United States Trust Company of New York, relating to the Existing Notes, dated as of August 20, 1997.(1) 10.4 Registration Rights Agreement, dated August 20, 1997, between the Company and the Existing Note Holders.(1) 10.5 Loan and Security Agreement, dated August 20, 1997, between the Company, the Lenders and NationsBank, N.A.(1) 10.6 Amendment No. 1, Waiver Joinder Agreement to Loan Security Agreement, dated April 21, 1998, between the Company, Mercer and NationsBank, N.A. 10.7 Form of Revolving Note (included in Exhibit 10.6). 10.8 Subsidiary Guaranty, dated August 20, 1997, between the Company and the Subsidiaries.(1) 10.9 Subsidiary Security Agreement, dated August 20, 1997, between the Company and the Subsidiaries.(1) 10.10 Assignment for Security, dated April 21, 1998, by Mercer.
EXHIBIT NO. DESCRIPTION - ----------- -------------------------------------------------------------------------------------------------------- 10.11 First Amendment to Deed of Trust with Absolute Assignment of Leases and Rents, Security Agreement and Fixture Filing, dated April 21, 1998, between the Company and NationsBank, N.A. 10.12 Florida Mortgage, Security Agreement and Assignment of Leases and Rents, dated April 21, 1998, between Mercer and NationsBank, N.A. (unrecorded) 10.13 Stock Pledge Agreement, dated August 20, 1997.(1) 10.14 Pledge Agreement, dated April 21, 1998, between the Company and NationsBank, N.A. 10.15 Consent Solicitation Statement dated March 30, 1998. 10.16 Form of Consent to Amendments to Indenture. 10.17 Investment Agreement, dated August 20, 1997, between the Company and preferred shareholders.(1) 10.18 Shareholders' Agreement, dated August 20, 1997, between the Company and the shareholders.(1) 10.19 Shareholders' Registration Rights Agreement, dated August 20, 1997, between the Company and the shareholders.(1) 10.20 Warrantholders' Registration Rights Agreement, dated August 20, 1997, between the Company and the warrantholders.(1) 10.21 Form of Warrant Certificate.(1) 10.22 Form of Election Form for Series C Preferred Stock. 10.23 Management Agreement, dated August 20, 1997, between the Company and J. F. Lehman & Company.(1) 10.24 Lease Agreement, dated April 30, 1997 between the Company and Senter Properties, LLC for the premises at 2049 Senter Road, San Jose, CA.(1) 10.25 Lease Agreement, dated May 1, 1996, between the Company and SSMRT Bensenville Industrial Park (3), Inc. for the premises at 870 Thomas Drive, Bensenville, IL.(1) 10.26 Lease Agreement, dated October 20, 1995, between the Company and Lincoln Property Company for the premises at 13767 Freeway Drive, Santa Fe Springs, CA.(1) 10.27 Lease Agreement, dated April 25, 1983, between the Company and Donald M. Hypes for the premises at 14910 Carmenita Blvd., Norwalk, CA.(1) 10.28 Lease Agreement, dated March 29, 1996, between the Company and S&M Development Co., a general partnership for the premises at 13615 Excelsior Drive, Santa Fe Springs, CA.(1) 10.29 Lease Agreement, dated June 5, 1995, 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, MA.(1) 10.30 Consent to sale of all of the outstanding shares of Mercer Products Company, Inc. to Burke Industries, Inc., dated March 20, 1998 by Land Co. Leasing & New Development Co. and related Standard/Industrial Commercial Single-Tenant Lease-Gross, dated June 22, 1994, as amended, between The Childs Family Trust u/t/a of April 30, 1981 and The A.G. Gardner Trust u/t/a of March 5, 1981 dba Landco and Mercer. 10.31 Consent of Lessor dated April 21, 1998 and related Agreement of Lease dated December 1, 1998, as amended, between RTC Properties, Inc. and Mercer. 10.32 Sublease Agreement, dated February 20, 1992, between Burke Rubber Company for the premises at 107 South Riverside Drive, Modesto, CA.(1) 10.33 Servicing Agreement, dated April 26, 1996, between the Company and Westland Technologies.(1)
EXHIBIT NO. DESCRIPTION - ----------- -------------------------------------------------------------------------------------------------------- 12.1 Statement re: Computation of Ratio of Earnings to Fixed Charges. 21.1 Subsidiaries of the Company. 23.1 Consent of Gibson, Dunn & Crutcher LLP (to be included in Exhibit 5.1) LLP. 23.2 Consent of Ernst & Young LLP. 23.3 Consent of KPMG Peat Marwick LLP. 24.1 Powers of Attorney (see pages II-6 through II-11 of this Registration Statement). 25.1 Statement of Eligibility of United States Trust Company of New York, as trustee under the Indenture filed as Exhibits 4.1 and 4.2, on Form T-1. 27.1 Financial Data Schedule. 99.1 Form of Letter of Transmittal to be used in connection with the Notes Exchange Offer. 99.2 Notice of Guaranteed Delivery regarding Old Notes.
- ------------------------ (1) Incorporated by reference to the Company's Registration Statement on Form S-4, File No. 333-36675. (2) Incorporated by reference to the Company's 1997 annual report on Form 10-K, File No. 333-36675. EX-1.1 2 EXHIBIT 1.1 EXECUTION COPY BURKE INDUSTRIES, INC. $30,000,000 FLOATING INTEREST RATE NOTES DUE 2007 PURCHASE AGREEMENT April 17, 1998 NationsBanc Montgomery Securities LLC 100 North Tryon Street Charlotte, North Carolina 28255 Ladies and Gentlemen: Burke Industries, Inc., a California corporation (the "Company"), proposes to issue and sell to you (the "Initial Purchaser"), $30,000,000 principal amount of Floating Interest Rate Senior Notes Due 2007 (the "Notes") of the Company. The Notes are to be issued under an indenture (the "Indenture") to be dated as of April 21, 1998 between the Company and certain of the subsidiaries of the Company acting as guarantors (including Mercer Products Company, Inc.) with respect to the obligations of the Company thereunder (collectively, the "Guarantors") and United States Trust Company of New York, as trustee (the "Trustee"). The sale of the Notes to the Initial Purchaser will be made without registration of the Notes under the Securities Act of 1933, as amended (the "Securities Act"), in reliance upon exemptions from the registration requirements of the Securities Act. The Initial Purchaser has advised the Company that the Initial Purchaser will offer and sell the Notes purchased by it hereunder in accordance with Section 4 hereof as soon as it deems advisable. The Notes will have the benefit of certain registration rights, pursuant to a Registration Rights Agreement, substantially in the form attached hereto as Exhibit A, to be dated as of April 21, 1998, between the Company and the Initial Purchaser (the "Registration Rights Agreement"). In connection with the sale of the Notes, the Company has prepared a preliminary offering memorandum, dated March 30, 1998 (the "Preliminary Memorandum") and a final offering memorandum, dated April 17, 1998 (the "Final Memorandum"). Each of the Preliminary Memorandum and the Final Memorandum sets forth certain information concerning the Company and the Notes. The Company hereby confirms that it has authorized the use of the Preliminary Memorandum and the Final Memorandum, and any amendment or supplement thereto, in connection with the offer and sale of the Notes by the Initial Purchaser. Unless stated to the contrary, all references herein to the Final Memorandum are to the Final 2 Memorandum at the Execution Time (as defined below) and are not meant to include any amendment or supplement, or any information incorporated by reference therein, subsequent to the Execution Time. 1. INTRODUCTION. The Securities are being issued and sold in connection with the Company's acquisition (the "Mercer Acquisition") of Mercer Products Company, Inc. ("Mercer") pursuant to a Stock Purchase Agreement, dated March 5, 1998 (the "Stock Purchase Agreement"), among the Company, Mercer and Sovereign Specialty Chemicals, Inc. ("Sovereign"). Pursuant to the Stock Purchase Agreement, the Company will acquire from Sovereign all of the outstanding capital stock of Mercer for $35,750,000, subject to working capital and other adjustments. The Mercer Acquisition is being financed through: (i) the issuance and sale of the Notes, (ii) the issuance and sale of 3,000 shares of the Company's 6% Convertible Preferred Stock (the "Convertible Preferred Stock") to J.F. Lehman Equity Investors I, L.P. ("JFLEI") and other equity holders of the Company and (iii) available cash of the Company. In connection with the sale of the Notes, the Company has solicited and obtained the requisite consents (the "Consent Solicitation") from the holders of its 10% Senior Notes due 2007 (the "Existing Notes") to certain proposed amendments (the "Proposed Amendments") to the indenture under which such notes were issued (the "Existing Indenture). The Proposed Amendments would, among other things, permit the issuance of the Notes and permit the incurrence of indebtedness represented thereby. Concurrently with the Offering, the Company has entered into discussions to amend its $15.0 million revolving credit facility (such amendment or such credit facility, as amended, the "Bank Facility Amendment"). 2. REPRESENTATIONS AND WARRANTIES. The Company represents and warrants to the Initial Purchaser that: (a) The Preliminary Memorandum, at the date thereof, did not contain any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. The Final Memorandum, at the date hereof, does not, and at the Closing Date (as defined below) will not (or, if amended or supplemented, the Final Memorandum as amended or supplemented at the date of any such amendment or supplement and at the Closing Date, will not), contain any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; PROVIDED, HOWEVER, that the Company makes no representation or warranty as to the 3 information contained in or omitted from the Preliminary Memorandum or the Final Memorandum, or any amendment or supplement thereto, in reliance upon and in conformity with information furnished in writing to the Company, or its agents or advisors by, or on behalf of the Initial Purchaser specifically for inclusion therein. (b) Neither the Company nor any "Affiliate" (as defined in Rule 501(b) of Regulation D under the Securities Act ("Regulation D")) of the Company or any person acting on its or their behalf (other than the Initial Purchaser and persons acting on its behalf, as to which no representation is made) has, directly or indirectly, made offers or sales of any security, or solicited offers to buy any security, under circumstances that would require the registration of the Notes under the Securities Act. (c) Neither the Company nor any Affiliate, or any person acting on its or their behalf (other than the Initial Purchaser and persons acting on its behalf, as to which no representation is made) has engaged in any form of general solicitation or general advertising (within the meaning of Regulation D) in connection with any offer or sale of the Notes in the United States. (d) The Notes satisfy the eligibility requirements of Rule 144A(d)(3) under the Securities Act. (e) The Company is not and, as of the Execution Time, will not be an "investment company" within the meaning of the Investment Company Act of 1940, as amended (the "Investment Company Act"), without taking account of any exemption arising out of the number of holders of the securities of the Company. (f) The Company has not paid or agreed to pay to any person any compensation for soliciting another to purchase any securities of the Company (except as contemplated by this Agreement). (g) The consolidated financial statements (including the notes thereto) and schedules of the Company and its consolidated subsidiaries, set forth in the Final Memorandum fairly present in all material respects the financial position, results of operations and cash flows of the Company and its consolidated subsidiaries and Mercer, respectively, as of the dates and for the periods specified therein; since the date of the latest of such financial statements, there has been no change nor any development or event involving a prospective change which has had a material adverse effect on (i) the business, operations, properties, assets, liabilities, net worth, condition (financial or otherwise) or prospects of the Company and its consolidated subsidiaries and Mercer, taken as a whole, or (ii) the ability of the Company to perform any of its obligations (whether existing prior to or as of the Effective Time) under this 4 Agreement, the Registration Rights Agreement, the Indenture or the Notes (a "Material Adverse Effect"); such financial statements and schedules have been prepared in accordance with generally accepted accounting principles consistently applied throughout the periods involved (except as otherwise expressly noted in the Final Memorandum); the other financial and statistical information and data set forth in the Final Memorandum (and any amendment or supplement thereto) is, in all material respects, accurately presented and prepared on a basis consistent with such financial statements, except as otherwise stated therein; and the statistical, market-related data included in the Final Memorandum are based on or derived from sources which the Company believes to be reliable and accurate and are based upon assumptions and qualifications which the Company considers at the time made reasonable and appropriate in all material respects. (h) The pro forma combined financial statements (including the notes thereto) and the other pro forma financial information included in the Final Memorandum (i) comply as to form in all material respects with the applicable requirements of Regulation S-X promulgated under the Exchange Act, (ii) have been prepared in accordance with the Commission's rules and guidelines with respect to pro forma financial statements and (iii) have been properly computed on the bases described therein; the assumptions used in the preparation of the pro forma financial data and other pro forma financial information included in the Final Memorandum are reasonable in all material respects and the adjustments used therein are appropriate in all material respects to give effect to the transactions or circumstances referred to therein. (i) Except as contemplated in the Final Memorandum, subsequent to the respective dates as of which information is given in the Preliminary Memorandum and the Final Memorandum, (i) the Company and its subsidiaries and Mercer have not incurred any material liability or obligation, direct or contingent, nor entered into any material transaction not in the ordinary course of business; (ii) the Company has not purchased any of its outstanding capital stock, nor declared, paid or otherwise made any dividend or distribution of any kind on its capital stock; and (iii) there has not been any material change in the capital stock, short-term debt or long-term debt of the Company or its subsidiaries and Mercer, except as described in or contemplated by the Preliminary Memorandum or the Final Memorandum, as the case may be. (j) Each of the Company and the Guarantors has been duly incorporated and is validly existing as a corporation in good standing under the laws of California, and, in the case of Mercer, the laws of New Jersey, and is and, as of the Execution Time, will be duly qualified to do business as a foreign corporation and is and, as of the Execution time, will be in good standing under the laws of each jurisdiction which 5 requires such qualification wherein it owns or leases properties or conducts business, except in such jurisdictions in which the failure to so qualify, singly or in the aggregate, would not have a Material Adverse Effect. None of the California Guarantors have any substantial assets or properties or conduct any operations. (k) Each of the Company and the Guarantors has full power (corporate and other) to own or lease its properties and conduct its business as described in the Final Memorandum; the Company has full power (corporate and other) to enter into the Registration Rights Agreement, the Indenture and the Bank Facility Amendment and to carry out all the terms and provisions thereof to be carried out by it. (l) The Company has the authorized, issued and outstanding capitalization as set forth in the Final Memorandum in the column entitled "Historical" under the caption "Capitalization; and, as of the Execution Time, will have the authorized, issued and outstanding capitalization as set forth in the Final Memorandum in the column entitled "Pro Forma" under the caption "Capitalization." All of the issued shares of capital stock of the Company have been duly authorized, validly issued, fully paid and nonassessable and were not issued in violation of any preemptive or similar rights. (m) There are no outstanding subscriptions, rights, warrants, options, calls, convertible securities, commitments of sale or liens related to or entitling any person to purchase or otherwise to acquire any shares of capital stock of, or other ownership interest in, the Company or any subsidiary thereof except as otherwise disclosed in the Final Memorandum. (n) The issued shares of capital stock of each of the Guarantors have been duly authorized and validly issued, are fully paid and nonassessable and, except for directors' qualifying shares and except as otherwise set forth in the Final Memorandum are owned of record and beneficially by the Company, either directly or through wholly owned subsidiaries, free and clear of any pledge, lien, encumbrance, security interest, restriction on voting or transfer, preemptive rights or claim of any third party. No Guarantor is prohibited, directly or indirectly, from paying any dividends to the Company, from making any other distribution on such Guarantor's capital stock, from repaying to the Company any loans or advances to such Guarantor from the Company or from transferring any of such Guarantor's property or assets to the Company or any other Guarantor, except as described in or contemplated by the Final Memorandum. There has been no change in the authorized and issued shares of each class of capital stock of each of the California Guarantors since August 20, 1997. (o) Neither the Company nor any of its subsidiaries is (i) in violation of its corporate charter or bylaws, (ii) in breach or violation of any law, ordinance, 6 governmental or administrative rule or regulation or court decree or (iii) in default in the performance or observance of any obligation, agreement, covenant or condition contained in any contract, indenture, mortgage, loan agreement, note, lease or other instrument to which it is a party or by which its respective properties may be bound, which in the case of clauses (ii) or (iii) would have a Material Adverse Effect. (p) The issuance, offering and sale of the Notes to the Initial Purchaser pursuant to this Agreement, the delivery of the Notes under this Agreement, the compliance by the Company and the Guarantors with the other provisions of this Agreement and the provisions of the Registration Rights Agreement, the Indenture and the Notes, the compliance by the Company with the provisions of this Agreement and the Bank Facility Amendment, the consummation of the other transactions herein and therein contemplated and the consummation of the other transactions contemplated hereby and in the Final Memorandum (including the consummation of the Mercer Acquisition and the performance by the Company of its obligations under the Stock Purchase Agreement) do not, except as disclosed in or contemplated by the Final Offering Memorandum, (i) require the consent, approval, authorization, order, registration or qualification of or with any governmental authority or court, except such as (A) may be required under state securities or blue sky laws, (B) that if not obtained would not create a Material Adverse Effect or (C) as may be contemplated by the Registration Rights Agreement or (ii) conflict with, result in a breach or violation of, or constitute a default under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any of its subsidiaries pursuant to, any material contract, loan agreement, note, indenture, mortgage, deed of trust, lease or other agreement or instrument to which the Company or any of its subsidiaries is a party, or by which the Company or any of its subsidiaries or any of their respective properties is bound, or the charter or by-laws of the Company, any of the subsidiaries of the Company, or any statute, rule or regulation or any judgment, order or decree of any governmental authority or court or arbitrator applicable to the Company or any of its subsidiaries, except as rights to indemnity and contribution may be limited by federal or state securities laws or public policy. (q) The Company and its subsidiaries possess all certificates, authorizations and permits (including environmental permits) issued by the appropriate federal, state or foreign regulatory authorities or bodies necessary to conduct their respective businesses, except for those the lack of which would not cause a Material Adverse Effect, and neither the Company nor any of its subsidiaries has received any notice of proceedings relating to the revocation or modification of any such certificate, authorization or permit which, singly or in the aggregate, is reasonably likely to result in a Material Adverse Effect. 7 (r) No legal or governmental proceedings or investigations are pending to which the Company or any of its subsidiaries is a party or to which the property of the Company or any of its subsidiaries is subject that are not described in the Final Memorandum and are required to be disclosed therein, and no such proceedings or investigations, to the best knowledge of the Company, have been threatened against the Company or any of its subsidiaries, or with respect to any of their respective properties, except in each case for such proceedings or investigations that, singly or in the aggregate, are not reasonably likely to result in a Material Adverse Effect. (s) The Company and each of its subsidiaries have valid title in fee simple to all items of real property and title to all personal property owned by each of them, in each case free and clear of any pledge, lien, encumbrance, security interest or other defect or claim of any third party, except (i) such as do not interfere with the use made or proposed to be made of such property by the Company or such subsidiary to an extent that such interference would have a Material Adverse Effect, and (ii) permitted liens set forth in or contemplated by the Final Memorandum. Any real property and buildings held under lease by the Company or any such subsidiary are held and, as of the Execution Time, will be held under valid, subsisting and enforceable leases, with such exceptions as do not interfere with the use made or proposed to be made of such property and buildings by the Company or such subsidiary to an extent that such interference would have a Material Adverse Effect. (t) This Agreement has been duly authorized, executed and delivered by the Company. (u) The Registration Rights Agreement, the Indenture, the Stock Purchase Agreement and the Bank Facility Amendment have been duly authorized by all necessary corporate actions of the Company and, when duly executed and delivered by the Company (and its subsidiaries, as applicable) and the other parties thereto will constitute legal, valid and binding obligations of the Company, enforceable against the Company in accordance with their terms, except as the same may be limited by (i) applicable bankruptcy, insolvency, reorganization, moratorium or other laws affecting creditors' rights generally, including without limitation the effect of statutory or other laws regarding fraudulent conveyances or transfers or preferential transfers, or (ii) general principles of equity, whether considered at law or at equity, and except as rights to indemnity and contribution in the Registration Rights Agreement may be limited by federal or state securities laws or public policy. (v) The issuance, sale and delivery by the Company of the Convertible Preferred Stock and the performance by the Company of its obligations 8 contained in the certificate of determination therefor have been duly authorized by all necessary corporate action and when issued, delivered and paid for will constitute legal, valid and binding obligations of the Company and enforceable against the Company in accordance with its terms, except as the same may be limited by (i) applicable bankruptcy, insolvency, reorganization, moratorium or other laws affecting creditors' rights generally, including without limitation the effect of statutory or other laws regarding fraudulent conveyances or transfers or preferential transfers, or (ii) general principles of equity, whether considered at law or at equity. (w) The Notes and the Guarantees have been duly authorized by all necessary corporate action for issuance and sale pursuant to this Agreement and, when executed, authenticated, issued and delivered in the manner provided for in the Indenture and sold and paid for as provided in this Agreement, the Notes and the Guarantees will constitute legal, valid and binding obligations of the Company and the Guarantors, respectively, entitled to the benefits of the Indenture and enforceable against the Company and the Guarantors, respectively, in accordance with their terms, except as the same may be limited by (i) applicable bankruptcy, insolvency, reorganization, moratorium or other laws affecting creditors' rights generally, including without limitation the effect of statutory or other laws regarding fraudulent conveyances or transfers or preferential transfers or (ii) general principles of equity, whether considered at law or at equity. (x) Ernst & Young LLP, who have audited certain financial statements of the Company and its consolidated subsidiaries and Mercer for certain periods and delivered their reports with respect to the audited consolidated financial statements and schedules of the Company and audited financial statements and schedules of Mercer for certain periods in the Final Memorandum, are independent public accountants within the meaning of the Securities Act and the applicable rules and regulations thereunder; and KPMG Peat Marwick LLP, who have audited certain financial statements of Mercer and delivered their report with respect to such audited financial statements and schedules of Mercer in the Final Memorandum, are independent public accountants within the meaning of the Securities Act and the applicable rules and regulations thereunder. 9 (y) The Company and each of its subsidiaries and Mercer maintain a system of internal accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management's general or specific authorizations; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain asset accountability; (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (z) Neither the Company nor any of its subsidiaries nor Mercer or any of its subsidiaries now or, after giving effect to the issuance of the Notes and the consummation of the transactions contemplated by the Final Memorandum will be (i) insolvent, (ii) left with unreasonably small capital with which to engage in its anticipated businesses or (iii) incurring debts beyond its ability to pay such debts as they become due. (aa) The Company and its subsidiaries own or otherwise possess the right to use all patents, trademarks, service marks, trade names and copyrights, all applications and registrations for each of the foregoing, and all other proprietary rights and confidential information used in the conduct of their respective businesses as currently conducted, except to the extent the absence thereof would not have a Material Adverse Effect; and neither the Company nor any of its subsidiaries has received any notice, or is otherwise aware, of any infringement of or conflict with the rights of any third party with respect to any of the foregoing which, singly or in the aggregate, is reasonably likely to result in a Material Adverse Effect. (bb) The Company and its subsidiaries are insured by insurers of recognized financial responsibility (or by appropriate self-insurance) against such losses and risks and in such amounts as are prudent and customary in the businesses and in the locations in or at which they are engaged; and neither the Company nor any such subsidiary has any reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that would not have a Material Adverse Effect. (cc) There is (i) no unfair labor practice complaint pending against the Company or any of its subsidiaries or, to the best knowledge of the Company, threatened against any of them, before the National Labor Relations Board or any state or local labor relations board, and no significant grievance or more significant arbitration proceeding arising out of or under any collective bargaining agreement is so 10 pending against the Company or any of its subsidiaries or, to the best knowledge of the Company, threatened against any of them, and (ii) no significant strike, labor dispute, slowdown or stoppage pending against the Company or any of its subsidiaries or, to the best knowledge of the Company, threatened against it or any of its subsidiaries which, in the case of (i) or (ii) is likely to result in a Material Adverse Effect. (dd) Except as set forth in the Final Memorandum, the Company has filed all foreign, federal, state and local tax returns that are required to be filed, except insofar as the failure to file such returns, singly or in the aggregate, would not have a Material Adverse Effect, or has requested extensions thereof and in each case has paid all material taxes required to be paid by it and any other assessment, fine or penalty levied against it, to the extent that any of the foregoing is due and payable, other than those being contested in good faith and for which adequate reserves have been provided or those currently payable without penalty or interest. (ee) Neither the Company nor any Affiliate of the Company has taken, directly or indirectly, any action designed to cause or result in, or which has constituted or which might reasonably be expected to cause or result in, stabilization or manipulation (as such terms are defined under the Exchange Act) of the price of any security of the Company to facilitate the sale or resale of the Notes. (ff) Except as disclosed in the Final Memorandum, and except as would not individually or in the aggregate have a Material Adverse Effect (i) the Company and each of its subsidiaries is in compliance with all applicable Environmental Laws (as defined below), (ii) the Company and each of its subsidiaries has all permits, authorizations and approvals required under any applicable Environmental Laws and is in compliance with their requirements, (iii) there are no pending, or to the best knowledge of the Company or any of its subsidiaries threatened, Environmental Claims (as defined below) against the Company or any of its subsidiaries and (iv) the Company and each of its subsidiaries does not have knowledge of any circumstances with respect to any of their respective properties or operations that could reasonably be anticipated to form the basis of an Environmental Claim against the Company or any of its subsidiaries or any of their respective properties or operations and the business operations relating thereto that would have a Material Adverse Effect. For purposes of this Agreement, the following terms shall have the following meanings: "Environmental Law" means, with respect to any person, any federal, state, local or municipal statute, law, rule, regulation, ordinance, code, policy or rule of common law and any published judicial or administrative interpretation thereof including any judicial or administrative order, consent decree or judgment binding on such person or any of its subsidiaries, relating to the environment, health, safety or any chemical, material or substance, exposure to which is prohibited, limited or regulated by any such governmental authority. "Environmental Claims" means any and all administrative, 11 regulatory or judicial actions, suits, demands, demand letters, claims, liens, notices of noncompliance or violation, investigations or proceedings relating in any way to any Environmental Law. (gg) The Company has reasonably concluded that any and all costs and liabilities incurred or reasonably expected to be incurred pursuant to any Environmental Law (including, without limitation, any capital or operating expenditures required for clean-up, closure of properties or compliance with Environmental Laws or any permit, license or approval, any related constraints on operating activities and potential liabilities to third parties) would not, singly or in the aggregate, have a Material Adverse Effect. (hh) Each certificate signed by any officer of the Company and delivered to the Initial Purchaser or its counsel shall be deemed to be a representation and warranty by the Company to the Initial Purchaser as to the matters covered thereby. (ii) The guarantees by the subsidiaries have been duly authorized by each of the Guarantors, and, when executed and authenticated in accordance with the provisions of the Indenture, will conform in all material respects to the description thereof in the Final Memorandum, will be valid and binding obligations of each of the Guarantors, will be entitled to the benefits of the Indenture and will be enforceable in accordance with their terms, except as the same may be limited by (i) applicable bankruptcy, insolvency, reorganization, moratorium or other laws affecting creditors' rights generally, including without limitation the effect of statutory or other laws regarding fraudulent conveyances or transfers or preferential transfers or (ii) general principles of equity, whether considered at law or at equity.. (jj) The sale of the Notes to the Initial Purchaser does not constitute a "prohibited transaction" (as defined in the Employee Retirement Income Security Act of 1974, as amended). (kk) The Stock Purchase Agreement is in full force and effect, and the Company shall have performed all of its obligations thereunder required to be performed on or prior to the Execution Time. 3. PURCHASE AND SALE. Subject to the terms and conditions and in reliance upon the representations and warranties herein set forth, the Company agrees to sell to the Initial Purchaser, and the Initial Purchaser agrees to purchase from the Company at a purchase price of 97% of the principal amount thereof, plus accrued interest, if any, from April 21, 1998 to the Closing Date, $30,000,000 principal amount of Notes. 12 4. DELIVERY AND PAYMENT. Delivery of and payment for the Notes shall be made at 10:00 a.m. New York City time, on April 21, 1998 or such later date as the Initial Purchaser shall designate, which date and time may be postponed by agreement between the Initial Purchaser and the Company (such date and time of delivery and payment for the Notes being herein called the "Closing Date"). Delivery of the Notes shall be made to the Initial Purchaser against payment by the Initial Purchaser of the purchase price thereof to or upon the order of the Company in immediately available funds or such other manner of payment as may be agreed by the Company and the Initial Purchaser. Delivery of the Notes shall be made at such location as the Initial Purchaser shall reasonably designate at least one business day in advance of the Closing Date and payment for the Notes shall be made at the offices of Gibson, Dunn & Crutcher, 200 Park Avenue, New York, New York, with any transfer taxes payable in connection with the transfer of the Notes fully paid, against payment of the purchase price therefor. Certificates for the Notes shall be registered in such names and in such denominations as the Initial Purchaser may request not less than two full business days in advance of the Closing Date. 5. OFFERING OF NOTES BY THE INITIAL PURCHASER. The Initial Purchaser represents and warrants to and agrees with the Company that: (a) It, or any person acting on its behalf, has not solicited offers, offered or sold, and will not solicit offers, offer or sell, any Notes except to those it reasonably believes to be (i) "qualified institutional buyers" (as defined in Rule 144A under the Securities Act) and that, in connection with each such sale, it has taken or will take reasonable steps to ensure that the purchaser of such Notes is aware that such sale is being made in reliance on Rule 144A, or (ii) other institutional "accredited investors" (as defined in Rule 501(a) (1), (2), (3) or (7) of Regulation D) that, prior to their purchase of the Notes, deliver to the Initial Purchaser a letter containing the representations and agreements set forth in the form of Annex A to the Final Memorandum. The Initial Purchaser agrees that prior to or simultaneously with the confirmation of sale by it to any purchaser of any of the Notes purchased by such Initial Purchaser from the Company pursuant hereto, it shall furnish to that purchaser a copy of the Final Memorandum. (b) Neither it nor any person acting on its behalf has made or will make offers or sales of the Notes in the United States by means of any form of general solicitation or general advertising (within the meaning of Regulation D) in the United States. (c) The Initial Purchaser's acquisition of the Notes does not constitute a "prohibited transaction" (as defined in the Employee Retirement Income Security Act of 1974, as amended). 13 6. AGREEMENTS. The Company agrees with the Initial Purchaser that: (a) The Company will furnish to the Initial Purchaser and to Counsel for the Initial Purchaser, without charge, during the period referred to in paragraph (c) below, as many copies of the Final Memorandum and any amendments and supplements thereto as it may reasonably request. The Company will pay the expenses of printing of all documents relating to the Offering. (b) The Company will not amend or supplement the Final Memorandum unless the Initial Purchaser shall previously have been advised thereof and shall not have objected thereto in writing within four business days after being furnished a copy thereof. (c) Prior to the consummation of the exchange offer made pursuant to the Registration Rights Agreement or the effectiveness of an applicable shelf registration statement if, in the reasonable judgment of the Initial Purchaser, the Initial Purchaser or any of its Affiliates are required to deliver an offering memorandum in connection with sales of, or market-making activities with respect to, the Notes, (A) the Company will periodically amend or supplement the Final Memorandum so that the information contained in the Final Memorandum complies with the requirements of Rule 144A of the Securities Act, (B) the Company will amend or supplement the Final Memorandum when necessary to reflect any material changes in the information provided therein so that the Final Memorandum will not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in light of the circumstances existing as of the date the Final Memorandum is so delivered, not misleading and (C) the Company will provide the Initial Purchaser with copies of each such amended or supplemented Final Memorandum, as the Initial Purchaser may reasonably request. The Company hereby expressly acknowledges that the indemnification and contribution provisions of Section 9 hereof are specifically applicable and relate to each offering memorandum, registration statement, prospectus, amendment or supplement referred to in this Section 6(c). (d) The Company will arrange for the qualification of the Notes for sale by the Initial Purchaser under the laws of such jurisdictions as the Initial Purchaser may reasonably designate and will maintain such qualifications in effect as long as required for the sale of the Notes; PROVIDED, HOWEVER, that the Company shall not be obligated to qualify as a foreign corporation in any jurisdiction in which they are not now so qualified or to take any action that would subject them to general consent to service of process in any jurisdiction in which they are not now so subject or to subject themselves to taxation in any such jurisdiction. The Company will promptly advise the 14 Initial Purchaser of the receipt by the Company of any notification with respect to the suspension of the qualification of the Notes for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose. (e) Whenever the Company publishes or makes available to the public (by filing with any regulatory authority or securities exchange or by publishing a press release or otherwise) any information that could reasonably be expected to be material in the context of the offer and sale of Notes under this Agreement, the same shall immediately notify the Initial Purchaser as to the nature of such information or event. Until the third anniversary of the Closing Date, the Company will notify the Initial Purchaser of (i) any decrease in the rating of the Notes or any other debt securities of the Company by any nationally recognized statistical rating organization (as defined in Rule 436(g) under the Securities Act) or (ii) any notice given of any intended or potential decrease in any such rating or of a possible change in any such rating which does not indicate the direction of the possible change, as soon as the Company becomes aware of any such decrease or notice. For a period of two years after the Closing Time, the Company will also deliver to the Initial Purchaser, as soon as available and to the extent individually prepared, and without request, copies of its latest annual report and quarterly statement and any reports of its auditors thereon. (f) Neither the Company, any of its Affiliates, nor any person acting on its or their behalf other than the Initial Purchaser, as to which no agreement is made, will, directly or indirectly, make offers or sales of any security, or solicit offers to buy any security, under circumstances that would require the registration of the Notes under the Securities Act (other than pursuant to the Registration Rights Agreement). (g) Except following the effectiveness of the Exchange Offer Registration Statement or the Shelf Registration Statement (as defined in the Final Offering Memorandum), as the case may be, neither the Company, any of its Affiliates, nor any person acting on its or their behalf other than the Initial Purchaser, as to which no agreement is made, will engage, in connection with the offering of the Notes, (i) in any form of general solicitation or general advertising (within the meaning of Regulation D) or (ii) in any public offering within the meaning of Section 4(2) of the Securities Act. (h) So long as any of the Notes are "restricted securities" within the meaning of Rule 144(a)(3) under the Securities Act, the Company will, during any period in which it is not subject to and in compliance with Section 13 or 15(d) of the Exchange Act, provide to each holder of such restricted securities and to each prospective purchaser (as designated by such holder) of such restricted securities, upon the request of such holder or prospective purchaser, any information required to be provided by Rule 144A(d)(4) under the Securities Act. Such information, at the date of 15 its provision by the Company to such holders or prospective purchasers, will not contain any 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. This covenant is intended to be for the benefit of the holders and the prospective purchasers designated by such holders from time to time of such restricted securities. (i) The Company will cooperate with the Initial Purchaser and use its best efforts to (i) permit the Notes to be eligible for clearance and settlement through The Depository Trust Company and (ii) permit the Notes to be designated PORTAL-eligible securities in accordance with the rules and regulations of the National Association of Securities Dealers, Inc. (the "NASD"). (j) The Company will not, until 180 days following the Closing Date, without the prior written consent of the Initial Purchaser, offer, sell or contract to sell, or otherwise dispose of, directly or indirectly, or announce the offering of, any debt securities issued or guaranteed by the Company (other than the Notes). (k) The Company will apply the net proceeds from the sale of the Notes as set forth in the Final Memorandum under the caption "Use of Proceeds." 7. CONDITIONS TO THE OBLIGATIONS OF THE INITIAL PURCHASER. The obligations of the Initial Purchaser to purchase the Notes shall be subject to the accuracy in all material respects of the representations and warranties on the part of the Company contained herein at the date and time that this Agreement is executed and delivered by the parties hereto (the "Execution Time"), and at the Closing Date as specified in Section 7(g), to the accuracy in all material respects of the statements of the Company made in any certificates delivered pursuant to the provisions hereof, to the performance by the Company of their obligations hereunder at or prior to the Closing Date and to the following additional conditions: (a) The Company shall have entered into a Registration Rights Agreement with the Initial Purchaser substantially in the form attached hereto as Exhibit A. (b) The Company and the Trustee shall have entered into the Indenture. (c) The Company shall have furnished to the Initial Purchaser the opinion of Gibson, Dunn & Crutcher, L.L.P., Counsel for the Company, dated the Closing Date, subject to customary qualifications and exceptions reasonably acceptable to Counsel for the Initial Purchaser, substantially to the effect that: 16 (i) the Company is a corporation validly existing and in good standing under the laws of California and is duly qualified to do business as a foreign corporation and is in good standing under the laws of each jurisdiction which requires such qualification wherein it owns or leases properties or conducts business, except in such jurisdictions in which the failure to so qualify, singly or in the aggregate, would not have a Material Adverse Effect; (ii) each of the Guarantors organized under the laws of the State of California (the "California Guarantors") is a corporation validly existing and in good standing under the laws of the jurisdiction in which it is chartered or organized and is duly qualified to do business as a foreign corporation and is in good standing under the laws of each jurisdiction which requires such qualification wherein it owns or leases properties or conducts business, except in such jurisdictions in which the failure to so qualify, singly or in the aggregate, would not have a Material Adverse Effect; (iii) the Company has the authorized, issued and outstanding capitalization as set forth in the Final Memorandum under the caption "Capitalization." All of the issued shares of capital stock of the Company have been duly authorized and validly issued and are fully paid and nonassessable and were not, to the best of such counsel's knowledge, issued in violation of any preemptive or similar rights; (iv) the issued shares of capital stock of each of the California Guarantors have been duly authorized and validly issued, are fully paid and nonassessable and, the issued shares of capital stock of each of the Guarantors, except for directors' qualifying shares and except as otherwise set forth in or contemplated by the Final Memorandum are owned of record and beneficially by the Company, either directly or through wholly owned subsidiaries, free and clear, to the best of such counsel's knowledge, of any pledge, lien, encumbrance, security interest, restriction on voting or transfer, preemptive rights or other defect or claim of any third party; (v) this Agreement has been duly authorized, executed and delivered by the Company; (vi) each of the Registration Rights Agreement and the Indenture have been duly authorized, executed and delivered by the Company and the California Guarantors and constitute legal, valid and binding obligations of the Company and its subsidiaries, enforceable against the Company in accordance with their terms, except as the same may be limited by (A) applicable 17 bankruptcy, insolvency, reorganization, moratorium or other laws affecting creditors' rights generally, including without limitation the effect of statutory or other laws regarding fraudulent conveyances or transfers, preferential transfers or distributions by corporations to shareholders, (B) general principles of equity, whether considered at law or at equity, including, without limitation, concepts of materiality, reasonableness, good faith and fair dealing, or (C) other customary exceptions specified by such counsel in their opinion and reasonably satisfactory to Counsel for the Initial Purchaser; (vii) the Notes have been duly authorized and, when executed and authenticated in accordance with the provisions of the Indenture and delivered to and paid for by the Initial Purchaser pursuant to this Agreement, will constitute legal, valid and binding obligations of the Company and the Guarantors entitled to the benefits of the Indenture and enforceable against the Company and the Guarantors in accordance with their terms, except as the same may be limited by (A) applicable bankruptcy, insolvency, reorganization, moratorium or other laws affecting creditors' rights generally, including without limitation the effect of statutory or other laws regarding fraudulent conveyances or transfers, preferential transfers or distributions by corporations to shareholders, (B) general principles of equity, whether considered at law or at equity, including, without limitation, concepts of materiality, reasonableness, good faith and fair dealing, or (C) other customary exceptions specified by such counsel in their opinion and reasonably acceptable to Counsel for the Initial Purchaser; (viii) the Guarantees executed by the California Guarantors have been duly authorized and, when executed in accordance with the provisions of the Indenture, all of the Guarantees will constitute legal, valid and binding obligations of the Guarantors entitled to the benefits of the Indenture and enforceable against the Guarantors in accordance with their terms, except as may be limited by (A) applicable bankruptcy, insolvency, reorganization, moratorium or other laws affecting creditors' rights generally, including without limitation the effect of statutory or other laws regarding fraudulent conveyances or transfers, preferential transfers or distributions by corporations to shareholders, (B) general principles of equity, whether considered at law or at equity, including, without limitation, concepts of materiality, reasonableness, good faith and fair dealing, or (C) other customary exceptions specified by such counsel in their opinion and reasonably acceptable to Counsel for the Initial Purchaser; (ix) the statements set forth under the headings "Acquisition of Mercer", "Description of Senior Notes", "Consent Solicitation", "Description of 18 Credit Facility", "Description of Capital Stock" and "Plan of Distribution" in the Final Memorandum, insofar as such statements constitute summaries of the legal matters, documents and proceedings referred to therein, fairly summarize the matters referred to therein; (x) the issuance, offering and sale and delivery of the Notes to the Initial Purchaser pursuant to this Agreement, the execution of the Amended Credit Facility, the compliance by the Company and the Guarantors with the other provisions of this Agreement and the provisions of the Registration Rights Agreement, the Indenture and the Notes and the consummation of the other transactions herein and therein contemplated and the consummation of the other transactions contemplated hereby and in the Final Memorandum (including the consummation of the Mercer Acquisition and the performance by the Company of its obligations under the Stock Purchase Agreement) do not (i) require the consent, approval, authorization, order, registration or qualification of or with any governmental authority or court (except such as may be required under state securities or blue sky laws or except as may be contemplated by the Registration Rights Agreement or except for such that have already been obtained, or (ii) (a) conflict with, result in a breach or violation of, or constitute a default under the charter or by-laws of the Company or any of the subsidiaries of the Company or Mercer, or (b) result in a breach or violation of, or constitute a default under or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any of its subsidiaries or Mercer pursuant to (1) any material contract, loan agreement, note, indenture, mortgage, deed of trust, lease or other agreement or instrument to which the Company or any of its subsidiaries or Mercer is a party, or by which the Company or any of its subsidiaries or Mercer or any of their respective properties is bound, in each case, that has been identified to such Counsel as being the only such documents that are material to the Company or such subsidiary or Mercer, as applicable, by officers of such entity pursuant to an officers' certificate attached to such opinion, except for liens, charges or encumbrances imposed under the Amended Credit Facility, or, (2) to the best of such Counsel's knowledge, (x) any statute, rule or regulation that in such counsel's experience is generally applicable to transactions of the type contemplated by the Final Memorandum or (y) any judgment, order or decree of any governmental authority or court or arbitrator applicable to the Company or any of its subsidiaries or Mercer, except, in each case, as (i) rights to indemnity and contribution may be limited by federal or state securities laws or public policy and (ii) would not have a Material Adverse Effect. 19 (xi) to the best knowledge of such counsel, there are no pending or threatened legal or governmental proceedings to which the Company or Mercer is a party that would be required under the Securities Act to be described in a registration statement or a prospectus delivered at the time of the confirmation of the sale of an offering of securities registered under the Securities Act that are not described in the Final Memorandum, or, to such counsel's best knowledge after due inquiry, that seek to restrain, enjoin, prevent the consummation of or otherwise challenge the issuance or sale of the Notes to the Initial Purchaser; (xii) assuming the accuracy of the representations and warranties of the Initial Purchaser and compliance by it with its agreements contained herein, no registration of the Notes under the Securities Act is required, and no qualification of the Indenture under the Trust Indenture Act of 1939 is necessary, for the offer and sale by the Initial Purchaser of the Notes in the manner contemplated by this Agreement; and (xiii) the Company is not an "investment company" within the meaning of the Investment Company Act without taking account of any exemption arising out of the number of holders of securities of the Company. In addition, such counsel shall also state that such counsel has participated in conferences with officers and representatives of the Company, representatives of the independent public accountants for the Company and the Initial Purchaser at which the contents of the Final Memorandum and related matters were discussed and, although such counsel has not independently verified and are not passing upon and assume no responsibility for the accuracy, completeness or fairness of the statements contained in the Final Memorandum (except to the extent specified in paragraph (ix) hereof), no facts have come to the attention of such counsel that lead such counsel to believe that the Final Memorandum, as of its date or as of the Closing Date, contained or contains an untrue statement of a material fact or omitted or omits to state any material fact necessary to make the statements therein, in light of the circumstances under which there were made, not misleading (it being understood that such counsel need express no belief or opinion with respect to the financial statements, schedules and related notes thereto and the other financial, statistical and accounting data included therein). All references in this Section 7(d) to the Final Memorandum shall be deemed to include any amendment or supplement thereto at the Closing Date. 20 (d) The Company shall have furnished to the Initial Purchaser the opinion of Dechert Price & Roads, New Jersey Counsel for the Company, dated the Closing Date, substantially to the effect that: (i) Mercer is a corporation validly existing and in good standing under the laws of California and is duly qualified to do business as a foreign corporation and is in good standing under the laws of each jurisdiction which requires such qualification wherein it owns or leases properties or conducts business, except in such jurisdictions in which the failure to so qualify, singly or in the aggregate, would not have a Material Adverse Effect; (ii) each of the Indenture and the Registration Rights Agreement has been duly authorized, executed and delivered by Mercer and constitute legal, valid and binding obligations of Mercer, enforceable against Mercer in accordance with its terms, except as the same may be limited by (A) applicable bankruptcy, insolvency, reorganization, moratorium or other laws affecting creditors' rights generally, including without limitation the effect of statutory or other laws regarding fraudulent conveyances or transfers, preferential transfers or distributions by corporations to shareholders, (B) general principles of equity, whether considered at law or at equity, including, without limitation, concepts of materiality, reasonableness, good faith and fair dealing, or (C) other customary exceptions specified by such counsel in their opinion and reasonably satisfactory to Counsel for the Initial Purchaser; and (iii) the Guarantee executed by Mercer has been duly authorized and, when executed and authenticated in accordance with the provisions of the Indenture, will constitute legal, valid and binding obligations of Mercer enforceable against the Mercer in accordance with its terms, except as may be limited by (A) applicable bankruptcy, insolvency, reorganization, moratorium or other laws affecting creditors' rights generally, including without limitation the effect of statutory or other laws regarding fraudulent conveyances or transfers, preferential transfers or distributions by corporations to shareholders, (B) general principles of equity, whether considered at law or at equity, including, without limitation, concepts of materiality, reasonableness, good faith and fair dealing, or (C) other customary exceptions specified by such counsel in their opinion and reasonably acceptable to Counsel for the Initial Purchaser. (e) The Company shall have furnished to the Initial Purchaser the opinion of Hogan & Hartson, counsel for Sovereign dated the Closing Date, substantially the the 21 effect that the issued shares of capital stock of Mercer have been duly authorized and validly issued, are fully paid and nonassessable. (f) The Initial Purchaser shall have received from Shearman & Sterling, Counsel for the Initial Purchaser such opinion or opinions, dated the Closing Date, with respect to the issuance and sale of the Notes and other related matters as the Initial Purchaser may reasonably require, and the Company shall have furnished to such counsel such documents as they reasonably request for the purpose of enabling them to pass upon such matters; (g) (i) the representations and warranties on the part of the Company in this Agreement shall be true and correct in all material respects on and as of the Closing Date with the same effect as if made on the Closing Date, and the Company shall have complied with all the agreements and satisfied all the conditions on their part to be performed or satisfied hereunder at or prior to the Closing Date; (ii) since the date of the most recent financial statements of the Company and Mercer included in the Final Memorandum, there shall have been no change nor any development or event involving a prospective change constituting a Material Adverse Effect; and (iii) the Company shall have furnished to the Initial Purchaser a certificate of the Company signed by the chief executive officer and the principal financial or accounting officer or the vice president of finance of the Company dated the Closing Date, to the effect that the signers of such certificate have carefully examined the Final Memorandum, any amendment or supplement to the Final Memorandum and this Agreement and to the effect set forth in clauses (i) and (ii) above. (h) At the Execution Time and at the Closing Date, each of Ernst & Young LLP and KPMG Peat Marwick LLP shall have furnished to the Initial Purchaser a letter or letters, dated respectively as of the Execution Time and as of the Closing Date, in form and substance satisfactory to the Initial Purchaser, confirming that they are independent accountants within the meaning of the Securities Act and the Exchange Act and the applicable rules and regulations thereunder and Rule 101 of the Code of Professional Conduct of the American Institute of Certified Public Accountants (the "AICPA") and otherwise satisfactory in form and substance to the Initial Purchaser and its Counsel. (i) The Notes shall have been designated PORTAL-eligible securities in accordance with the rules and regulations of the NASD. 22 (j) (i) Neither the Company nor any of its subsidiaries shall have sustained since the date of the latest audited financial statements included in the Final Memorandum losses or interferences with their businesses, taken as a whole, from fire, explosion, flood or other calamity, whether or not covered by insurance, or from any labor dispute or court or governmental action, order or decree, otherwise than as set forth or contemplated in the Final Memorandum or (ii) since such date, there shall not have been any change in the capital stock or long-term debt of the Company or any of its subsidiaries or any change, or any development involving a prospective change, in or affecting the general affairs, management, financial position, stockholders' equity or results of operations of the Company or its subsidiaries, taken as a whole, otherwise than as set forth or contemplated in the Final Memorandum, the effect of which, in any such case described in clause (i) or (ii), is, in the reasonable judgment of the Initial Purchaser, so material and adverse as to make it impracticable or inadvisable to proceed with the offering or the delivery of the Notes being delivered on the Closing Date on the terms and in the manner contemplated herein and in the Final Memorandum. (k) Subsequent to the execution and delivery of this Agreement, there shall not have occurred any of the following: (i) trading in securities generally on the New York Stock Exchange or The NASDAQ Stock Market's National Market, or in the over-the-counter market shall have been suspended or materially limited, or minimum prices shall have been established on such exchange; (ii) a banking moratorium shall have been declared by federal or New York State authorities; (iii) the United States shall have become engaged in hostilities, there shall have been an escalation in hostilities involving the United States or there shall have been a declaration of a national emergency or war by the United States; or (iv) there shall have occurred such a material adverse change in general economic, political or financial conditions (or the effect of international conditions on the financial markets in the United States shall be such) as to make it, in each case, in the reasonable judgment of the Initial Purchaser, impracticable or inadvisable to proceed with the offering or delivery of the Notes being delivered on the Closing Date on the terms and in the manner contemplated herein and in the Final Memorandum. (l) None of the issuance and sale of the Notes pursuant to this Agreement or any of the other transactions contemplated by the Final Memorandum shall be enjoined (temporarily or permanently) and no restraining order or other injunctive order shall have been issued or any action, suit or proceeding shall have been commenced with respect to this Agreement, the Stock Purchase Agreement, the Amended Credit Facility or any of the other transactions contemplated by the Final Memorandum, before any court or governmental authority. 23 (m) Subsequent to the Execution Time, there shall not have been any decrease in the rating of any of the Company's debt securities by any "nationally recognized statistical rating organization" (as defined for purposes of Rule 436(g) under the Securities Act) or any notice given of any intended or potential decrease in any such rating or of a possible change in any such rating that does not indicate the direction of the possible change. (n) Prior to the Closing Date, the Company shall have obtained the requisite consent under the Existing Indenture of the holders of the Existing Notes to execute and has executed a supplemental indenture effecting the Proposed Amendments to the Existing Indenture, and, as of the Closing Date, such supplemental indenture shall be in full force and effect. (o) At the Execution Time, the Stock Purchase Agreement shall be in full force and effect with no defaults thereunder; on the Closing Date, all conditions precedent to consummation of the Mercer Acquisition shall have been satisfied or waived by the parties thereto; and at the Execution Time, the Mercer Acquisition shall be consummated simultaneously with the issuance of the sale of the Notes. (p) Prior to the Closing Date, the Company shall have furnished to the Initial Purchaser such further information, certificates and documents as the Initial Purchaser may reasonably request. If any of the conditions specified in this Section 7 shall not have been fulfilled in all material respects when and as provided in this Agreement, or if any of the opinions and certificates mentioned above or elsewhere in this Agreement shall not be in all material respects reasonably satisfactory in form and substance to the Initial Purchaser and Counsel for the Initial Purchaser, this Agreement and all obligations of the Initial Purchaser hereunder may be canceled at the Closing Date by the Initial Purchaser. Notice of such cancellation shall be given to the Company in writing or by telephone or telegraph confirmed in writing. The documents required to be delivered by this Section 7 will be delivered at the office of Counsel for Company, at 200 Park Avenue, New York, New York, on the Closing Date. 8. PAYMENT OF EXPENSES. The Company hereby agrees that it shall, whether or not the transactions contemplated by this Agreement are consummated, pay all expenses incident to the performance of their obligations under this Agreement, including the fees and disbursements of their accountants and counsel, the cost of printing and delivery of the Preliminary Memorandum, the Final Memorandum, all amendments thereof and supplements thereto, this Agreement and all other documents relating to the offering, the cost 24 of preparing, printing, packaging and delivering the Notes, the fees and disbursements, including fees of counsel incurred in compliance with Section 6(d), the fees and disbursements of the Trustee, the fees of any agency that rates the Notes and the fees and expenses incurred in connection with the admission of the Notes for trading in the PORTAL system. If the sale of the Notes provided for herein is not consummated because any condition to the obligations of the Initial Purchaser set forth in Section 6 hereof is not satisfied or because of any refusal, inability or failure on the part of the Company to perform any agreement herein or comply with any provision hereof other than by reason of default by the Initial Purchaser in payment for the Notes on the Closing Date, the Company will reimburse the Initial Purchaser upon demand for all reasonable out-of-pocket expenses (including reasonable fees and disbursements of counsel) that shall have been incurred by it in connection with the proposed purchase and sale of the Notes. Except as specifically set forth herein, the Initial Purchaser shall pay the costs and expenses of its counsel and any transfer taxes on the Notes due in connection with resales of the Notes to subsequent purchasers. 9. INDEMNIFICATION AND CONTRIBUTION. (a) The Company agrees to indemnify and hold harmless the Initial Purchaser, the directors, officers, employees and agents of the Initial Purchaser and each person who controls the Initial Purchaser 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 the Preliminary Memorandum, the Final Memorandum or any information provided by the Company or any of their Affiliates 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 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, liability or action; PROVIDED, HOWEVER, that the Company will not be liable in any such 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 (i) made in the Preliminary Memorandum or the Final Memorandum, or in any amendment thereof or supplement thereto, in reliance upon and in conformity with written information furnished to the Company by or on behalf of the Initial Purchaser specifically for inclusion therein or (ii) made in the Preliminary Memorandum if a copy of the Final Memorandum was not delivered by or on behalf of the Initial Purchaser to the person asserting any claim against the Initial Purchaser, the Final Memorandum was required by law to have been so delivered by the Initial Purchaser and the untrue statement contained in or omission from such Preliminary Memorandum was 25 corrected in the Final Memorandum. This indemnity agreement will be in addition to any liability which the Company may otherwise have. (b) The Initial Purchaser agrees to indemnify and hold harmless the Company, its directors, its officers, and each person who controls the Company within the meaning of either the Securities Act or the Exchange Act, to the same extent as the foregoing indemnity from the Company to the Initial Purchaser, but only with reference to written information relating to the Initial Purchaser furnished to the Company by or on behalf of the Initial Purchaser specifically for inclusion in the Preliminary Memorandum or the Final Memorandum (or in any amendment or supplement thereto). THIS INDEMNITY AGREEMENT WILL BE IN ADDITION TO ANY LIABILITY WHICH THE INITIAL PURCHASER MAY OTHERWISE HAVE. THE COMPANY ACKNOWLEDGES THAT THE STATEMENTS SET FORTH IN THE LAST PARAGRAPH OF THE COVER PAGE, THE LAST PARAGRAPH ON PAGE ii AND THE THIRD, FIFTH AND SEVENTH THE HEADING "PLAN OF DISTRIBUTION" IN THE PRELIMINARY MEMORANDUM AND THE FINAL MEMORANDUM CONSTITUTE THE ONLY INFORMATION FURNISHED IN WRITING BY OR ON BEHALF OF THE INITIAL PURCHASER FOR INCLUSION IN THE PRELIMINARY MEMORANDUM OR THE FINAL MEMORANDUM (OR ANY AMENDMENT OR SUPPLEMENT THERETO). (c) Promptly after receipt by an indemnified party under this Section 9 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 9, notify the indemnifying party in writing of the commencement thereof; but the failure so to notify the indemnifying party (i) will not relieve it 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 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 if (i) the use of counsel chosen by the indemnifying party to represent the indemnified party would present such counsel with an actual 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 based on written advice from counsel there may be legal defenses available to it and/or other indemnified parties which are different from or additional 26 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. It is understood that the indemnifying party shall not, in connection with any proceeding or related proceedings in the same jurisdiction, be liable for the fees and expenses of more than one separate firm (in addition to any local counsel) for all such indemnified parties and that all such fees and expenses shall be reimbursed as they are incurred. Such firm shall be designated in writing by NationsBanc Montgomery Securities LLC in the case of parties indemnified pursuant to paragraph (a) above and by the Company, in the case of parties indemnified pursuant to paragraph (b) above. The indemnifying party shall not be liable for any settlement of any proceeding effected without its written consent (not to be unreasonably withheld), but if settled with such consent or if there be a final judgment for the plaintiff, the indemnifying party agrees to indemnify the indemnified party from and against any loss or liability by reason of such settlement or judgment to the extent required by paragraph (a) or (b) above, as applicable. Notwithstanding the foregoing sentence, if at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for fees and expenses of counsel as contemplated by the third and fourth sentences of this paragraph, the indemnifying party agrees that it shall be liable for any settlement of any proceeding effected without its written consent if (i) such settlement is entered into more than 20 days after receipt by such indemnifying party of the aforesaid request, (ii) such indemnifying party shall have received notice of the terms of such settlement at least five days prior to such settlement being entered into and (iii) such indemnifying party shall not have reimbursed the indemnified party in accordance with such request prior to the date of such settlement. 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 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 9 is unavailable to or insufficient to hold harmless an indemnified party for any reason, the Company and the Initial Purchaser agree to contribute to the aggregate losses, claims, damages and liabilities (including legal or other expenses reasonably incurred in connection with investigating or defending same) (collectively, "Losses") to which the Company and the Initial Purchaser may be subject in such proportion as is appropriate to reflect the relative benefits received by the Company, on the one hand and by the Initial Purchaser on the other hand from the offering of the Notes; PROVIDED, HOWEVER, that in no case shall the Initial Purchaser be responsible for any amount in excess of the purchase discount or 27 commission applicable to the Notes purchased by the Initial Purchaser hereunder. If the allocation provided by the immediately preceding sentence is unavailable for any reason, the Company and the Initial Purchaser shall contribute in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of the Company, on the one hand and of the Initial Purchaser on the other hand in connection with the statements or omissions which resulted in such Losses as well as any other relevant equitable considerations. Benefits received by the Company shall be deemed to be equal to the total net proceeds from the offering (before deducting expenses), and benefits received by the Initial Purchaser shall be deemed to be equal to the total purchase discounts and commissions received by the Initial Purchaser from the Company in connection with the purchase of the Notes hereunder. Relative fault shall be determined by reference to whether any alleged untrue statement or omission relates to information provided by the Company or the Initial Purchaser. The Company and the Initial Purchaser agree that it would not be just and equitable if contribution were determined by pro rata allocation or any other method of allocation which does not take into 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 9, each person who controls the Initial Purchaser within the meaning of either the Securities Act or the Exchange Act and each director, officer, employee and agent of the Initial Purchaser shall have the same rights to contribution as the Initial Purchaser, and each person who controls the Company within the meaning of either the Securities Act or Exchange Act and each officer and director of the Company shall have the same rights to contribution as the Company, subject in each case to the applicable terms and conditions of this paragraph (d). 10. TERMINATION. This Agreement shall be subject to termination in the absolute discretion of the Initial Purchaser, by notice given to the Company prior to delivery of and payment for the Notes, if prior to such time any of the events described in Section 7(j) or 7(k) shall have occurred or if the Initial Purchaser shall decline to purchase the Notes for any reason permitted under this Agreement. 11. REPRESENTATIONS AND INDEMNITIES TO SURVIVE. The respective agreements, representations, warranties, indemnities and other statements of the Company or its officers and of the Initial Purchaser set forth in or made pursuant to this Agreement will remain in full force and effect, regardless of any investigation made by or on behalf of the Initial Purchaser, the Company or any of the officers, directors or controlling persons referred to in Section 9 hereof, and will survive delivery of and payment for the Notes. The provisions of Sections 8 and 9 hereof shall survive the termination or cancellation of this Agreement. 12. NOTICES. All communications hereunder will be in writing and effective only on receipt, and, if sent to the Initial Purchaser, will be mailed, delivered or telecopied 28 and confirmed to it at 100 North Tryon Street, Charlotte, North Carolina 28255, Attention: William Casperson, or, if sent to the Company, will be mailed, delivered or telecopied and confirmed to the Company at 2250 South Tenth Street, San Jose, California 95112, Attention: Dave Worthington, Vice President, Finance. 13. SUCCESSORS. This Agreement will inure to the benefit of and be binding upon the parties hereto and their respective successors and the officers and directors and controlling persons referred to in Section 9 hereof, and no other person will have any right or obligation hereunder. 14. APPLICABLE LAW. This Agreement will be governed by and construed in accordance with the laws of the State of New York. 15. BUSINESS DAY. For purposes of this Agreement, "business day" means each Monday, Tuesday, Wednesday, Thursday and Friday that is not a day on which banking institutions in The City of New York, New York are authorized or obligated by law, executive order or regulation to close. 16. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which will be deemed to be an original, but all such counterparts will together constitute one and the same instrument. 29 If the foregoing is in accordance with your understanding of our agreement, please sign and return to us the enclosed duplicate hereof, whereupon this Agreement and your acceptance shall represent a binding agreement between the Company and the Initial Purchaser. Very truly yours, BURKE INDUSTRIES, INC. By: /s/ KEITH OSTER ------------------------------------- Name: Keith Oster Title: Secretary The foregoing Agreement is hereby confirmed and accepted as of the date first above written. NATIONSBANC MONTGOMERY SECURITIES LLC By: /s/ DAVID APPLE ---------------------------------- Name: David Apple Title: Associate EX-3.9 3 EXHIBIT 3.9 CERTIFICATE OF MERGER OF MERCER PRODUCTS COMPANY, INC. WITH AND INTO E-M ACQUISITION CORP. ------------------------------------------- Pursuant to Section 14A:10-5.1 of the New Jersey Business Corporation Act ------------------------------------------- E-M Acquisition Corp., a corporation organized and existing under the Laws of the State of New Jersey (the "Corporation"), DOES HEREBY CERTIFY THAT: FIRST: The Corporation is a corporation organized and existing under the laws of the State of New Jersey. SECOND: Mercer Products Company, Inc. (the "Subsidiary") is a corporation organized and existing under the laws of the State of New Jersey. THIRD: Annexed hereto and made a part hereof is the Plan of Merger for merging the Subsidiary with and into the Corporation as approved by the directors and the shareholders entitled to vote of the Corporation. FOURTH: The number of shares of the Corporation that were entitled to vote at the time of the approval of the Plan of Merger by its shareholders is ten (10), all of which are of one class. The holder of all outstanding shares entitled to vote thereon of the Corporation approved the Plan of Merger by Written Consent In Lieu of Meeting, dated November 30, 1990, and the number of shares represented by such Consent is ten (10). FIFTH: The Corporation owns 9,906 shares of Common Stock, without par value, of the Subsidiary which constitute all of the issued and outstanding shares of the Subsidiary, and there is no other class of stock of the Subsidiary. SIXTH: The Corporation will continue its existence as the surviving corporation under the name Mercer Products Company, Inc. pursuant to the provisions of the New Jersey Business Corporation Act. SEVENTH: The effective date of the merger herein provided for shall be the close of business on December 31, 1990. IN WITNESS WHEREOF, the Corporation has caused this Certificate of Merger to be executed by its duly authorized officer on the 21st day of December, 1990. E-M ACQUISITION CORP. By: /s/ DAVID S. WINTERBOTTOM ------------------------------------- David S. Winterbottom President 2 CERTIFICATE OF INCORPORATION OF E-M ACQUISITION CORP. -------------------------------------- The undersigned, of the age of eighteen years or over, for the purpose of forming a corporation pursuant to the provisions of the New Jersey Business Corporation Act, does hereby execute the following Certificate of Incorporation: FIRST: The name of the Corporation is: E-M Acquisition Corp. SECOND: The purpose for which the Corporation is formed is to engage in any activity within the purposes for which corporations may be organized under the New Jersey Business Corporation Act. THIRD: The aggregate number of shares which the Corporation shall have authority to issue is one thousand (1,000) of the par value of ten cents (10 CENTS) per share. FOURTH: The address of the Corporation's initial registered office is c/o The Prentice-Hall Corporation System, New Jersey, Inc., 150 West State Street, Trenton, New Jersey 08608; and the name of the Corporation's initial registered agent at such address is The Prentice-Hall Corporation System, New Jersey, Inc. FIFTH: The number of directors constituting the initial board of directors shall be two; and the names and addresses of the directors are as follows: Names Addresses ----- --------- David S. Winterbottom Common Road Stafford ST16 3EH, England 3 Anthony J. Wein Common Road Stafford ST16 3EH, England SIXTH: The name and address of the incorporator is as follows: Names Addresses ----- --------- John Cleary 30 Rockefeller Plaza New York, NY 10112 SEVENTH: The Board of Directors is authorized to make, alter and repeal the By-Laws of the Corporation, provided that any By-Laws made by the Board of Directors may be altered or repealed, and new By-Laws made, by the shareholders. EIGHTH: Except to the extent prohibited by law, no director or officer of the Corporation shall be personally liable to the Corporation or its shareholders for damages for breach of any duty owed to the Corporation or its shareholders, provided that a director or officer shall not be relieved from liability for any breach of duty based upon an act or omission (a) in breach of such person's duty of loyalty to the Corporation or its shareholders, (b) not in good faith or involving a knowing violation of law or (c) resulting in receipt by such person of an improper personal benefit. Neither the amendment or repeal of this Article Eighth, nor the adoption of any provision of this Certificate of Incorporation inconsistent with this Article Eighth, shall eliminate or reduce the effect of this Article Eighth in respect of any matter which occurred or any cause of action, suit or claim which but for this Article Eighth would have accrued or arisen, prior to such amendment, repeal or adoption. IN WITNESS WHEREOF, I, the incorporator of the above named corporation, have hereunto signed this Certificate of Incorporation on the 2nd day of July, 1990. 4 /s/ JOHN CLEARY ---------------------------------------- John Cleary Sole Incorporator 5 PLAN OF MERGER OF MERCER PRODUCTS COMPANY, INC. WITH AND INTO E-M ACQUISITION CORP. PLAN OF MERGER approved on November 30, 1990 by E-M Acquisition Corp. (the "Corporation"), a New Jersey corporation, and by its Board of Directors on said date. 1. Mercer Products Company, Inc., a New Jersey corporation and wholly owned subsidiary of the Corporation (the "Subsidiary"), shall, pursuant to the provisions of the New Jersey Business Corporation Act, be merged with and into the Corporation (the "Surviving Corporation"), which shall be the surviving corporation upon the effective date of the merger, and which shall continue to exist as the surviving corporation under the name Mercer Products Company, Inc. pursuant to the provisions of the New Jersey Business Corporation Act. The separate existence of the Subsidiary shall cease upon said effective date in accordance with the provisions of said New Jersey Business Corporation Act. 2. The Certificate of Incorporation of the Surviving Corporation upon the effective date of the merger shall be the Certificate of Incorporation of said Surviving Corporation except that Article FIRST thereof, relating to the name of the corporation, is hereby amended so as to read as follows upon the affective date of the merger: "FIRST: The name of the Corporation is: Mercer Products Company, Inc."; and said Certificate of Incorporation as herein amended shall continue in full force and effect until further amended in the manner prescribed by the provisions of the New Jersey Business Corporation Act. 3. The By-Laws of the Surviving Corporation upon the effective date of the merger shall be the By-Laws of said Surviving Corporation and shall continue in full force and effect until changed, altered, or amended as therein provided and in the manner prescribed by the provisions of the New Jersey Business Corporation Act. 4. The directors and officers in office of the Subsidiary upon the effective date of the merger shall be the members of the Board of Directors and the officers of the Surviving Corporation, all of whom shall hold their directorships and offices until the election and qualification of their respective successors or until their tenure is otherwise terminated in accordance with the By-Laws of the Surviving Corporation. 6 5. Each issued share of the Subsidiary shall, upon the effective date of the merger, be cancelled. 6. All of the issued and outstanding shares of the Surviving Corporation shall remain unchanged in the hands of the holders thereof. 7. The Plan of Merger herein made and approved shall be submitted to the sole shareholder of the Corporation for its approval or rejection, in the manner prescribed by the provisions of the New Jersey Business Corporation Act. 8. The effective date of the merger herein provided for shall be the close of business on December 31, 1990. 7 EX-3.10 4 EXHIBIT 3.10 AMENDED AND RESTATED BYLAWS FOR THE REGULATION OF MERCER PRODUCTS COMPANY, INC. A NEW JERSEY CORPORATION ARTICLE I PRINCIPAL EXECUTIVE OFFICE The principal executive office of the corporation shall be 2250 South Tenth Street, San Jose, California 95112. ARTICLE II MEETING OF SHAREHOLDERS Section 2.01 ANNUAL MEETINGS. The annual meeting of shareholders shall be held on the 15th day of June in each year (or, should such day fall upon a legal holiday, then on the first day thereafter which is not a legal holiday) at 10:00 o'clock A.M., or at such other time and on such other date as the board of directors shall determine. At each annual meeting, directors shall be elected and any other proper business may be transacted. Section 2.02 SPECIAL MEETINGS. Special meetings of shareholders may be called by the board of directors, the chairman of the board (if there be such an officer), the president, or the holders of shares entitled to cast not less than ten percent (10%) of the votes at such meeting. Each special meeting shall be held at such date and time as is requested by the person or persons calling the meeting within the limits fixed by law. Section 2.03 PLACE OF MEETINGS. Each annual or special meeting of shareholders shall be held at such location as may be determined by the board of directors, or if no such determination is made, at such place as may be determined by the chief executive officer, or by any other officer authorized by the board of directors or the chief executive officer to make such determination. If no location is so determined, any annual or special meeting shall be held at the principal executive office of the corporation. Section 2.04 NOTICE OF MEETINGS. Notice of each annual or special meeting of shareholders shall contain such information, and shall be given to such persons at such time, and in such manner, as the board of directors shall determine, or if no such determination is made, as the chief executive officer, or any other officer so authorized by the board of directors or the chief executive officer, shall determine, subject to the requirements of applicable law. Section 2.05 CONDUCT OF MEETINGS. Subject to the requirements of applicable law, all annual and special meetings of shareholders shall be conducted in accordance with such rules and procedures as the board of directors may determine and, as to matters not governed by such rules and procedures, as the chairman of such meeting shall determine. The chairman of any annual or special meeting of shareholders shall be designated by the board of directors and, in the absence of any such designation, shall be the chief executive officer of the corporation. Section 2.06 INFORMAL ACTION BY SHAREHOLDERS. An action required or permitted to be taken at a meeting of Shareholders may be taken without a meeting if a consent, in writing, setting forth such action, is signed by all the Shareholders entitled to vote on the subject matter thereof and any other Shareholders entitled to notice of a meeting of Shareholders (but not to vote thereat) have waived in writing any rights which they may have to dissent from such action, and such consents and waivers are filed with the minutes of proceedings of the Shareholders. Such consents and waivers may be signed by different Shareholders on separate counterparts. 2 ARTICLE III DIRECTORS Section 3.01 NUMBER. The number of directors of the corporation shall be one (1) until changed in accordance with applicable law. Section 3.02 MEETINGS OF THE BOARD. Each regular and special meeting of the board shall be held at a location determined as follows: The board of directors may designate any place, within or without the State of New Jersey, for the holding of any meeting. If no such designation is made, (i) any meeting called by a majority of the directors shall be held at such location, within the county of the corporation's principal executive office, as the directors calling the meeting shall designate; and (ii) any other meeting shall be held at such location, within the county of the corporation's principal executive office, as the chief executive officer may designate, or in the absence of such designation, at the corporation's principal executive office. Subject to the requirements of applicable law, all regular and special meetings of the board of directors shall be conducted in accordance with such rules and procedures as the board of directors may approve and, as to matters not governed by such rules and procedures, as the chairman of such meeting shall determine. The chairman of any regular or special meeting shall be designated by the directors and, in the absence of any such designation, shall be the chief executive officer of the corporation. Members of the board of directors (or any committee appointed by the board) may participate in a meeting by means of conference telephone or similar communications equipment whereby all persons participating in the meeting can hear each other, and participation in such meeting in such manner shall constitute presence in person at such meeting. 3 Section 3.03 INFORMAL ACTION BY DIRECTORS. Any action required or permitted to be taken at any meeting of the Board of Directors may be taken without a meeting, if a consent in writing to such action is signed by all of the Directors and such written consents may be signed by different Directors on separate counterparts. ARTICLE IV INDEMNIFICATION OF DIRECTORS, OFFICERS, AND OTHER CORPORATE AGENTS Section 4.01 INDEMNIFICATION. This corporation shall indemnify and hold harmless any person who is or was a director or officer of this corporation, or is or was serving at the request of the Board of Directors of this Corporation as a director, officer, employee or agent of another foreign or domestic corporation, partnership, joint venture, trust or other enterprise (an "Agent"), from and against any expenses, judgments, fines, settlements, and other amounts actually and reasonably incurred in connection with any "proceeding" (as defined in Section 14A:3-5 of the New Jersey Business Corporation Law) to the fullest extent permitted by applicable law. The corporation shall advance to its agents expenses incurred in defending any proceeding prior to the final disposition thereof to the fullest extent and in the manner permitted by applicable law. Section 4.02 RIGHT TO INDEMNIFICATION. This section shall create a right of indemnification for each person referred to in Section 4.01, whether or not the proceeding to which the indemnification relates arose in whole or in part prior to adoption of such section and in the event of death such right shall extend to such person's legal representatives. The right of indemnification hereby given shall not be exclusive of any 4 other rights such person may have whether by law or under any agreement, insurance policy, vote of directors or shareholders, or otherwise. Section 4.03 INSURANCE. The corporation shall have power to purchase and maintain insurance on behalf of any agent of the corporation against any liability asserted against or incurred by the agent in such capacity or arising out of the agent's status as such whether or not the corporation would have the power to indemnify the agent against such liability. ARTICLE V OFFICERS Section 5.01 OFFICERS. The corporation shall have a president, a treasurer, a secretary, and such other officers, including a chairman of the board, as may be designated by the board. Unless the board of directors shall otherwise determine, the president shall be the chief executive officer of the corporation. Officers shall have such powers and duties as may be specified by, or in accordance with, resolutions of the board of directors. In the absence of any contrary determination by the board of directors, the chief executive officer shall, subject to the power and authority of the board of directors, have general supervision, direction, and control of the officers, employees, business, and affairs of the corporation. Section 5.02 LIMITED AUTHORITY OF OFFICERS. No officer of the corporation shall have any power or authority outside the normal day-to-day business of the corporation to bind the corporation by any contract or engagement or to pledge its credit or to render it liable in connection with any transaction unless so authorized by the board of directors. 5 ARTICLE VII AMENDMENTS New bylaws may be adopted or these bylaws may be amended or repealed by the shareholders or by the directors. 6 CERTIFICATE OF SECRETARY I, the undersigned, do hereby certify: 1. That I am the duly elected and acting secretary of Mercer Products Company, Inc., a New Jersey corporation; and 2. That the foregoing bylaws, comprising six (6) pages, constitute the bylaws of said corporation as duly adopted by action of the board of directors of the corporation duly taken as of April 21, 1998. IN WITNESS WHEREOF, I have hereunto subscribed my name and affixed the seal of said corporation as of this 21st day of April, 1998. /s/ KEITH OSTER ---------------------------------------- Keith Oster, Secretary Seal EX-4.1 5 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 April 21, 1998 --------------------- $30,000,000 Floating Interest Rate Senior Notes Due 2007 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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 Fixed Rate Notes . . . . . . . . . . . . . . . . . . . . . . 2 Additional Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Affiliate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 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 Calculation Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Capital Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Capitalized Lease Obligation. . . . . . . . . . . . . . . . . . . . . . 4 Change of Control . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Closing Date. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Commission. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Common Stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Company Request" or "Company Order. . . . . . . . . . . . . . . . . . . 6 Consolidated Adjusted Net Income. . . . . . . . . . . . . . . . . . . . 6 - --------------------- Note: This table of contents shall not, for any purpose, be deemed to be a part of the Indenture. Consolidated EBITDA . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Consolidated Net Worth. . . . . . . . . . . . . . . . . . . . . . . . . 7 Corporate Trust Office. . . . . . . . . . . . . . . . . . . . . . . . . 7 Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Daily Interest Amount . . . . . . . . . . . . . . . . . . . . . . . . . 7 Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Defaulted Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Depositary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Disinterested Director. . . . . . . . . . . . . . . . . . . . . . . . . 8 Disqualified Stock. . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Event of Default. . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Exchange Act. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Exchange Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Exchange Offer. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Exchange Offer Registration Statement . . . . . . . . . . . . . . . . . 8 Federal Bankruptcy Code . . . . . . . . . . . . . . . . . . . . . . . . 9 Fixed Charge Coverage Ratio . . . . . . . . . . . . . . . . . . . . . . 9 Fixed Charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Fixed Rate Note Guarantee . . . . . . . . . . . . . . . . . . . . . . . 9 Fixed Rate Note Indenture . . . . . . . . . . . . . . . . . . . . . . . 9 Fixed Rate Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Generally Accepted Accounting Principles" or "GAAP. . . . . . . . . . . 9 Global Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Hedging Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Holder. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Indebtedness. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10 Indenture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10 Indenture Obligations . . . . . . . . . . . . . . . . . . . . . . . . .10 Initial Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10 Interest Payment Date . . . . . . . . . . . . . . . . . . . . . . . . .10 Interest Period . . . . . . . . . . . . . . . . . . . . . . . . . . . .11 Interest Rate Determination Date. . . . . . . . . . . . . . . . . . . .11 Investment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11 JFLEI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11 Lehman. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11 LIBOR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11 Lien. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12 Liquidated Damages. . . . . . . . . . . . . . . . . . . . . . . . . . .12 London Banking Day. . . . . . . . . . . . . . . . . . . . . . . . . . .12 Maturity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12 Mercer Acquisition. . . . . . . . . . . . . . . . . . . . . . . . . . .12 Mercer Transactions . . . . . . . . . . . . . . . . . . . . . . . . . .12 Moody's . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12 Net Cash Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . .12 Non-U.S. Person . . . . . . . . . . . . . . . . . . . . . . . . . . . .13 4 Non-U.S. Restricted Subsidiary. . . . . . . . . . . . . . . . . . . . .13 Note Guarantee. . . . . . . . . . . . . . . . . . . . . . . . . . . . .13 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13 Offering. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13 Officers' Certificate . . . . . . . . . . . . . . . . . . . . . . . . .13 Opinion of Counsel. . . . . . . . . . . . . . . . . . . . . . . . . . .14 Outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14 Paying Agent. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15 Permitted Business. . . . . . . . . . . . . . . . . . . . . . . . . . .15 Permitted Indebtedness. . . . . . . . . . . . . . . . . . . . . . . . .15 Permitted Investments . . . . . . . . . . . . . . . . . . . . . . . . .15 Person. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16 Predecessor Note. . . . . . . . . . . . . . . . . . . . . . . . . . . .16 Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . .16 Principals. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16 Public Equity Offering. . . . . . . . . . . . . . . . . . . . . . . . .16 Purchase Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17 QIB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17 Qualified Equity Interest . . . . . . . . . . . . . . . . . . . . . . .17 Qualified Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . .17 Recapitalization. . . . . . . . . . . . . . . . . . . . . . . . . . . .17 Redemption Date . . . . . . . . . . . . . . . . . . . . . . . . . . . .17 Redemption Price. . . . . . . . . . . . . . . . . . . . . . . . . . . .17 Register" and "Note Registrar . . . . . . . . . . . . . . . . . . . . .17 Registrar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17 Registration Rights Agreement . . . . . . . . . . . . . . . . . . . . .17 Registration Statement. . . . . . . . . . . . . . . . . . . . . . . . .17 Regular Record Date . . . . . . . . . . . . . . . . . . . . . . . . . .17 Regulation S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17 Related Party . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18 Representative Amount . . . . . . . . . . . . . . . . . . . . . . . . .18 Restricted Subsidiary . . . . . . . . . . . . . . . . . . . . . . . . .18 Reuters Screen LIBO Page. . . . . . . . . . . . . . . . . . . . . . . .18 Rule 144A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18 Sale and Leaseback Transaction. . . . . . . . . . . . . . . . . . . . .18 Securities Act. . . . . . . . . . . . . . . . . . . . . . . . . . . . .18 Series A Preferred Stock. . . . . . . . . . . . . . . . . . . . . . . .18 Series C Preferred Stock. . . . . . . . . . . . . . . . . . . . . . . .18 Shelf Registration Statement. . . . . . . . . . . . . . . . . . . . . .18 Significant Subsidiary. . . . . . . . . . . . . . . . . . . . . . . . .18 S&P . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19 Special Record Date . . . . . . . . . . . . . . . . . . . . . . . . . .19 Specified Indebtedness. . . . . . . . . . . . . . . . . . . . . . . . .19 Stated Maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . .19 Subordinated Indebtedness . . . . . . . . . . . . . . . . . . . . . . .19 5 Subsidiary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19 Subsidiary Guarantor. . . . . . . . . . . . . . . . . . . . . . . . . .19 Telerate Page 3750. . . . . . . . . . . . . . . . . . . . . . . . . . .19 Trust Indenture Act" or "TIA. . . . . . . . . . . . . . . . . . . . . .19 Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19 Unrestricted Subsidiary . . . . . . . . . . . . . . . . . . . . . . . .20 U.S. Government Obligations . . . . . . . . . . . . . . . . . . . . . .20 U.S. Restricted Subsidiary. . . . . . . . . . . . . . . . . . . . . . .20 Voting Stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20 Wholly Owned Restricted Subsidiary. . . . . . . . . . . . . . . . . . .20 SECTION 102. Incorporation by Reference of Trust Indenture Act . . . .20 SECTION 103. Compliance Certificates and Opinions. . . . . . . . . . .21 SECTION 104. Form of Documents Delivered to Trustee. . . . . . . . . .22 SECTION 105. Acts of Holders . . . . . . . . . . . . . . . . . . . . .22 SECTION 106. Notices, Etc., to Trustee, Company and Subsidiary Guarantors. . . . . . . . . . . . . . . . . . . . . . .23 SECTION 107. Notice to Holders; Waiver . . . . . . . . . . . . . . . .24 SECTION 108. Effect of Headings and Table of Contents. . . . . . . . .24 SECTION 109. Successors and Assigns. . . . . . . . . . . . . . . . . .25 SECTION 110. Separability Clause . . . . . . . . . . . . . . . . . . .25 SECTION 111. Benefits of Indenture . . . . . . . . . . . . . . . . . .25 SECTION 112. Governing Law . . . . . . . . . . . . . . . . . . . . . .25 SECTION 113. Legal Holidays. . . . . . . . . . . . . . . . . . . . . .25 SECTION 114. No Recourse Against Others. . . . . . . . . . . . . . . .26 ARTICLE TWO NOTE FORMS SECTION 201. Forms Generally . . . . . . . . . . . . . . . . . . . . .26 SECTION 202. Restrictive Legends . . . . . . . . . . . . . . . . . . .27 ARTICLE THREE THE NOTES SECTION 301. Title and Terms . . . . . . . . . . . . . . . . . . . . .29 SECTION 302. Denominations . . . . . . . . . . . . . . . . . . . . . .30 SECTION 303. Execution, Authentication, Delivery and Dating. . . . . .30 SECTION 304. Temporary Notes . . . . . . . . . . . . . . . . . . . . .31 SECTION 305. Registration, Registration of Transfer and Exchange . . .32 SECTION 306. Book-Entry Provisions for Global Note . . . . . . . . . .33 SECTION 307. Special Transfer Provisions . . . . . . . . . . . . . . .34 SECTION 308. Mutilated, Destroyed, Lost and Stolen Notes . . . . . . .36 SECTION 309. Payment of Interest; Interest Rights Preserved. . . . . .37 SECTION 310. Persons Deemed Owners . . . . . . . . . . . . . . . . . .38 SECTION 311. Cancellation. . . . . . . . . . . . . . . . . . . . . . .38 SECTION 312. Issuance of Additional Notes. . . . . . . . . . . . . . .39 6 SECTION 313. Calculation of Interest . . . . . . . . . . . . . . . . .39 ARTICLE FOUR SATISFACTION AND DISCHARGE SECTION 401. Satisfaction and Discharge of Indenture . . . . . . . . .40 SECTION 402. Application of Trust Money. . . . . . . . . . . . . . . .41 ARTICLE FIVE REMEDIES SECTION 501. Events of Default . . . . . . . . . . . . . . . . . . . .41 SECTION 502. Acceleration of Maturity; Rescission and Annulment. . . .43 SECTION 503. Collection of Indebtedness and Suits for Enforcement by Trustee. . . . . . . . . . . . . . . . . . . . . . .44 SECTION 504. Trustee May File Proofs of Claim. . . . . . . . . . . . .45 SECTION 505. Trustee May Enforce Claims Without Possession of Notes. .45 SECTION 506. Application of Money Collected. . . . . . . . . . . . . .46 SECTION 507. Limitation on Suits . . . . . . . . . . . . . . . . . . .46 SECTION 508. Unconditional Right of Holders to Receive Principal, Premium and Interest. . . . . . . . . . . . . . . . . .46 SECTION 509. Restoration of Rights and Remedies. . . . . . . . . . . .47 SECTION 510. Rights and Remedies Cumulative. . . . . . . . . . . . . .47 SECTION 511. Delay or Omission Not Waiver. . . . . . . . . . . . . . .47 SECTION 512. Control by Holders. . . . . . . . . . . . . . . . . . . .47 SECTION 513. Waiver of Past Defaults . . . . . . . . . . . . . . . . .48 SECTION 514. Waiver of Stay or Extension Laws. . . . . . . . . . . . .48 ARTICLE SIX THE TRUSTEE SECTION 601. Notice of Defaults. . . . . . . . . . . . . . . . . . . .49 SECTION 602. Certain Rights of Trustee . . . . . . . . . . . . . . . .49 SECTION 603. Trustee Not Responsible for Recitals or Issuance of Notes. . . . . . . . . . . . . . . . . . . . . . . .50 SECTION 604. May Hold Notes. . . . . . . . . . . . . . . . . . . . . .51 SECTION 605. Money Held in Trust . . . . . . . . . . . . . . . . . . .51 SECTION 606. Compensation and Reimbursement. . . . . . . . . . . . . .51 SECTION 607. Corporate Trustee Required; Eligibility . . . . . . . . .52 SECTION 608. Resignation and Removal; Appointment of Successor . . . .52 SECTION 609. Acceptance of Appointment by Successor. . . . . . . . . .54 SECTION 610. Merger, Conversion, Consolidation or Succession to Business. . . . . . . . . . . . . . . . . . . . . . . .54 ARTICLE SEVEN HOLDERS LISTS AND REPORTS BY TRUSTEE, COMPANY AND SUBSIDIARY GUARANTORS SECTION 701. Disclosure of Names and Addresses of Holders. . . . . . .55 7 SECTION 702. Reports by Trustee. . . . . . . . . . . . . . . . . . . .55 ARTICLE EIGHT CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE SECTION 801. Company May Consolidate, Etc., Only on Certain Terms. . .55 SECTION 802. Successor Substituted . . . . . . . . . . . . . . . . . .57 ARTICLE NINE SUPPLEMENTS AND AMENDMENTS TO INDENTURE AND NOTE GUARANTEES SECTION 901. Without Consent of Holders. . . . . . . . . . . . . . . .57 SECTION 902. With Consent of Holders . . . . . . . . . . . . . . . . .59 SECTION 903. Execution of Supplemental Indentures. . . . . . . . . . .59 SECTION 904. Effect of Supplemental Indentures . . . . . . . . . . . .60 SECTION 905. Conformity with Trust Indenture Act . . . . . . . . . . .60 SECTION 906. Reference in Notes to Supplemental Indentures . . . . . .60 SECTION 907. Notice of Supplemental Indentures . . . . . . . . . . . .60 ARTICLE TEN COVENANTS SECTION 1001. Payment of Principal, Premium, if Any, and Interest. . .61 SECTION 1002. Maintenance of Office or Agency. . . . . . . . . . . . .61 SECTION 1003. Money for Note Payments to Be Held in Trust. . . . . . .61 SECTION 1004. Corporate Existence. . . . . . . . . . . . . . . . . . .63 SECTION 1005. Payment of Taxes and Other Claims. . . . . . . . . . . .63 SECTION 1006. Maintenance of Properties. . . . . . . . . . . . . . . .63 SECTION 1007. Insurance. . . . . . . . . . . . . . . . . . . . . . . .64 SECTION 1008. Statement by Officers As to Default. . . . . . . . . . .64 SECTION 1009. [INTENTIONALLY OMITTED]. . . . . . . . . . . . . . . . .64 SECTION 1010. Limitation on Indebtedness of Issuance of Disqualified Stock. . . . . . . . . . . . . . . . . . . . . . . . .64 SECTION 1011. Limitation on Restricted Payments. . . . . . . . . . . .67 SECTION 1012. Limitation on Issuances and Sales of Preferred Stock of Restricted Subsidiaries . . . . . . . . . . . . . .72 SECTION 1013. Limitation on Transactions with Affiliates . . . . . . .72 SECTION 1014. Limitation on Liens. . . . . . . . . . . . . . . . . . .73 SECTION 1015. Purchase of Notes upon a Change of Control . . . . . . .75 SECTION 1016. Limitation on Certain Asset Sales. . . . . . . . . . . .77 SECTION 1017. Unrestricted Subsidiaries. . . . . . . . . . . . . . . .80 SECTION 1018. Limitation on Dividends and Other Payment Restrictions Affecting Restricted Subsidiaries. . . . . . . . . . .81 SECTION 1019. Waiver of Certain Covenants. . . . . . . . . . . . . . .82 8 SECTION 1020. Payment for Consent. . . . . . . . . . . . . . . . . . .82 SECTION 1021. Limitation on Guarantees of Indebtedness by Restricted Subsidiaries . . . . . . . . . . . . . .83 SECTION 1022. Line of Business . . . . . . . . . . . . . . . . . . . .83 SECTION 1023. Reports. . . . . . . . . . . . . . . . . . . . . . . . .83 ARTICLE ELEVEN REDEMPTION OF NOTES SECTION 1101. Right of Redemption. . . . . . . . . . . . . . . . . . .84 SECTION 1102. Applicability of Article . . . . . . . . . . . . . . . .84 SECTION 1103. Election to Redeem; Notice to Trustee. . . . . . . . . .84 SECTION 1104. Selection by Trustee of Notes to Be Redeemed . . . . . .84 SECTION 1105. Notice of Redemption . . . . . . . . . . . . . . . . . .85 SECTION 1106. Deposit of Redemption Price. . . . . . . . . . . . . . .86 SECTION 1107. Notes Payable on Redemption Date . . . . . . . . . . . .86 SECTION 1108. Notes Redeemed in Part . . . . . . . . . . . . . . . . .86 ARTICLE TWELVE DEFEASANCE AND COVENANT DEFEASANCE SECTION 1201. Company Option to Effect Defeasance or Covenant Defeasance . . . . . . . . . . . . . . . . . . . . . .87 SECTION 1202. Defeasance and Discharge . . . . . . . . . . . . . . . .87 SECTION 1203. Covenant Defeasance. . . . . . . . . . . . . . . . . . .87 SECTION 1204. Conditions to Defeasance or Covenant Defeasance. . . . .88 SECTION 1205. Deposited Money and U.S. Government Obligations to Be Held in Trust; Other Miscellaneous Provisions .89 SECTION 1206. Reinstatement. . . . . . . . . . . . . . . . . . . . . .90 ARTICLE THIRTEEN GUARANTEES SECTION 1301. Note Guarantees. . . . . . . . . . . . . . . . . . . . .90 SECTION 1302. Execution and Delivery of Note Guarantee . . . . . . . .92 SECTION 1303. Severability . . . . . . . . . . . . . . . . . . . . . .92 SECTION 1304. Seniority of Guarantees. . . . . . . . . . . . . . . . .92 SECTION 1305. Limitation of Subsidiary Guarantor's Liability . . . . .92 SECTION 1306. Contribution . . . . . . . . . . . . . . . . . . . . . .93 SECTION 1307. Release of a Subsidiary Guarantor. . . . . . . . . . . .93 SECTION 1308. Subsidiary Guarantors May Consolidate, Etc., on Certain Terms. . . . . . . . . . . . . . . .94 SECTION 1309. Benefits Acknowledged. . . . . . . . . . . . . . . . . .94 SECTION 1310. Issuance of Guarantees by Certain New Restricted Subsidiaries. . . . . . . . . . . . . . . . . . . . .95
Schedule A Exhibit A - Form of Note Exhibit B - Form of Note Guarantee 9 Exhibit C - Form of Letter to Be Delivered by Institutional Accredited Investors 10 INDENTURE, dated as of April 21, 1998 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 Floating Interest Rate Senior Notes Due 2007 (herein called the "Initial Notes"), and Floating Interest Rate 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 $20,000,000 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: ARTICLE ONE DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION SECTION 101. DEFINITIONS. 2 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 Fixed Rate Notes" has the meaning set forth in Section 1010. "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 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 3 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. "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 $1,000,000 or (b) for aggregate net proceeds in excess of $1,000,000. 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 Code 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 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 entered into on August 20, 1997, as amended on April 21, 1998, among the Company, the Banks and NationsBank, N.A., as agent, as such agreement may further be amended, restated, supplemented, refinanced, replaced or otherwise modified from time to time (including any such refinancing or replacement agent by a different institution). 4 "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 purposes 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. "Calculation Agent" has the meaning set forth in Section 201. "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. "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, 5 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. "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. 6 "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 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. 7 "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. "corporation" includes corporations, associations, companies and business trusts. "Daily Interest Amount" has the meaning set forth in Section 313(b). 8 "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 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. 9 "Exchange Offer" means the exchange offer that may be effected pursuant to the Registration Rights Agreement. "Exchange Offer Registration Statement" means the Exchange Offer Registration Statement as defined in the Registration Rights Agreement. "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. "Fixed Rate Note Guarantee" means any guarantee of the Fixed Rate Notes issued by a Restricted Subsidiary of the Company pursuant to the Fixed Rate Note Indenture. "Fixed Rate Note Indenture" means the Indenture dated as of August 20, 1997 between the Company and United States Trust Company of New York, as Trustee, as it may from time to time be supplemented or amended. "Fixed Rate Notes" means the Company's 10% Senior Notes due 2007. "Generally Accepted Accounting Principles" or "GAAP" means generally accepted accounting principles in the United States, as in effect on the date of the Indenture. "Global Note" has the meaning set forth in Section 201. 10 "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 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 11 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. "Interest Period" means the period from and including a scheduled Interest Payment Date through the day next preceding the following scheduled Interest Payment Date, with the exception that the first Interest Period shall commence on and include April 21, 1998 and end on and include August 14, 1998. "Interest Rate Determination Date" means, with respect to each Interest Period, the second London Banking Day prior to the first day of such Interest Period. "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 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. "JFLEI" means J.F. Lehman Equity Investors I, L.P. "Lehman" means J.F. Lehman & Company. "LIBOR", with respect to an Interest Period, means the rate (expressed as a percentage per annum) for deposits in United States dollars for a six-month period (or four-month period with respect to the first Interest Period) beginning on the second London Banking Day after the Interest Determination Date that appears on Telerate Page 3750 as of 11:00 a.m., London time, on the Interest Determination Date. If Telerate Page 3750 does not include such a rate or is unavailable on an Interest Determination Date, LIBOR for the Interest Period shall be the arithmetic mean of the rates (expressed as a percentage per annum) for deposits in a Representative Amount in United States dollars for a six-month period beginning on the second London Banking Day after the Interest Determination Date that appears on Reuters Screen LIBO Page as of 11:00 a.m., London time, on the Interest Determination Date. 12 If Reuters Screen LIBO Page does not include two or more rates or is unavailable on an Interest Determination Date, the Calculation Agent will request the principal London office of each of four major banks in the London interbank market, as selected by the Calculation Agent, to provide such bank's offered quotation (expressed as a percentage per annum), as of approximately 11:00 a.m., London time, on such Interest Determination Date, to prime banks in the London interbank market for deposits in a Representative Amount in United States dollars for a six-month period beginning on the second London Banking Day after the Interest Determination Date. If at least two such offered quotations are so provided, LIBOR for the Interest Period will be the arithmetic mean of such quotations. If fewer than two such quotations are so provided, the Calculation Agent will request each of three major banks in New York City, as selected by the Calculation Agent, to provide such bank's rate (expressed as a percentage per annum), as of approximately 11:00 a.m., New York City time, on such Interest Determination Date, for loans in a Representative Amount in United States dollars to leading European banks for a six-month period beginning on the second London Banking Day after the Interest Determination Date. If at least two such rates are so provided, LIBOR for the Interest Period will be the arithmetic mean of such rates. If fewer than two such rates are so provided, then LIBOR for the Interest Period will be LIBOR in effect with respect to the immediately preceding Interest Period. "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. "London Banking Day" means any day in which dealings in United States dollars are transacted or, with respect to any future date, are expected to be transacted in the London interbank market. "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. "Mercer Acquisition" means the acquisition by the Company of all of the outstanding capital stock of Mercer Products Company, Inc. ("Mercer") pursuant to a Stock 13 Purchase Agreement dated March 5, 1998 between the Company, Mercer and Sovereign Specialty Chemicals, Inc. "Mercer Transactions" means (i) the Offering and (ii) the Mercer Acquisition and the related financing transactions in connection therewith. "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 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 14 include such Additional Notes for purposes of this Indenture and all Initial Notes, Exchange Notes and any such Additional Notes, shall vote together as one series of Notes under this Indenture. "Offering" means the offering of the Notes 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 canceled 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 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 15 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 Indebtedness" has the meaning specified in Section 1010. "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, 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; 16 (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 in any Person, a majority of the equity ownership and voting stock of which is owned, directly or indirectly, by the Company and/or one or more of the Subsidiaries of the Company, that do not exceed $7,500,000 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. "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. 17 "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. "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). "Purchase Date" means any Change of Control Payment Date or Excess Proceeds Payment Date. "QIB" means a "Qualified Institutional Buyer" under Rule 144A. "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). "Qualified Stock" of any person means any and all Capital Stock of such person, other than Disqualified Stock. "Recapitalization" means the August 20, 1997 acquisition by J.F. Lehman Equity Investors I, L.P. of a controlling interest in the Company through a recapitalization of the outstanding securities of the Company. "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. "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 April 21, 1998 relating to the Notes. 18 "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). "Representative Amount" means a principal amount of not less than U.S. $1,000,000 for a single transaction in the relevant market at the relevant time. "Restricted Subsidiary" means any Subsidiary other than an Unrestricted Subsidiary. "Reuters Screen LIBO Page" means the display designated as page "LIBO" on the Reuter Monitor Money Rates Service (or such other page as may replace the LIBO page on that service for the purpose of displaying London Interbank Offered Rates of leading banks). "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, collectively, the Series A Cumulative Redeemable Preferred Stock of the Company, no par value, and the Series B Cumulative Redeemable Preferred Stock of the Company, no par value, in each case, issued on August 20, 1997. 19 "Series C Preferred Stock" means the 6% Convertible Preferred Stock of the Company issued on the Closing Date. "Shelf Registration Statement" means the Shelf Registration Statement as defined in the Registration Rights Agreement. "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. "Specified Indebtedness" has the meaning set forth in Section 501(5). "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. 20 "Telerate Page 3750" means the display designated as "Page 3750" on the Dow Jones Telerate Service (or such other page as may replace Page 3750 on that service for the purpose of displaying London Interbank Offered Rates of leading banks) or any successor service. "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: 21 "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; 22 (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 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 23 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. 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. 24 (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 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. 25 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. 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. 26 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 "Floating Interest Rate Senior Notes due 2007" and the Exchange Notes shall be known as the "Floating Interest Rate 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. 27 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 28 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 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 29 COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE 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 $30,000,000, 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 "Floating Interest Rate Senior Notes Due 2007" and the Exchange Notes shall be known and designated as the "Floating Interest Rate 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 a rate per annum, reset semi-annually, equal to LIBOR (as determined by the Calculation Agent, which shall initially be the Trustee (the "Calculation Agent")) plus 400 basis points, from April 21, 1998 or from the most recent Interest Payment Date to which interest has been paid or duly provided for, payable semi-annually on February 15 and August 15 of each year, commencing on August 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. 30 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 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 31 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 $30,000,000 plus the aggregate 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. 32 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 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 33 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 canceled by the Trustee. 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 34 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. (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 35 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), (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 36 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 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 37 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. 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. 38 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: (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 39 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. 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 canceled 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 canceled 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 canceled as provided in this Section, except as expressly permitted by this Indenture. All canceled 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 canceled Notes be returned to it. SECTION 312. ISSUANCE OF ADDITIONAL NOTES. The Company may, subject to Article Ten of this Indenture, issue up to $20,000,000 aggregate principal amount of additional Notes having identical terms and conditions to the Notes offered hereby (the "Additional Notes"). Any Additional Notes will 40 be part of the same issue as the Notes offered hereby and will vote on all matters with the Notes offered hereby. SECTION 313. CALCULATION OF INTEREST. (a) The Calculation Agent shall determine the interest rate applicable to the Notes in accordance with the terms of this Indenture. (b) The amount of interest for each day that the Notes are outstanding (the "Daily Interest Amount") shall be calculated by dividing the interest rate in effect for such day by 360 and multiplying the result by the principal amount of the Notes outstanding. The amount of interest to be paid on the Notes for each Interest Period shall be calculated by adding the Daily Interest Amounts for each day in the Interest Period. All percentages resulting from the such calculations shall be rounded, if necessary, to the nearest one-hundred-thousandth of a percentage point, with five one-millionths of a percentage point being rounded upwards (e.g., 9.876545% (or 0.09876545) being rounded to 9.87655% (or 0.0987655)) and all dollar amounts used in or resulting from the calculations shall be rounded to the nearest cent (with one-half cent being rounded upwards). The interest rate on the Notes shall in no event be higher than the maximum rate permitted by New York law as the same may be modified by United States law of general application. The Calculation Agent shall, upon request of the holder of any Note, provide the interest rate then in effect with respect to the Notes. All calculations made by the Calculation Agent in the absence of manifest error shall be conclusive for all purposes and binding on the Company, the Subsidiary Guarantors and the holders of the Notes. (c) The Calculation Agent will cause the applicable rate of interest determined by it to be notified to the Paying Agent as soon as practicable after such determination but in no event later than the second Business Day following the Interest Rate Determination Date. 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 41 Trustee, at the expense of the Company, will execute proper instruments acknowledging satisfaction and discharge of the Indenture when: (a) either (i) all of 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. 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 42 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 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 ("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 43 and payable or (ii) a default in any payment when due at final maturity of any such Specified Indebtedness; (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, 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. 44 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 have 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 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. 45 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 (including, without limitation, those of the Calculation Agent). 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 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. 46 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 (including, without limitation, the Calculation Agent), 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. 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, 47 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 hereunder (including in its capacity as Calculation Agent); 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. 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 48 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. 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 49 (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. ARTICLE SIX THE TRUSTEE SECTION 601. NOTICE OF DEFAULTS. 50 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; (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; 51 (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, 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. 52 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, Calculation 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 (in its capacity as Trustee, Paying Agent, Calculation Agent and Registrar) 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. 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 53 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. 54 (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. 55 (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 right to adopt the certificate of authentication of any predecessor Trustee or to authenticate Notes in 56 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 or more related 57 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 58 Company is not the continuing obligor under the Indenture) is equal to or greater than 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 59 (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, 60 any affected Subsidiary Guarantor and the Trustee, the Company and the 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. SECTION 904. EFFECT OF SUPPLEMENTAL INDENTURES. 61 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. 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. 62 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. The Company shall, as long as any Note is Outstanding, maintain a Calculation Agent. 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 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 63 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 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 64 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 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. 65 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 2.0 to 1.0. In making the foregoing calculation for any four-quarter period that includes the Closing Date, pro forma effect shall be given to the Mercer Transactions 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 66 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) $25,000,000 or (y) the amount of the Borrowing Base, less any amounts applied to the permanent reduction of such credit facilities pursuant to Section 1016; 67 (ii) Indebtedness of the Company or any Restricted Subsidiary outstanding on the Closing Date (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 Fixed Rate Notes (other than additional Fixed Rate Note issued under the Fixed Rate Notes Indenture after August 20, 1997 ("Additional Fixed Rate Notes")) and the existing Fixed Rate Note Guarantees (including any Fixed Rate Note Guarantees issued pursuant to Section 1021 of the Fixed Rate Note Indenture); (v) Indebtedness represented by the Notes (other than the Additional Notes) and the Note Guarantees (including any Note Guarantees issued pursuant to Section 1021); (vi) Indebtedness of the Company or any Restricted Subsidiary under Hedging Obligations incurred in the ordinary course of business; (vii) 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; (viii) 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 (whether through the direct acquisition of 68 such property or assets or indirectly through the acquisition of the Capital Stock of any Person owning such property or assets), 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 Indebtedness under clauses (A) and (B) does not exceed $10,000,000 at any one time outstanding; (ix) 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 $15,000,000 at any one time outstanding; (x) 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 (xi) 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), (vi), (vii), (viii), (ix) or (x) 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: 69 (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 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 October 1, 1997 to the last day of the Company's most recently ended fiscal quarter for which internal financial statements are available at the 70 time of such proposed Restricted Payment (or, if such aggregate cumulative Consolidated Adjusted Net Income is a loss, minus 100% of such amount), plus (B) 100% of the aggregate net cash proceeds received by the Company after August 20, 1997 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) $3,000,000. For purposes of this Section 1011, the accrual of dividends on the Series C Preferred Stock shall not be treated as a Restricted Payment. 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 71 be permitted to refinance such original Subordinated Indebtedness with such new Subordinated Indebtedness pursuant to clause (xi) 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 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 Certificates of Determination for the Series A Preferred Stock as in effect on August 20, 1997; and (ii) commencing October 15, 2000, the payment of regular quarterly cash dividends (in the amount no greater than that provided for in the Certificates of Determination for the Series A Preferred Stock as in effect on August 20, 1997), out of funds legally available therefor, on any of the shares of Series A Preferred Stock issued and outstanding on August 20, 1997 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 August 20, 1997, 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 72 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 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 73 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. 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 $1,000,000, 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 $5,000,000, 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; 74 (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; (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 the Mercer Transactions; 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 aggregate principal amount of the 75 outstanding Indebtedness permitted by clauses (i) and (ix) 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 (a) the Notes, any Additional Notes or any Note Guarantee or (b) any Fixed Rate Notes, any Additional Fixed Rate Notes or any Fixed Rate Note Guarantees, PROVIDED the Notes or any related Note Guarantee and the Fixed Rate Notes and any Fixed Rate Note Guarantees are secured equally and ratably with the obligation or liability secured by such Lien; (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 (vi) of the definition of "Permitted Indebtedness" in Section 1010; (viii) Liens securing Indebtedness permitted to be incurred under paragraph (viii) 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, 76 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; (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, 77 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 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"). (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; 78 (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 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 canceled 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 79 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 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 $5,000,000, the Company shall, within 30 days thereafter, make an offer (an "Excess Proceeds Offer") to purchase from all holders of Notes and Additional Notes, PRO RATA in proportion to the respective amounts outstanding of the Notes, Additional Notes, Fixed Rate Notes and 80 Additional Fixed Rate Notes, 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, Additional Notes, Fixed Rate Notes and Additional Fixed Rate 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, Additional Notes, Fixed Rate Notes and Additional Fixed Rate Notes validly tendered and not withdrawn by holders thereof exceeds the Excess Proceeds, the Notes, Additional Notes, Fixed Rate Notes and Additional Fixed Rate 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. (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 81 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: (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 canceled 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. 82 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, 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; 83 (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 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. 84 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. 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. 85 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 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. The Notes may be redeemed at the option of the Company at any time, as a whole or from time to time in part, upon not less than 30 nor more than 60 days' prior notice, 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. 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. 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 86 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, (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 87 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 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. 88 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 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 89 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, 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 90 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 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. 91 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 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) 92 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. 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 93 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. SECTION 1304. SENIORITY OF GUARANTEES. 94 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 its debts (after giving effect to all other fixed and contingent liabilities incurred or assumed on such 95 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 96 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. 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: Secretary and Vice-President Attest: /s/ LOUIS MINTZ -------------------- Title: Louis Mintz Assistant Secretary UNITED STATES TRUST COMPANY OF NEW YORK By /s/ GERALD GANEY ----------------------------- Authorized Signatory BURKE FLOORING PRODUCTS, INC. BURKE CUSTOM PROCESSING, INC. BURKE RUBBER COMPANY, INC. MERCER PRODUCTS COMPANY, INC. Each, a Subsidiary Guarantor By /s/ KEITH OSTER ------------------------------ Name: Keith Oster Title: Vice-President Attest: /s/ LOUIS MINTZ -------------------- Title: Louis Mintz Assistant Secretary Schedule A EXHIBIT A [FACE OF NOTE] BURKE INDUSTRIES, INC. Floating Interest Rate [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: LIBOR plus 400 basis points. Interest Payment Dates: February 15 and August 15 of each year commencing August 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: - ------------------------------ ** For Exchange Notes (Form of Trustee's Certificate of Authentication) This is one of the Floating Interest Rate [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. Floating Interest Rate [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 per annum, reset semi-annually, equal to LIBOR plus 400 basis points, as determined by the Calculation Agent, from April 21, 1998, 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 August 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 Calculation Agent shall determine the interest rate applicable to the Notes in accordance with the terms of the Indenture. [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 canceled 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 April 21, 1998 (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 any time at the option of the Company, in whole or in part, at 105.00% of the principal amount thereof, plus accrued and unpaid interest thereon to, but excluding the date of redemption, if redeemed prior to February 15, 1999 and 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 February 15 of each of the years set forth below:
REDEMPTION YEAR PRICE ------------------------------------------------------------------ 1999 . . . . . . . . . . . . . . . . . . . . . . . . . 104.00 2000 . . . . . . . . . . . . . . . . . . . . . . . . . 103.00 2001 . . . . . . . . . . . . . . . . . . . . . . . . . 102.00 2002 . . . . . . . . . . . . . . . . . . . . . . . . . 101.00 2003 . . . . . . . . . . . . . . . . . . . . . . . . . 100.00
and thereafter at 100% of the principal amount, together with accrued interest, if any, to the redemption date. 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. If a Change of Control occurs at any time, then 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 April 21, 2000, 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 Thirteen of the Indenture, and reference is hereby made to such Indenture for the precise terms of this Note Guarantee. The terms of Article Thirteen 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 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. MERCER PRODUCT COMPANY, INC. Each, a Subsidiary Guarantor By: ----------------------------------- Name: Title: Attest: --------------------------- Title: MERCER PRODUCTS COMPANY, INC., a Subsidiary Guarantor By: ----------------------------------- Name: Title: Attest: --------------------------- Title: EXHIBIT C FORM OF LETTER TO BE DELIVERED BY ACCREDITED INVESTORS , 1998 Ladies and Gentlemen: In connection with our purchase of the Notes we confirm that: 1. We understand that the Notes have not been 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 any persons acting on behalf of the Company has made any representation to us with respect to the Company or the offer or sale of any Notes and (b) any information we desire concerning the Company and the Notes or any other matter relevant to our decision to purchase the 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 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 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 Notes that may be purchased by an IAI is $250,000. 5. We are acquiring the 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 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 Notes will be in registered form only and that any certificates delivered to us in respect of the 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 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 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 Notes are sold in compliance with Rule 144(k) under the Securities Act or (b) the Notes are sold in compliance with Rule 144A under the Securities Act or (c) the Notes are sold in compliance with Regulation S under the Securities Act or (d) the Notes are sold pursuant to an effective registration statement under the Securities Act or (e) the Notes are sold to the Company or an affiliate (as defined in Rule 501(b) of Regulation D) of the Company or (f) the 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. 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 Senior Notes should be registered in the name of the new beneficial owner as follows: Name: ------------------------------ Address: ----------------------------------- Taxpayer ID Number: ---------------------------------- EX-4.2 6 EXHIBIT 4.2 - -------------------------------------------------------------------------------- BURKE INDUSTRIES, INC. Issuer, THE SUBSIDIARY GUARANTORS NAMED HEREIN Subsidiary Guarantors and UNITED STATES TRUST COMPANY OF NEW YORK Trustee FIRST SUPPLEMENTAL INDENTURE Dated as of April 21, 1998 $110,000,000 10% Senior Notes Due 2007 - -------------------------------------------------------------------------------- FIRST SUPPLEMENTAL INDENTURE, dated as of April 21, 1998, by and between Burke Industries, Inc., a California corporation (the "Company"), the Subsidiary Guarantors (as defined in the Indenture), Mercer Products Company, Inc., a New Jersey corporation ("Mercer") and United States Trust Company of New York, a New York Banking corporation, as Trustee (the "Trustee") RECITALS OF THE COMPANY WHEREAS, the Company and the existing Subsidiary Guarantors have heretofore executed and delivered to the Trustee that certain Indenture, dated as of August 20, 1997 (the "Original Indenture", and as amended hereby, the "Indenture"), by and among the Company, the existing Subsidiary Guarantors and the Trustee pursuant to which $110,000,000 of the 10% Senior Notes due 2007 of the Company were issued (capitalized terms used herein and not defined herein have the meanings given to such terms in the Original Indenture); WHEREAS, Section 902 of the Indenture provides that the Company, the existing Subsidiary Guarantors and the Trustee may, from time to time, with the consent of the Holders of not less than a majority in aggregate Outstanding principal amount of the Notes, enter into one or more supplemental indentures to provide for, among other things, the amendments to the Indenture set forth below (the "Amendments"); WHEREAS, the Company has solicited the consent of the Holders of the Notes to the Amendments pursuant to that certain Consent Solicitation Statement dated March 30, 1998; WHEREAS, Holders of at least a majority in aggregate principal amount of the Outstanding Notes have consented to the Amendments; WHEREAS, on March 5, 1998, the Company entered into a Stock Purchase Agreement among the Company, Mercer Products Company, Inc. ("Mercer") and Sovereign Specialty Chemicals, Inc. pursuant to which the Company will, simultaneously with the execution of this First Supplemental Indenture, acquire all of the outstanding capital stock of Mercer; WHEREAS, pursuant to Section 1310 of the Indenture the Company must provide to the Trustee, on the date that any Person becomes a Restricted Subsidiary, a supplemental indenture in accordance with the terms of Section 1310 of the Indenture; WHEREAS, Mercer desires to guarantee the obligations of the Company under the Indenture in accordance with the terms thereof; WHEREAS, the Company, Mercer and the existing Subsidiary Guarantors have been duly authorized by each of their respective Board of Directors to enter into, execute and deliver this First Supplemental Indenture; WHEREAS, the Company and the existing Subsidiary Guarantors have complied with all conditions contained in the Indenture with respect to the Amendments; and NOW THEREFORE, for and in consideration of the premises and covenants and agreements contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and the Trustee agree as follows: ARTICLE ONE AMENDMENTS The following sections of the Indenture are hereby modified as follows: SECTION 1. Section 101 of the Indenture is hereby amended by adding the following definitions: "Additional New Notes" means up to $20.0 million in aggregate principal amount of New Notes having identical terms to the New Notes that, subject to compliance with Article 10 of the New Indenture, may be issued after the New Closing Date pursuant to the New Indenture. "Mercer Acquisition" means the acquisition by the Company of all of the outstanding capital stock of Mercer Products Company, Inc. pursuant to a Stock Purchase Agreement dated March 5, 1998 among the Company, Mercer and Sovereign Specialty Chemicals, Inc. "New Closing Date" means the date on which the New Notes are originally issued under the New Indenture. "New Indenture" means the indenture entered into on the New Closing Date pursuant to which the New Notes are issued, as it may be supplemented or amended from time to time. "New Notes" means Floating Interest Rate Senior Notes due August 15, 2007 to be issued in connection with the Mercer Acquisition and shall include (i) any notes having substantially identical terms issued in exchange for such New Notes or any Additional New Notes pursuant to a registration rights agreement and (ii) any Additional New Notes that may be issued pursuant to the New Indenture. "New Notes Guarantee" means any guarantee of the New Notes issued by a Restricted Subsidiary of the Company pursuant to the New Indenture. "Recapitalization" means the August 20, 1997 acquisition by J.F. Lehman Equity Investors I., L.P. of a controlling interest in the Company through a recapitalization of the outstanding securities of the Company. "Series C Preferred Stock" means the Convertible Preferred Stock of the Company issued on the New Closing Date. 3 SECTION 2. Restated Definition of Certain Defined Terms. 1. Clause (j) of the definition of Permitted Investments contained in Section 101 is hereby deleted in its entirety and replaced with the following language: (j) other Investments in any Person, a majority of the equity ownership and Voting Stock of which is owned, directly or indirectly, by the Company and/or one or more of the Subsidiaries of the Company, that do not exceed $7.5 million in the aggregate at any time outstanding. 2. The definition of Series A Preferred Stock contained in Section 101 is hereby deleted in its entirety and replaced with the following language: "Series A Preferred Stock" means, collectively, the Series A Cumulative Redeemable Preferred Stock of the Company, no par value and the Series B Cumulative Redeemable Preferred Stock of the Company, no par value, in each case issued on the Closing Date. SECTION 3. Section 1010 of the Indenture is hereby amended as follows: 1. Clause (i) of the definition of Permitted Indebtedness contained in Section 1010 is hereby amended by deleting the figure $15 million appearing therein and substituting therefor the figure $25.0 million. 2. Clause (iv) of the definition of Permitted Indebtedness contained in Section 1010 is hereby deleted in its entirety and replaced with the following language: (iv) Indebtedness represented by (i) the Notes (other than the Additional Notes), (ii) the Note Guarantees (including any Note Guarantees issued pursuant to Section 1021 of this Indenture), (iii) the New Notes (other than any Additional New Notes) and (iv) the New Notes Guarantees (including any New Notes Guarantees issued pursuant to Section 1021 of the New Indenture); 3. Clause (vii) of the definition of Permitted Indebtedness contained in Section 1010 is hereby amended by deleting the figure $7,500,000 appearing therein and substituting therefor the figure $10.0 million. 4. Clause (viii) of Section 1010 is hereby amended by deleting the figure $10 million appearing therein and substituting therefor the figure $15.0 million. 4 SECTION 4. Section 1011 of the Indenture is hereby amended by adding the following language to the beginning of the paragraph beginning with "Notwithstanding the foregoing, the Company and its Restricted Subsidiaries may take the following actions ..." For purposes of this "Limitation on Restricted Payments" covenant, the accrual of dividends on the Series C Preferred Stock shall not be treated as a Restricted Payment. SECTION 5. Section 1013 of the Indenture is hereby amended by deleting clause (F) thereof in its entirety and replacing it with the following language: (F) the payment of all fees and expenses related to the Recapitalization, the offering of the New Notes and the Mercer Acquisition; and SECTION 6. Section 1014 of the Indenture is hereby amended as follows: 1. Clause (ii) of the definition of Permitted Liens contained in Section 1014 is hereby deleted in its entirety and replaced with the following language: (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 aggregate principal amount of the outstanding Indebtedness permitted by clauses (i) and (viii) of the definition of "Permitted Indebtedness; 2. Clause (iv) of the definition of Permitted Liens contained in Section 1014 is hereby deleted in its entirety and replaced with the following language: (iv) Liens securing (a) the Notes or any Note Guarantee or (b) any New Notes or any New Notes Guarantees, provided that both the Notes or any related Note Guarantee and the New Notes or any related New Notes Guarantee are secured equally and ratably with the obligation or liability secured by such Lien; SECTION 7. Clause (c) of Section 1016 of the Indenture is hereby deleted in its entirety and replaced with the following language: 5 (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 New Notes, PRO RATA in proportion to the respective principal amounts outstanding of the Notes and New Notes, the maximum principal amount (expressed as a multiple of $1,000) of Notes and New Notes that may be purchased out of 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 New 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 New Notes validly tendered and not withdrawn by holders thereof exceeds the Excess Proceeds, the Notes and New 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. ARTICLE TWO ADDITIONAL NOTE GUARANTEE SECTION 1. Simultaneously with the execution of this First Supplemental Indenture, pursuant to Section 1310 of the Indenture Mercer shall issue a Note Guarantee in the form attached hereto as Exhibit 1, and thereafter, Mercer shall be deemed to be a "Subsidiary Guarantor" under and as defined in the Indenture. ARTICLE THREE MISCELLANEOUS SECTION 1. Except as expressly supplemented by this First Supplemental Indenture, the Indenture and the Notes issued thereunder are in all respects ratified and confirmed and all of the rights, remedies, terms, conditions, covenants and agreements of the Indenture and Notes issued thereunder shall remain in full force and effect. SECTION 2. This First Supplemental Indenture is executed as and shall constitute an indenture supplemental to the Indenture and shall be construed in connection with and as part of the Indenture. This First Supplemental Indenture shall be governed by and construed in accordance with the laws of the jurisdiction that governs the Indenture and its construction. SECTION 3. This First Supplemental Indenture may be executed in any number of counterparts, each of which shall be deemed to be an original for all purposes; but such counterparts shall together be deemed to constitute but one and the same instrument. 6 SECTION 4. Any and all notices, requests, certificates and other instrument executed and delivered after the execution and delivery of this First Supplemental Indenture may refer to the Indenture without making specific reference to this First Supplemental Indenture, but nevertheless all such references shall include this First Supplemental Indenture unless the context otherwise requires. SECTION 5. This First Supplemental Indenture shall be deemed to have become effective upon the date first above written. SECTION 6. In the event of a conflict between the terms of this First Supplemental Indenture and the Indenture, this First Supplemental Indenture shall control. 7 IN WITNESS WHEREOF, the parties have caused this First Supplemental 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 Attest: /s/ LOUIS MINTZ --------------------------- ------------------------------- Name: Keith Oster Name: Louis Mintz Title: Secretary Title: Assistant Secretary UNITED STATES TRUST COMPANY OF NEW YORK, as Trustee By: /s/ GERALD P. GANEY --------------------------- Name: Gerald P. Ganey Title: Senior Vice President BURKE FLOORING PRODUCTS, INC. BURKE CUSTOM PROCESSING, INC. BURKE RUBBER COMPANY, INC. Each an existing Subsidiary Guarantor By: /s/ KEITH OSTER Attest: /s/ LOUIS MINTZ ---------------------------- ------------------------------- Name: Keith Oster Name: Louis Mintz Title: Vice President Title: Assistant Secretary MERCER PRODUCTS COMPANY, INC. By: /s/ KEITH OSTER Attest: /s/ LOUIS MINTZ ----------------------------- ------------------------------ Name: Keith Oster Name: Louis Mintz Title: Vice President Title: Assistant Secretary 8 EX-4.4 7 EXHIBIT 4.4 BURKE INDUSTRIES, INC. 2250 South Tenth Street San Jose, CA 95112 $30,000,000 FLOATING INTEREST RATE SENIOR NOTES DUE 2007 REGISTRATION RIGHTS AGREEMENT New York, New York April 21, 1998 NationsBanc Montgomery Securities LLC NationsBank Corporate Center 100 North Tryon Street, NC1-007-07-01 Charlotte, North Carolina 28255-0001 Ladies and Gentlemen: Burke Industries, Inc., 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 Floating Interest Rate 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. "COMMISSION" means the Securities and Exchange Commission. "COMPANY" has the meaning set forth in the preamble hereto. 2 "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 April 21, 1998 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. "FINAL MEMORANDUM" has the meaning set forth in the Purchase Agreement. "GUARANTEES" has the meaning set forth in the Purchase Agreement. 3 "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., Burke Rubber Company, Inc. and Mercer Products 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. "REGISTRATION DEFAULT" has the meaning set forth in Section 5(b) hereto. 4 "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 30 6 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 Company has been notified in writing on or prior to the 60th day following the 7 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 in 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 Notes shall result in such Exchange Notes being not "freely tradeable" and (y) the requirement that an Exchanging Dealer deliver a Prospectus in 8 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 (but in any event within 45 Business Days after such filing occurs) 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. 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: 9 (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 shall be 11 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 reasonable 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, and 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 reasonably 12 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 (including supplements thereto) 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 and the Company and the Guarantors may exclude from such registration the Notes of any Holder that fails to furnish such information (including supplements thereto) within a reasonable period of time after receiving such request. (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 14 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 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 15 (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 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 16 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 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 the 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. 17 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 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 18 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 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 an actual 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 based on written advice from counsel that there may be legal defenses available to it and/or other indemnified parties that are different from or additional to 19 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 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 20 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 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 21 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. (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 Montgomery Securities LLC; (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. 22 (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. (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. 23 Please confirm that the foregoing correctly sets forth the agreement among the Company, the Subsidiary Guarantors and you. Very truly yours, BURKE INDUSTRIES, INC. By: /s/ KEITH OSTER ------------------------------------- Name: Keith Oster Title: Secretary BURKE FLOORING PRODUCTS, INC. BURKE CUSTOM PROCESSING, INC. BURKE RUBBER COMPANY, INC. MERCER PRODUCTS COMPANY, INC. Each, a Subsidiary Guarantor By: /s/ KEITH OSTER ------------------------------------- Name: Keith Oster Title: Secretary The foregoing Agreement is hereby accepted as of the date first above written. NATIONSBANC MONTGOMERY SECURITIES LLC By: /s/ DAVID APPLE --------------------------- Name: David Apple Title: Associate 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-5.1 8 EXHIBIT 5.1 June 18, 1998 (213) 229-7000 C 11484-00005 Burke Industries, Inc. 2250 Tenth Street San Jose, CA 95112 Re: BURKE INDUSTRIES, INC. -- REGISTRATION STATEMENT ON FORM S-4 Ladies and Gentlemen: We have acted as special counsel for Burke Industries, Inc., a California corporation (the "Company"), in connection with the registration by the Company of up to $30,000,000 aggregate principal amount of the Company's Floating Interest Rate Senior Notes due 2007 (the "New Notes") on a Form S-4 Registration Statement of even date herewith (the "Registration Statement") under the Securities Act of 1933, as amended. The New Notes will be offered in exchange for a like principal amount of the Company's Floating Interest Rate Senior Notes due 2007 (the "Old Notes") pursuant to that certain Registration Rights Agreement, dated as of April 21, 1998, by and among the Company, four of the Company's subsidiaries, Burke Flooring Products, Inc., a California corporation, Burke Custom Processing, Inc., a California corporation, Burke Rubber Company, Inc., a California corporation, and Mercer Products Company, Inc., a New Jersey corporation (the "Subsidiary Guarantors"), and NationBanc Capital Markets, Inc. (the "Registration Rights Agreement"). The Registration Rights Agreement was executed in connection with the private placement of Old Notes. We have also acted as special counsel for the Subsidiary Guarantors in connection with the registration of the guarantees of the New Notes by the Subsidiary Guarantors under the Registration Statement ( the "Guarantees"). The New Notes will be issued pursuant to that certain Indenture dated as of April 21, 1998, by and among the Company, the Subsidiary Guarantors and United States Trust Company of New York, as Trustee (the "Indenture"). Burke Industries, Inc. June 18, 1998 Page 2 We are familiar with the actions to be taken by the Company and the Subsidiary Guarantors in connection with the offering of the New Notes and the issuance of the Guarantees. On the basis of such knowledge and such investigation as we have deemed necessary, we are of the opinion that: (i) the New Notes have been duly authorized by the Company and, when issued in exchange for the Old Notes pursuant to the terms of the exchange offer described in the Registration Statement and the Indenture, will be validly issued and will constitute legal and binding obligations of the Company; and (ii) the Guarantees have been duly authorized by the Subsidiary Guarantors and, when issued along with the New Notes in accordance with the terms of the Indenture, will be validly issued and will constitute the legal and binding obligations of the Subsidiary Guarantors. Our opinions are subject to limitations imposed by (i) applicable bankruptcy, insolvency, reorganization, moratorium or other laws affecting creditors' rights generally, including without limitation, the effect of statutory or other laws regarding fraudulent conveyances or transfers or preferential transfers and (ii) general principles of equity, whether considered at law or at equity, including without limitation, concepts of materiality, reasonableness, good faith and fair dealing. We hereby consent to the filing of this opinion as an exhibit to the Company's S-4 Registration Statement, dated as of this date, and to the reference to this firm under the heading "Legal Matters" contained in the prospectus that forms a part of the Registration Statement. Very truly yours, /s/ Gibson, Dunn & Crutcher LLP GIBSON, DUNN & CRUTCHER LLP EX-8.1 9 EXHIBIT 8.1 June 18, 1998 (213) 229-7000 C 11484-00005 Burke Industries, Inc. 2250 Tenth Street San Jose, CA 95112 Re: EXCHANGE OF FLOATING INTEREST RATE SENIOR NOTES DUE 2007 Ladies and Gentlemen: We have acted as special counsel for Burke Industries, Inc., a California corporation (the , "Company"), in connection with the issuance by the Company of $30.0 million principal amount of Floating Interest Rate Senior Notes Due 2007 (the "Exchange Notes") issued in exchange for $30.0 million principal amount of the Company's Floating Interest Rate Notes due 2007 (the "Old Notes"). The terms of the Old Notes and the Exchange Notes are described in the Prospectus of even date herewith (the "Prospectus") and the operative documents described therein. This opinion is based on the accuracy of the facts described and the representations made in the Prospectus. We have made such legal and factual examinations and inquiries as we have deemed necessary or appropriate for purposes of this opinion. We are opining herein as to the effect on the subject transaction only of the federal income tax laws of the United States, and we express no opinion with respect to the applicability thereto, or the effect thereon, of other federal laws, the laws of any other jurisdiction or as to any matters of municipal law or the laws of any other local agencies within any state. Based on the foregoing, we hereby confirm our opinion in the Prospectus described under the caption "Federal Income Tax Consequences." June 18, 1998 Page 2 This opinion is based on various statutory provisions, regulations promulgated thereunder and interpretations thereof by the Internal Revenue Service and the courts having jurisdiction over such matters, all of which are subject to change either prospectively or retroactively. Any variation or difference in the facts from those set forth in the Prospectus or the operative documents described therein may affect the conclusions stated herein. We hereby consent to the use of our name and opinion under the caption "Federal Income Tax Consequences" in the Prospectus. Very truly yours, /s/ Gibson, Dunn & Crutcher LLP GIBSON, DUNN & CRUTCHER LLP EX-10.6 10 EXHIBIT 10.6 [EXECUTION COPY] AMENDMENT NO. 1 WAIVER AND JOINDER AGREEMENT TO LOAN AND SECURITY AGREEMENT Dated as of April 21, 1998 THIS AMENDMENT NO. 1, WAIVER AND JOINDER AGREEMENT entered into as of April 21, 1998 by and between BURKE INDUSTRIES, INC., a California corporation ("Burke"), MERCER PRODUCTS COMPANY, INC., a New Jersey corporation ("Mercer"), and NATIONSBANK, N.A., a national banking association, as the sole Lender under the Loan Agreement (as hereinafter defined) and as agent for the Lenders (the "Agent"). PRELIMINARY STATEMENT Burke and the Agent are parties to that certain Loan and Security Agreement dated as of August 20, 1997 (the "Loan Agreement"; terms defined therein, unless otherwise defined herein, being used herein as therein defined). In connection with the Acquisition of Mercer by Burke, Burke has requested, among other things, an increase in the amount of the Revolving Credit Facility, the amendment of certain financial and other covenants under the Loan Agreement, a waiver of any Default or Event of Default under the Loan Agreement occurring as a result of the Mercer Transaction (as hereinafter defined) and that Mercer be joined as a party to the Loan Agreement as a Borrowing Subsidiary so that, among other things, the Receivables and Inventory of Mercer will be eligible to be included in the Borrowing Base under the Loan Agreement, and the Agent has agreed to amend the Loan Agreement as hereinafter set forth, upon and subject to the terms and conditions of this Amendment No. 1. STATEMENT OF AGREEMENT NOW, THEREFORE, in consideration of the Loan Agreement, the mutual covenants set forth therein and herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: Section 1. AMENDMENTS TO LOAN AGREEMENT. Subject to the provisions of Section 4 hereof, the Loan Agreement is hereby amended as follows: (a) by amending the provisions of Section 1.1 DEFINITIONS thereof (i) by amending clause (i) of the definition COLLATERAL in its entirety to read as follows: (i) all Real Estate as to which a Mortgage has been recorded, (ii) by amending the definition REVOLVING CREDIT FACILITY by deleting the figure "$15,000,000" appearing therein and substituting therefor the figure "$25,000,000"; (iii) by amending the definition PERMITTED PURCHASE MONEY DEBT by deleting the figure "$3,000,000" appearing in clause (c) thereof and substituting therefor the figure "$10,000,000"; (iv) by amending the definition LETTER OF CREDIT FACILITY by deleting the figure "$1,000,000" appearing therein and substituting therefor the figure "$3,000,000"; (v) by amending the definition PERMITTED INVESTMENTS by deleting the word "and" appearing at the end of clause (h) thereof, amending clause (i) thereof in its entirety to read as follows: (i) other Investments that do not exceed $7,500,000 in the aggregate at any time outstanding; and and inserting a new clause (j) at the end thereof to read in its entirety as follows: (j) Investments in connection with the Mercer Transaction. (vi) by amending the definition SENIOR NOTE INDENTURE by adding immediately before the period at the end thereof the phrase ", as amended by the First Supplemental Indenture." (vii) by adding the following definitions in appropriate alphabetical order: AMENDMENT NO. 1 EFFECTIVE DATE means the date on which Amendment No. 1 shall have become effective in accordance with its terms. AMENDMENT NO. 1 means the Amendment No. 1, Waiver and Joinder Agreement to Loan and Security Agreement executed and delivered by Burke, Mercer, the Agent and the Lender on or before the Amendment No. 1 Effective Date. CONSENT SOLICITATION STATEMENT means the Burke Industries, Inc. Solicitation of Consents to Indenture Amendments dated March 30, 1998. FIRST SUPPLEMENTAL INDENTURE means the first supplemental indenture, dated as of April 21, 1998, by and between Burke Industries, Inc., the Subsidiary Guarantors (as defined therein) and United States Trust Company of New York, amending the Senior Notes Indenture. 2 MERCER means Mercer Products Company, Inc., a New Jersey corporation, and its successors and assigns. MERCER ACQUISITION means the Acquisition by Burke of 100% of the issued and outstanding capital stock of Mercer pursuant to the Mercer Acquisition Documents. MERCER ACQUISITION AGREEMENT means the Stock Purchase Agreement by and among Burke, as purchaser, Sovereign Specialty Chemicals, Inc., as seller, and Mercer, dated as of March 5, 1998 in the form delivered to the Agent on or prior to the Amendment No. 1 Effective Date. MERCER ACQUISITION DOCUMENTS means the Mercer Acquisition Agreement, and any other agreement, document, certificate or instrument to be delivered in connection with the Mercer Acquisition. MERCER MORTGAGE means the Florida Mortgage, Security Agreement and Assignment of Leases and Rents, or any replacement, modification or substitution thereof, in form and substance satisfactory to the Agent, executed and delivered by Mercer in favor of the Agent for the benefit of the Lenders, pursuant to which the Mercer Property is mortgaged to the Agent for the benefit of the Lenders. MERCER PLEDGE AGREEMENT means the Pledge Agreement, in form and substance satisfactory to the Agent, executed and delivered by Burke on or before the Amendment No. 1 Effective Date in favor of the Agent for the benefit of the Lenders, pursuant to which Burke pledges all of the issued and outstanding capital stock of Mercer. MERCER REAL ESTATE means the Real Estate owned by Mercer located at 37235 State Road 19, Umatilla, Lake County, Florida. MERCER TRADEMARK ASSIGNMENT means the Assignment for Security-Trademarks, dated on or before the Amendment No. 1 Effective Date, executed by Mercer in form and substance satisfactory the Agent. MERCER TRANSACTION means and includes, collectively, the transactions contemplated by the Consent Solicitation Statement, the First Supplemental Indenture, the Mercer Acquisition Documents, the New Senior Notes and the New Senior Note Indenture, including the New Equity Issuance. NEW EQUITY ISSUANCE means the issuance by Burke of 3,000 shares of its Preferred Stock for aggregate consideration in the amount of $3,000,000. NEW SENIOR NOTES means Burke's Floating Interest Rate Senior Notes due 2007 in the original principal amount of $30,000,000, issued pursuant to the New Senior Note Indenture, and any Exchange Notes (as defined in the New Senior Note Indentures) issued in exchange therefor; 3 NEW SENIOR NOTE INDENTURE means the Indenture dated as of April 21, 1998, between Burke and United States Trust Company of New York, Trustee, relating to the New Senior Notes. (b) by amending the provisions of Article 8 AFFIRMATIVE COVENANTS by inserting a new Section 8.10 MERCER MORTGAGE at the end thereof to read in its entirety as follows: SECTION 8.10 MERCER MORTGAGE. Upon the occurrence of any Default or Event of Default, or at any time upon the written request of the Agent or any Lender, provide each of the following to the Agent: (a) a replacement Mercer Mortgage duly executed and delivered by Mercer, in proper form for recording in the state of Florida; (b) a fully paid mortgagee title insurance policy or, at the option of the Lender, an unconditional commitment 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, in an amount equal to not less than the fair market value of the Real Estate subject to the Mercer Mortgage, insuring that the Mercer Mortgage creates a valid first lien on, and security title to, the Mercer Real Estate, with no survey exceptions and no other exceptions which the Agent shall not have approved in writing; (c) such materials and information concerning the Mercer Property as the Agent may require, including, without limitation, certificates of occupancy covering the Mercer Real Estate, and owner's affidavits as to such matters relating to the Mercer Real Estate as the Agent may request; (d) a report from a qualified engineering firm or other qualified consultant acceptable to the Agent with respect to an investigation and assessment of the Mercer 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) contact with local, state or federal agencies regarding known or suspected hazardous material contamination of the property or other properties in the area; (B) review of aerial photographs; (C) visual site inspection noting unregulated fills, storage tanks or areas, ground discoloration or soil odors; and (D) other investigative methods deemed necessary by the consultant or the Agent to enable the consultant to deliver a report in a form typically issued in connection with a "Phase 1" environmental report; (e) certificates or binders of insurance relating to each of the policies of insurance required by the Mercer Mortgage, together with mortgagee clauses satisfactory to the Agent; and 4 (f) an amount equal to the recording for and expenses and all documentary, stamp, intangibles recording and other taxes required to be paid in connection with the recording of the Mercer Mortgage and such other documents and instruments as the Agent may reasonably request in connection with the Mercer Mortgage. (c) by amending the provisions of Section 10.2 DEBT thereof by (i) amending subsection (c) to read in its entirety as follows, "(c) Debt represented by the Senior Notes and the New Senior Notes and Debt represented by unsecured Guaranties of the Senior Notes and the New Senior Notes," and (ii) by deleting the figure "$10,000,000" appearing in subsection (f) thereof and substituting therefor the figure "$15,000,000". (d) by amending the provisions of Section 10.4 INVESTMENTS thereof by deleting the figure "$5,000,000" appearing in subsections (i) and (ii) thereof and in each such instance substituting therefor the figure "$7,500,000". (e) by amending the provisions of Section 10.8 TRANSACTIONS WITH AFFILIATES thereof by deleting the word "and" appearing immediately before the beginning of clause (viii), and inserting immediately before the period at the end thereof the following: ", and (viii) payments to J. F. Lehman & Company of (A) a transaction fee of $500,000 payable on the Amendment No. 1 Effective Date, (B) fees and expenses in connection with the Mercer Transaction and (C) an annual management fee in addition to that permitted under clause (iii) above in an amount not to exceed $250,000. (f) by amending the provisions of Section 10.12 AMENDMENTS OF OTHER AGREEMENTS thereof in its entirety to read as follows: SECTION 10.12 AMENDMENTS OF OTHER AGREEMENTS. Amend the Senior Notes, the Senior Note Indenture, the New Senior Notes, the New Senior Note Indenture, or any related document. (g) by amending the provisions of Section 11.2(b) OTHER REMEDIES thereof by deleting the "and" at the end of clause (xi) thereof, substituting "; and" for the period at the end of clause (xii) thereof and adding a new clause (xiii) at the end thereof as follows: (xiii) record the Mercer Mortgage and compel the Borrower to provide the documentation required pursuant to SECTION 8.10. Section 2. JOINDER. Mercer hereby covenants and agrees that from and after the Amendment No. 1 Effective Date Mercer shall be deemed to be a "Borrowing Subsidiary" under and as defined in the Loan Agreement, and shall thereupon be bound by all of the terms and conditions of the Loan Agreement as fully as if Mercer were an initial signatory thereto in the capacity of a Borrowing Subsidiary. 5 Section 3. WAIVER. Effective on the Amendment No. 1 Effective Date (as hereinafter defined) the Agent and the Lender hereby waive any Default or Event of Default occurring as a result of the Mercer Transaction. Section 4. EFFECTIVENESS. The provisions of this Amendment No. 1 shall become effective on the date (the "Amendment No. 1 Effective Date") on which the Agent receives or waives receipt each of the following in form and substance satisfactory to the Agent: (a) payment of a commitment fee in the amount of $100,000; (b) four copies of this Amendment No. 1 duly executed by Burke and Mercer; (c) an amended and restated promissory note in the form attached hereto as ANNEX 1 (the "Amended and Restated Revolving Credit Note"), with all blanks appropriately completed, duly executed and delivered by Burke and Mercer; (d) a Consent and Confirmation of Guarantor in the form attached hereto as ANNEX 2 duly executed and delivered by each of the Guarantors; (e) the Mercer Pledge Agreement duly executed and delivered by Burke and the certificates representing the shares covered thereby, in form for transfer by delivery or accompanied by duly executed stock powers in blank; (f) certified copies of the articles of incorporation and by-laws of each of Burke and Mercer as in effect on the Amendment No. 1 Effective Date and all corporate action, including shareholder approval, if necessary, taken by each of Burke and Mercer or its shareholders to authorize the transactions contemplated by this Amendment No. 1 and the Mercer Transaction and the incumbency of officers of each of Burke and Mercer and, in the case of Mercer, the Borrowings under the Loan Agreement; (g) a certificate of the chief operating officer, president, vice president-finance or other officers reasonably acceptable to the Agent of each of Burke and Mercer stating that, to the best of his knowledge and based on an examination sufficient to enable him to make an informed statement, (i) after giving effect to this Amendment No. 1 and the Mercer Transaction, all of the representations and warranties made or deemed to be made under the Loan Agreement are true and correct as of the Amendment No. 1 Effective Date, (ii) after giving effect to this Amendment No. 1 and the Mercer Transaction, no Default or Event of Default exists; (iii) there has not occurred any material adverse change since December 31, 1997 in the business, assets, operations, condition (financial or otherwise) or prospects of Burke and its Subsidiaries or Mercer prior to the Amendment No. 1 Effective Date; and 6 (iv) there does not exist any action, suit, investigation or proceeding pending or threatened in any court or before any arbitrator or governmental authority that purports to affect adversely Mercer, Burke or its Subsidiaries or the Mercer Transaction, or that could have a material adverse effect on Mercer, Burke or its Subsidiaries or the Mercer Transaction or on the ability of Burke and its Subsidiaries to perform their obligations under the Loan Documents as amended. (h) evidence of the consummation of the Mercer Transaction, including evidence of receipt by Burke of an amount not less than $3,000,000 obtained through the New Equity Issuance and aggregate gross proceeds of $30,000,000 obtained through the issuance of the New Senior Notes, including copies of the Mercer Acquisition Documents, the consents of the requisite holders of the Senior Notes obtained pursuant to the Consent Solicitation Statement, and the New Note Indenture; (i) a certificate evidencing the good standing of Mercer in the jurisdiction of its incorporation and in each other jurisdiction in which it is qualified as a foreign corporation to transact business; (j) the Financing Statements duly executed and delivered by Mercer; (k) landlord's waiver and consent agreements duly executed on behalf of each lessor of real property described on ANNEX 3; (l) a modification to the existing Mortgage encumbering Real Estate located at 2250 South Tenth Street, San Jose, Santa Clara County, California (the "California Mortgage"), duly executed and delivered by Burke 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; (m) a fully paid endorsement to the mortgagee title insurance policy relating to the California Mortgage or, at the option of the Lender, an unconditional commitment for the issuance thereof with all requirements and conditions to the issuance of the final endorsement deleted or marked satisfied, issued by a title insurance company satisfactory to the Agent, confirming that the California Mortgage as amended continues to create a valid first lien on, and security title to, all Real Estate described therein as security for the Secured Obligations; (n) the Mercer Mortgage duly executed and delivered by Mercer and in proper form for the recording of such instrument in Lake County, Florida; (o) certificates or binders of insurance relating to each of the policies of insurance covering any of the Collateral owned by Mercer together with loss payable clauses which comply with the terms of Section 7.8 of the Loan Agreement; and (p) evidence satisfactory to the Agent of the release and termination of (or agreement to release and terminate) all Liens relating to Mercer's property other than Permitted Liens; 7 (q) a signed opinion of Gibson, Dunn & Crutcher LLP, counsel for Burke and Mercer, opining as to such matters in connection with this Agreement as the Agent or its counsel may reasonably request; (r) the Mercer Trademark Assignment duly executed and delivered by Mercer; (s) a Schedule of Inventory, a Schedule of Receivables and a Schedule of Equipment, each prepared as of a recent date; (t) updated Schedules to the Loan Agreement and the Loan Documents , as necessary, revised to reflect the Mercer Transaction and any other changes to the same since the Effective Date; and (u) such other documents and instruments as any Lender, through the Agent, may reasonably request. Section 5. EFFECT OF AMENDMENT. Upon and after the Amendment No. 1 Effective Date, all references to the Loan Agreement in that document or in any other Loan Document or related document shall mean the Loan Agreement as amended by this Amendment No. 1. Except as expressly provided in this Amendment No. 1, the execution and delivery of this Amendment No. 1 does not and will not amend, modify or supplement any provision of, or constitute a consent to, or a waiver of, any noncompliance with the provisions of, the Loan Agreement or any other Loan Document, and, except as specifically provided in this Amendment No. 1, the Loan Agreement and all other Loan Documents shall remain in full force and effect. Section 6. LEGAL EXPENSES. Burke and Mercer each jointly and severally agree to pay or reimburse the Agent on demand all costs and expenses, including reasonable legal fees and expenses, incurred by the Agent in connection with the preparation, execution and delivery of this Amendment No. 1. Section 7. REPRESENTATIONS AND WARRANTIES. Burke and Mercer each hereby makes the following representations and warranties to the Lender, which representations and warranties shall survive the delivery of this Amendment No. 1: (a) AUTHORIZATION OF AGREEMENTS. To the extent it is a party thereto, each has the right and power and has taken all necessary corporate action to authorize it to execute, deliver and perform in accordance with their respective terms, this Amendment No. 1, the Notes, the Mercer Mortgage, the Mercer Pledge Agreement, the Mercer Trademark Assignment, and each other Loan Document executed in connection with this Amendment No. 1 and the Mercer Transaction. This Amendment, No. 1 the Notes, the Mercer Mortgage, the Mercer Pledge Agreement, the Mercer Trademark Assignment, and each other Loan Document executed in connection with this Amendment No. 1 and the Mercer Transaction have each been duly executed and delivered by the duly authorized officers of Burke or Mercer, as the case may be, and are legal, valid and 8 binding obligations of Burke and Mercer, as the case may be, enforceable in accordance with their respective terms. (b) COMPLIANCE OF AGREEMENTS WITH LAWS. The execution, delivery and performance in accordance with their respective terms of this Amendment No. 1, the Notes, the Mercer Mortgage, the Mercer Pledge Agreement, the Mercer Trademark Assignment, and each other Loan Document executed in connection with this Amendment No. 1 and the Mercer Transaction, does 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 Burke, Mercer or any of their Affiliates, (ii) conflict with, result in a breach of or constitute a default under (i) the articles of incorporation or by-laws or any shareholders' agreement of Burke, Mercer or any other Subsidiary of Burke, (ii) any material provision of any indenture, agreement or other instrument to which Burke, Mercer or any other Subsidiary of Burke is a party or by which any of its property may be bound or (iii) any Governmental Approval relating to Burke, Mercer or any other Subsidiary of Burke, 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 Burke, Mercer or any other Subsidiary of Burke other than the Security Interest. Section 8. GENERAL PROVISIONS. (a) GOVERNING LAW. This Amendment No. 1 shall be construed in accordance with and governed by the law of the State of New York. (b) COUNTERPART EXECUTION. This Amendment No. 1 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. 9 IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 1 to be executed and delivered by their respective officers thereunto duly authorized as of the date first above written. BORROWER: BURKE INDUSTRIES, INC. By: /s/ KEITH OSTER ---------------------------------------- Name: Keith Oster --------------------------------- Title: Secretary --------------------------------- MERCER: MERCER PRODUCTS COMPANY, INC. By: /s/ KEITH OSTER ---------------------------------------- Name: Keith Oster --------------------------------- Title: Secretary --------------------------------- AGENT: NATIONSBANK, N.A. By: /s/ SHERRY D. LAIL ---------------------------------------- Name: Sherry D. Lail --------------------------------- Title: Vice President --------------------------------- LENDER: NATIONSBANK, N.A. By: /s/ SHERRY D. LAIL ---------------------------------------- Name: Sherry D. Lail --------------------------------- Title: Vice President --------------------------------- 10 ANNEX 1 FORM OF AMENDED AND RESTATED REVOLVING CREDIT NOTE $25,000,000 New York, New York _________ ____, 1998 FOR VALUE RECEIVED, the undersigned, BURKE INDUSTRIES, INC., a California corporation (the "Borrower"), and MERCER PRODUCTS COMPANY, INC., a New Jersey corporation (the "Borrowing Subsidiary"), jointly and severally, hereby unconditionally promise to pay to the order of NATIONSBANK, N.A. (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 TWENTY-FIVE MILLION AND NO/100 DOLLARS ($25,000,000.00), 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 and the Borrowing Subsidiary 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 and the Borrowing Subsidiary also unconditionally, jointly and severally, promise 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 given in substitution for the Revolving Credit Note dated August 20, 1997 made by the Borrower payable to the Lender and is one of the Revolving Credit Notes referred to in that certain Loan and Security Agreement dated as of August 20, 1997, as amended by Amendment No. 1, Waiver and Joinder Agreement to 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) among the Borrower, the Borrowing Subsidiary, 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 11 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 and the Borrowing Subsidiary, 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 and the Borrowing Subsidiary hereby, jointly and severally, agree 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 14.16 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. 12 IN WITNESS WHEREOF, the undersigned has executed this Note as of the day and year first above written. BURKE INDUSTRIES, INC. By: /s/ ----------------------------------- Name: Keith Oster ---------------------------- Title: Secretary ---------------------------- (CORPORATE SEAL) Attest: By: /s/ ------------------------------ Name: Louis Mintz -------------------------- Title: Assistant Secretary -------------------------- MERCER PRODUCTS COMPANY, INC. By: /s/ ----------------------------------- Name: Keith Oster ---------------------------- Title: Secretary ---------------------------- (CORPORATE SEAL) Attest: By: /s/ ------------------------------ Name: Louis Mintz -------------------------- Title: Assistant Secretary -------------------------- 13 ANNEX 2 FORM OF CONSENT AND CONFIRMATION OF GUARANTOR Each of the undersigned, each a Guarantor and party to a Subsidiary Guaranty (each as defined in the Loan and Security Agreement, dated as of August 20, 1997, between Burke Industries, Inc., the financial institutions party thereto from time to time and NationsBank, N.A., as Agent (the "Loan Agreement")), hereby expressly acknowledges and confirms, for the benefit of the Borrower and the Lender, that (1) such Guarantor has an economic interest in the financial success of the Borrower and the transactions contemplated by the Loan Agreement and the Amendment No. 1, Waiver and Joinder Agreement to the Loan and Security Agreement dated on or about the date hereof (the "Amendment"), and hereby confirms to the Agent and the Lender the benefits to such Guarantor by reason of such transactions, (2) such Guarantor has received a copy of the Amendment and consents thereto in all respects and (3) the Subsidiary Guaranty of which such Guarantor is the maker constitutes a continuing, unconditional guaranty of the Guaranteed Obligations under and as defined in the Subsidiary Guaranty after giving effect to the Amendment. Each Guarantor is and continues to be liable under the Subsidiary Guaranty to which it is a party in accordance with the terms thereof, notwithstanding the execution and delivery of the Amendment. Dated: April 21, 1998 BURKE FLOORING PRODUCTS, INC. By: /s/ ----------------------------------- Name: Keith Oster ---------------------------- Title: Secretary ---------------------------- BURKE CUSTOM PROCESSING, INC. By: /s/ ----------------------------------- Name: Keith Oster ---------------------------- Title: Secretary ---------------------------- BURKE RUBBER COMPANY, INC. By: /s/ ----------------------------------- Name: Keith Oster ---------------------------- 14 Title: Secretary ---------------------------- 15 ANNEX 3 LANDLORDS 16 EX-10.10 11 EXHIBIT 10.10 [EXECUTION COPY] ASSIGNMENT FOR SECURITY (TRADEMARKS) STATE OF NEW YORK ) ) ss.: COUNTY OF NEW YORK ) WHEREAS, Mercer Products Company, Inc., a New Jersey corporation (the "Assignor"), has adopted, used and is using marks which are the subject of registrations or pending applications in the United States Patent and Trademark Office as set forth on SCHEDULE A, and certain other trademarks, tradenames and registrations and applications for registration thereof (collectively, the "Trademarks"), and WHEREAS, the Assignor is the sole owner of the entire right, title and interest in and to the Trademarks and the goodwill of the business symbolized by the Trademarks and the registrations thereof, and WHEREAS, the Assignor has entered into that certain Amendment No. 1, Waiver and Joinder Agreement dated as of April 21, 1998, between the Assignor, Burke Industries, Inc., a California corporation (the "Borrower"), the financial institutions party thereto from time to time (the "Lenders"), and NationsBank, N.A., as agent for the Lenders (the "Agent"), pursuant to which the Assignor became a Borrowing Subsidiary under and as defined in that certain Loan and Security Agreement dated as of August 20, 1997 (as so amended and as hereafter amended, the "Loan Agreement"), pursuant to which the Lenders have, on or about the date hereof, made or agreed to make certain loans or other financial accommodations to or for benefit of the Assignor and under which the Assignor may incur other obligations to the Lenders, and WHEREAS, pursuant to the Loan Agreement the Assignor has agreed as security for the payment and performance of the Secured Obligations (as defined in the Loan Agreement) to assign to the Agent, and to grant to the Agent, for the benefit of the Lenders, a continuing security interest in, and a continuing lien on, all of the Assignor's right, title and interest in and to the following (collectively the "Trademark Collateral"), (a) The Trademarks 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, (f) all rights corresponding to any of the foregoing throughout the world, (g) all proceeds of and accessions to any and all of the foregoing, and WHEREAS, the Assignor is required under the Loan Agreement to grant to the Agent, for the benefit of the Lenders, a continuing security interest in, and a continuing lien on, the Trademark Collateral, NOW, THEREFORE, for good and valuable consideration, receipt of which is hereby acknowledged, the Assignor does hereby assign to the Agent, and grants to the Agent, for the benefit of the Lenders, a continuing security interest in and a continuing lien on, the Trademark Collateral as security for the payment and performance of the Secured Obligations. The Assignor hereby further acknowledges and affirms that the rights and remedies of the Agent with respect to the assignment of and security interest in and lien upon the Trademark Collateral made and granted hereby are more fully set forth in the Loan Agreement, the terms and provisions of which are hereby incorporated herein by reference as if fully set forth herein. IN WITNESS WHEREOF, the Assignor has caused this Assignment to be duly executed by its authorized officer or agent as of April 21, 1998. MERCER PRODUCTS COMPANY, INC. [Corporate Seal] By: /s/ KEITH OSTER ------------------------------------- Name: Keith Oster ------------------------------ Title: Secretary ------------------------------ Attest: /s/ Louis Mintz - ----------------------------- 2 STATE OF NEW YORK ) ) ss.: COUNTY OF NEW YORK ) On this 21st day of April, 1998, before me personally came Keith Oster, to me known, who, being by me duly sworn, did depose and say that he/she is ___________________________________ of Mercer Products Company, Inc., the corporation described herein and which executed the foregoing instrument; that he/she knows the seal of said corporation; that the seal affixed to said instrument is such corporate seal; that it was so affixed by order of the Board of Directors of said corporation and that he/she signed his thereto by like order. /s/ ROBIN A. KAHAN ----------------------------------- Notary Public My Commission Expires: [NOTARIAL SEAL] 3 SCHEDULE A (Trademarks)
REGISTRATION DATE OF TRADEMARK REGISTRATION # DATE SERIAL # EXPIRATION - --------- -------------- ------------ -------- ---------- DOCKSIDERS & DESIGN 1,372,591 11/26/85 11/26/05 MAXXI-TREAD 1,355,586 8/20/85 8/20/05 MERCER FRICTION GRIP 861,475 12/3/68 (Renewed 9/19/89) MERCER & DESIGN 1,810,789 12/14/93 12/14/03 MERCER 1,851,484 8/30/94 8/30/04 MIRROR-FINISH 1,782,795 7/20/93 7/20/03 RUBBERLYTE 1,524,506 2/14/89 2/14/09 RUBBERMYTE 1,641,500 7/23/91 7/23/01 UNICOLOR 1,829,424 4/5/94 4/5/04
4 EX-10.11 12 EXHIBIT 10.11 Recording Requested By and When Recorded Mail to: D. Brendan Donovan, Esq. Hunton & Williams NationsBank Plaza, Suite 4100 600 Peachtree Street, N.E. Atlanta, Georgia 30308-2216 ________________________________ (Space above this line for Recorder's Use) FIRST AMENDMENT TO DEED OF TRUST WITH ABSOLUTE ASSIGNMENT OF LEASES AND RENTS, SECURITY AGREEMENT AND FIXTURE FILING THIS FIRST AMENDMENT TO DEED OF TRUST WITH ASSIGNMENT OF LEASES AND RENTS, SECURITY AGREEMENT AND FIXTURE FILING (this "Amendment") is made and entered into as of the ____ day of April, 1998, by and between BURKE INDUSTRIES, INC., a California corporation, having its principal office and place of business at 2250 South Tenth Street, San Jose, California 95112 ("Trustor") and NATIONSBANK, N.A., a national banking association, in its capacity as agent for the Lenders (as defined herein) (together with each successor in such capacity, "Beneficiary"). BACKGROUND FACTS 1. Trustor previously executed and delivered that certain Deed of Trust with Absolute Assignment of Leases and Rents, Security Agreement and Fixture Filing, dated as of August 20, 1997, and recorded August 21, 1997 in the Official Records, County of Santa Clara, as Document No. 13822220 ("California Deed of Trust"). 2. The California Deed of Trust presently secures Trustor's obligation to repay to Lenders indebtedness incurred and to be incurred by Trustor pursuant to that certain Loan and Security Agreement dated as of August 20, 1997, by and among Trustor, the financial institutions party thereto from time to time ("Lenders"), and Beneficiary, as agent for the Lenders (the same as heretofore amended being referred to herein as the "Loan Agreement") (the terms used herein and not otherwise defined herein shall have the meanings ascribed to them in the Loan Agreement); 3. Trustor now wishes to increase the amount of the indebtedness so secured by an amount equal to $10,000,000.00 and in connection therewith, Trustor, Lenders, Mercer Products Company, Inc., a New Jersey corporation ("Borrowing Subsidiary"), and Beneficiary intend to enter into an Amendment No. 1, Waiver and Joinder Agreement to the Loan Agreement to be dated on or about the date hereof ("Amendment No. 1"), which, among other things, will provide for such increase. 4. Amendment No. 1 is intended to effect an increase in the amount of the indebtedness secured; however, Amendment No. 1 is not intended to be and shall not be construed as a prepayment or novation of such indebtedness, but is only an amendment and restatement of the terms applicable thereto. NOW THEREFORE, for and in consideration of the foregoing and of the mutual covenants and agreements herein contained, and as an inducement to Lenders to increase the amount of the indebtedness available under the Loan Agreement, Trustor, Trustee, and Beneficiary hereby covenant and agree as follows: 1. The introductory paragraph of the California Deed of Trust shall be deleted in its entirety and replaced with the following: THE PARTIES TO THIS DEED OF TRUST WITH ABSOLUTE ASSIGNMENT OF LEASES AND RENTS, SECURITY AGREEMENT AND FIXTURE FILING ("Deed of Trust"), made as of August 20, 1997, are BURKE INDUSTRIES, INC., a California corporation ("Trustor"), COMMONWEALTH LAND TITLE COMPANY, a California corporation ("Trustee"), and NATIONSBANK, N.A., a national banking association, as agent (in such capacity, together with its successors, being referred to herein as "Beneficiary") for itself and for each of the financial institutions which from time to time shall be a "Lender" under the Loan Agreement (as hereinafter defined). 2. Section 2.1 (a) of the California Deed of Trust shall be deleted in its entirety and replaced with the following: (a) Payment of all sums at any time owing under that certain Amended and Restated Revolving Credit Note, dated as of April ___, 1998, in the principal amount of TWENTY-FIVE MILLION AND NO/100 DOLLARS ($25,000,000) executed by Trustor and Mercer Products Company, Inc., a New Jersey corporation ("Borrowing Subsidiary"; and, together with Trustor, "Borrower"), as joint and several obligors thereupon, and payable to the order of Beneficiary, as lender ("Lender"), and payment of all sums at any time owing under any other Revolving Credit Notes issued and outstanding from time to time under the Loan Agreement (defined below) in exchange for, substitution for, replacement of or amendment or modification to or restatement of such Amended and Restated Revolving Credit Note, including such Revolving Credit Notes as may be issued to additional Lenders under the Loan Agreement (collectively, the "Note"); and 3. Section 2.1(c) of the California Deed of Trust shall be deleted in its entirety and replaced with the following: (c) Payment and performance of all covenants and obligations on the part of the Borrower and the Borrowing Subsidiary under that certain Loan and Security 2 Agreement dated as of August 20, 1997, as amended by an Amendment No. 1, Waiver and Joinder Agreement to Loan and Security Agreement dated as of April 21, 1998 and as hereafter amended, modified, supplemented, or restated from time to time (the "Loan Agreement"; terms defined therein and not otherwise defined herein being used herein or therein defined) by and among Trustor, as Borrower, Borrowing Subsidiary and Beneficiary, as Agent and Lender; and 4. Trustor and Beneficiary agree that nothing contained herein shall be deemed a novation of the California Deed of Trust or shall effect a novation of the California Deed of Trust. 5. Except as herein expressly amended, the California Deed of Trust is hereby ratified, confirmed, restated, and approved. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 3 IN WITNESS WHEREOF, this Amendment has been duly executed, delivered, and sealed by Trustor and Beneficiary as of the day and year first above written. TRUSTOR: BURKE INDUSTRIES, INC., a California corporation By: /s/ KEITH OSTER Name: Keith Oster Title: Secretary Attest: /s/ LOUIS MINTZ Name: Louis Mintz Title: Assistant Secretary [CORPORATE SEAL] BENEFICIARY: NATIONSBANK, N.A., a national banking association By: /s/ SHERRY D. LAIL Name: Sherry D. Lail Title: Vice President [SEAL] 4 ACKNOWLEDGMENT OF TRUSTOR STATE OF NEW YORK: --------- : ss COUNTY OF NEW YORK: --------- On April 21, 1998, before me, Robin Kahan, personally appeared Keith Oster and Louis Mintz, personally known to me (or proved to me on the basis of satisfactory evidence) to be the persons whose names are subscribed to the within instrument and acknowledged to me that they executed the same in their authorized capacity(ies), and that by their signatures on the instrument the persons, or the entity upon behalf of which the persons acted, executed the instrument. WITNESS my hand and official seal. Signature /s/ ROBIN A. KAHAN [seal] This document was prepared by: D. Brendan Donovan, Esq. Hunton & Williams NationsBank Plaza, Suite 4100 600 Peachtree Street, N.E. Atlanta, Georgia 30308-2216 5 ACKNOWLEDGMENT OF BENEFICIARY STATE OF GEORGIA: : ss COUNTY OF FULTON : On April 23, 1998, before me, Zarah Elliot, personally appeared Sherry Lail, VP, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person whose name is subscribed to the within instrument and acknowledged to me that s/he executed the same in her/his authorized capacity(ies), and that by her/his signature on the instrument the persons, or the entity upon behalf of which the persons acted, executed the instrument. WITNESS my hand and official seal. Signature /s/ ZARAH C. ELLIOT [seal] This document was prepared by: D. Brendan Donovan, Esq. Hunton & Williams NationsBank Plaza, Suite 4100 600 Peachtree Street, N.E. Atlanta, Georgia 30308-2216 6 EX-10.12 13 EXHIBIT 10.12 FLORIDA MORTGAGE, SECURITY AGREEMENT AND ASSIGNMENT OF LEASES AND RENTS.(1) STATE OF NEW YORK COUNTY OF ___________ THIS MORTGAGE, SECURITY AGREEMENT AND ASSIGNMENT OF LEASES AND RENTS made as of the ____ day of April, 1998, between MERCER PRODUCTS COMPANY, INC., a New Jersey corporation, having its principal office and place of business at 37235 State Road 19, Umatilla, Florida 32784 (hereinafter referred to as "Mortgagor") and NATIONSBANK, N.A., a national banking association at 600 Peachtree Street, N.E., NationsBank Plaza, 13th Floor, Atlanta, Georgia 30308, as agent (in such capacity, together with its successors, being referred to herein as "Mortgagee") for itself and for each of the financial institutions which from time to time shall be a "Lender" under the Loan Agreement (as hereinafter defined)(said parties being collectively and severally referred to herein as "Lender"), W I T N E S S E T H: WHEREAS, Mortgagor, its parent, Burke Industries, Inc., a California corporation (the "Borrower"), Mortgagee and Lender have entered into that certain Amendment No. 1, Waiver and Joinder Agreement to Loan and Security Agreement dated as of April 21, 1998, pursuant to which Mortgagor became a Borrowing Subsidiary under a certain Loan and Security Agreement dated as of August 20, 1997 (as so amended and as hereafter amended, modified, supplemented or restated from time to time, the "Loan Agreement"), among the Borrower, the Lender, and Mortgagee as the agent for Lender (unless otherwise defined herein, the capitalized terms used herein shall have the same meanings ascribed to them in the Loan Agreement); - ------------------------------- (1) Note: 1. This document was prepared by: D. Brendan Donovan, Esq., Hunton & Williams, 600 Peachtree Street, N.E., Suite 4100, Atlanta, Georgia 30308. 2. The maximum principal amount secured by this instrument is $[__________] and the indebtedness secured hereby matures on August 20, 2002, subject to extension as provided in the Loan Agreement. 3. The indebtedness secured hereby is also secured by real property located outside the State of Florida. The fair market value of the real property located within the State of Florida is $[__________] and the total fair market value of all of the real property securing such indebtedness is $[__________]. THEREFORE, FLORIDA INTANGIBLES TAX AND DOCUMENTARY STAMP TAX IS CALCULATED ON INDEBTEDNESS TOTALING $[__________]. WHEREAS, Mortgagor is justly indebted to Lender, in lawful money of the United States of America, as follows: (a) in the sum of $25,000,000 under the Revolving Credit Loans, which sum is evidenced by, and is to be paid by Mortgagor in accordance with the terms and provisions of, the Revolving Credit Notes (as the same may be amended, modified, supplemented, renewed, restated, extended or replaced, being hereinafter collectively and severally referred to herein as the "Notes"). WHEREAS, the principal amounts advanced by Lender to Mortgagor pursuant to the Notes and the Loan Agreement shall be payable, with interest thereon, in the manner and according to the terms and conditions specified in the Loan Agreement, all of which are incorporated herein by reference; and WHEREAS, Mortgagor desires to secure the payment of the Notes and all other amounts owing from time to time under the Notes and Loan Agreement, and certain other indebtedness; NOW, THEREFORE, in consideration of the Secured Obligations (as hereinafter defined) and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Mortgagor does hereby grant, bargain, sell, alien, remise, mortgage, convey and confirm unto Mortgagee, and grant to Mortgagee a security interest in, all that certain tract or parcel of land being more fully described on EXHIBIT A attached hereto and made a part hereof (the "Real Property"). TOGETHER with all the estate, right, title, interest, claim and demand whatsoever of Mortgagor of, in and to the Real Property, and every part and parcel thereof and of, in and to the following: A. all buildings, structures and other improvements now or hereafter located in whole or in part on the Real Property or any part or parcel thereof, and all adjacent lands included in the enclosures or occupied by buildings located partly on the Real Property or any part of parcel thereof; and B. the minerals, flowers, shrubs, crops, trees, timber and other emblements now or hereafter located on the Real Property or under or above the same, or any part or parcel thereof; and C. all and singular the tenements, hereditaments, easements and appurtenances thereunto or unto any part thereof now or hereafter belonging or in any wise appertaining, and all streets, alleys, passages, ways, watercourses, and all leasehold estates, easements and covenants now existing or hereafter created for the benefit of Mortgagor or any subsequent owner or tenant of the Real Property, and all rights to enforce the maintenance thereof, and all other rights, privileges and liberties of whatsoever kind or character, and the reversions and remainders thereof, and all estate, right, title, interest, property, possession, claim and demand whatsoever, at law or in equity, of Mortgagor in and to the Real Property or any part thereof; and -2- D. all building materials, fixtures, building machinery and building equipment, all machinery, apparatus, equipment, chattels, fittings and fixtures, whether now or hereafter actually or constructively attached to the Real Property and including all trade, domestic and ornamental fixtures (hereinafter referred to collectively as the "Additional Property") now or hereafter located in, upon, on or under the Real Property, or any part thereof, including, but without limiting the generality of the foregoing, all heating, water heating, air conditioning, freezing, lighting, laundry, incinerating and power apparatus and equipment; engines; pipes; pumps; tanks; motors; conduits; switchboards; antennas; wires; cables; transmitters; receivers; plumbing, lifting, cleaning, fire prevention, fire extinguishing, refrigerating, ventilating and communications apparatus; boilers, furnaces, oil burners or units thereof; stoves, ranges, refrigerators, dishwashers, disposals and other appliances; vacuum cleaning systems; elevators; escalators; shades; awnings; screens; storm doors and windows; attached cabinets; partitions; ducts and compressors; rugs and carpets; draperies; furniture and furnishings; together with all additions thereto, replacements thereof and substitutions therefor; and E. all monies, proceeds, issues and profits (hereinafter referred to collectively as the "Proceeds") derived from time to time hereafter by Mortgagor from the Real Property, buildings, structures, improvements, Additional Property or rents, including but not limited to condemnation awards and proceeds of the sale of, insurance on or other borrowings secured in whole or in part by any of, the Real Property, buildings, structures, improvements, Additional Property or rents; reserving only a license to Mortgagor to collect the same so long as there is no Event of Default (as hereinafter defined) which shall have occurred and be continuing, said license to be revokable during the continuance of an Event of Default immediately upon notice to Mortgagor. (All of the above-mentioned Real Property, Additional Property, Proceeds, improvements and other property and interests are sometimes collectively referred to herein as the "Mortgaged Property".) TO HAVE AND TO HOLD the Mortgaged Property hereby conveyed or mentioned and intended so to be, unto Mortgagee, to its own use forever. For purposes of this Mortgage, Security Agreement and Assignment of Leases and Rents (hereinafter referred to as this "Mortgage"), the term "Secured Obligations" shall mean, in each case whether now existing or hereafter arising: (a) the principal of and interest and premium, if any, on the Revolving Credit Loans; (b) all Letter of Credit Obligations; and (c) all other indebtedness, liabilities, obligations, covenants and duties of Mortgagor to Mortgagee or Lender, of every kind, nature and description, arising under or in respect of the Loan 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 -3- to Article 3 of the Loan Agreement and expenses required to be paid or reimbursed pursuant to Section 14.2 of the Loan Agreement. This Mortgage is given to secure the payment of the Secured Obligations and any renewal or renewals or any extension or extensions of any of the Notes, together with such future advances as may be made by Mortgagee or Lender to Mortgagor for any purpose pursuant to paragraph 39 of this Mortgage or any of the Loan Documents to the same extent as if such future advances were made on the date of the execution of this Mortgage. Mortgagor hereby sells, assigns, sets over and transfers to Mortgagee, and grants to Mortgagee a security interest in, Mortgagor's interest in any and all leases, tenant contracts and rental agreements and other contracts, licenses and permits (all of which are sometimes hereinafter referred to as the "Contracts") now or hereafter affecting or in any manner relating to the Mortgaged Property, or any part thereof, together with all rights and remedies provided in such Contracts or at law or in equity to enforce such Contracts, provided that nothing herein shall be construed to obligate Mortgagee or Lender to discharge or perform the duties and obligations of Mortgagor under such Contracts. Mortgagor agrees to execute and deliver such other instruments as Mortgagee may require evidencing the assignment of the Contracts. Mortgagor hereby sells, assigns, sets over and transfers to Mortgagee, and grants to Mortgagee a security interest in, all of the rents, tenant reimbursements, issues and profits which shall hereafter become due or be paid for the use of the Mortgaged Property or any part thereof, together with any and all income derived from the Mortgaged Property (all of which are sometimes hereinafter referred to as the "Rents"), reserving to Mortgagor a license to collect and retain the Rents only so long as there is no Event of Default which shall have occurred and be continuing, said license to be revokable during the continuance of an Event of Default immediately upon notice from Mortgagee to Mortgagor. Mortgagor agrees to execute and deliver such other instruments as Mortgagee may require evidencing the assignment of the Rents. MORTGAGOR COVENANTS AND AGREES with Mortgagee that until the Secured Obligations are fully repaid: 1. PAYMENT AND PERFORMANCE. Mortgagor shall pay to Mortgagee the Secured Obligations, in accordance with the terms of the Notes, the Loan Agreement and this Mortgage, and shall perform and comply with all the agreements, conditions, covenants, provisions and stipulations of the Notes, the Loan Agreement and this Mortgage. 2. MAINTENANCE OF MORTGAGED PROPERTY. In addition to, and not in derogation of, the requirements of Section 4 below and of any of the other Loan Documents: (a) Mortgagor shall make or cause to be made all needed and appropriate repairs, renewals, replacements and additions to the Mortgaged Property 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. In the event the Mortgaged Property, or any part thereof, is damaged or destroyed by fire or other casualty and if the cost of repairing and/or -4- replacing such damaged property is reasonably estimated to be in excess of $500,000.00, Mortgagor shall promptly notify Mortgagee, in writing, of such damage or destruction. (b) Mortgagor shall not remove, demolish, destroy or alter the Mortgaged Property, or any portion thereof, without the prior written consent of Mortgagee, unless such removal, demolition, destruction or alteration is made in connection with a renewal or replacement required under the terms of the Loan Agreement or unless Mortgagor replaces the affected portion of the Mortgaged Property with property of at least equal utility and value. (c) Mortgagor shall not commit or suffer any strip or waste of the Mortgaged Property. (d) Mortgagor shall promptly comply with all present and future laws, ordinances, rules and regulations of any governmental authority affecting the Mortgaged Property or any part thereof, except for instances of noncompliance that, singly or in the aggregate, could not materially and negatively affect the use, occupancy or value of the Mortgaged Property and except for instances of noncompliance that are being contested in good faith by appropriate proceedings and for which reserves for Mortgagor's reasonably anticipated liability therefor have been appropriately established. (e) Mortgagor shall not cause or permit anything to be done which would materially increase the risk of fire or other hazard to the Mortgaged Property, or any part thereof, or which would result in a material increase in any insurance premiums payable with respect to the Mortgaged Property, or which would result in the cancellation of any insurance policy carried with respect to the Mortgaged Property. 3. CONDEMNATION. Mortgagor, promptly upon obtaining actual knowledge of the institution, or the proposed, contemplated or threatened institution, of any proceedings for the taking of the Mortgaged Property, or any part thereof, by condemnation or eminent domain, will notify Mortgagee of the pendency of such proceedings. Mortgagee may, at its option, participate in any such proceedings, and Mortgagor shall promptly deliver to Mortgagee all instruments from time to time requested by Mortgagee to permit such participation. In any such proceedings Mortgagee may be represented by counsel selected by Mortgagee. Mortgagor hereby assigns to Mortgagee all awards hereafter made by virtue of any exercise of the right of condemnation or eminent domain by any authority, including any award for damages to or taking of title to the Mortgaged Property or any part thereof, or the possession thereof, or any right or easement affecting the Mortgaged Property or appurtenant thereto (including any award for any change of grade of streets), and the proceeds of all sales in lieu of condemnation. Mortgagee, at its option, is hereby authorized to collect and receive all such awards and the proceeds of all such sales and to give proper receipts and acquittances therefor, and Mortgagee, at its election and subject to the terms of the Loan Agreement, may use such awards and proceeds in any one or more of the following ways: (i) apply the same or any part thereof to the Secured Obligations, whether the Secured Obligations, or any part thereof, be then matured or unmatured, (ii) use the same or any part thereof to fulfill any of the covenants and agreements of Mortgagor hereunder as Mortgagee may determine, (iii) pay the same or any part thereof to Mortgagor for the purpose of replacing, restoring or altering the Mortgaged Property to a condition satisfactory to Mortgagee, or -5- (iv) release the same to Mortgagor. Notwithstanding anything contained in this Section 3 to the contrary, in the event that the portion of the Mortgaged Property remaining after any such taking can, in the reasonable judgment of both Mortgagor and Mortgagee, be restored to an economically viable and useful condition with a value substantially similar to that which existed immediately prior to such taking, Mortgagee agrees, upon Mortgagor's written request and provided no Event of Default has occurred and is continuing, to disburse such proceeds to Mortgagor pursuant to such procedures as Mortgagee shall reasonably establish for application to the restoration of the Mortgaged Property. Any proceeds applied to the Secured Obligations shall be applied in accordance with the provisions of Section 11.3 of the Loan Agreement. Mortgagee shall be under no obligation to question the amount of any such award or proceeds and may accept the same in the amount in which the same shall be paid. Mortgagor agrees to execute and deliver such other instruments as Mortgagee may require evidencing the assignment of all such awards and proceeds to Mortgagee. If, prior to the receipt by Mortgagee of such award or proceeds, the Mortgaged Property shall have been sold on foreclosure of this Mortgage, Mortgagee shall have the right to receive such award or proceeds to the extent of any unpaid Secured Obligations following such sale, with legal interest thereon, whether or not a deficiency judgment on this Mortgage shall have been sought or recovered, and of reasonable attorneys' fees, costs, including costs of litigation, and disbursements incurred by Mortgagee in connection with the collection of such award or proceeds. 4. OWNERSHIP AND DEFENSE OF TITLE. (a) Mortgagor 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, the Mortgaged Property or any interest therein, except for the Security Interest, the Permitted Liens, 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 any other dispositions expressly permitted under the Loan Agreement. The inclusion of "proceeds" of the Mortgaged Property under this Mortgage shall not be deemed a consent by Mortgagee to any other sale or other disposition of any part or all of the Mortgaged Property. The termination of a lease of Equipment at the end of its term shall not be deemed to be a disposition for purposes of this Section 4. (b) In the event that Mortgagor shall sell, lease, assign, transfer, pledge, hypothecate, grant a security interest or security title in or otherwise dispose of any Mortgaged Property other than in accordance with Section 4(a) hereof, the sales proceeds thereof shall be remitted to Mortgagee to reduce or repay the Secured Obligations. 5. USE AND MANAGEMENT OF MORTGAGED PROPERTY. Mortgagor shall use, operate and manage the Mortgaged Property only for the business of manufacturing, assembling and selling resilient floor covering accessories. Mortgagor shall not be permitted to materially alter or change the use of the Mortgaged Property without the prior written consent of Mortgagee, which consent shall not be unreasonably withheld. -6- 6. COMPLIANCE WITH ENVIRONMENTAL LAWS. (a) Mortgagor hereby represents, warrants, acknowledges to Mortgagee and agrees that, to the best of Mortgagor's knowledge and except as disclosed in the environmental reports provided by Mortgagor to Mortgagee pursuant to the Loan Agreement prior to the date hereof (the "Environmental Reports"), there has been no release of any hazardous materials, hazardous wastes or hazardous substances, as defined in 42 U.S.C. Sections 9601 ET SEQ. as amended, 42 U.S.C. Sections 6901 ET SEQ., as amended, and the regulations promulgated thereunder, and all applicable Federal, State and local laws, rules and regulations relating to hazardous substances, now existing or hereafter enacted, on, upon or into the Mortgaged Property and, to the best of Mortgagor's knowledge and except as disclosed in the Environmental Reports, there have been no such releases on, upon or into any real property in the vicinity of the Mortgaged Property which through soil or groundwater migration have come to be located on the Mortgaged Property. Mortgagor further represents and warrants that, to the best of Mortgagor's knowledge and except as disclosed in the Environmental Reports, there are no toxic or hazardous wastes located, in or about any portion of the Mortgaged Property in violation of any Environmental Laws or Applicable Law. Mortgagor agrees that it will indemnify and hold Mortgagee and Lender harmless from any and all expense, damage, loss or liability incurred by Mortgagee or Lender arising from the application of any Environmental Laws or Applicable Law, including any so-called "Super Fund" or "Super Lien" legislation, relating to the presence of toxic or hazardous wastes or materials on the Mortgaged Property (including any toxic or hazardous wastes or materials first appearing on the Mortgaged Property on or prior to the date of this Mortgage, regardless of whether Mortgagor was aware of the presence of such toxic or hazardous wastes or materials on the date hereof) in violation of any Environmental Laws or Applicable Law prior to Mortgagee or any third party acquiring the Mortgaged Property at foreclosure or by deed in lieu of foreclosure or otherwise, whether such legislation is Federal, State or local in nature. It is expressly acknowledged by Mortgagor that this covenant of indemnification shall survive any foreclosure of the lien and security interest of this Mortgage and shall inure to the benefit of Mortgagee, its successors and assigns. (b) Mortgagor shall: (i) not dispose of or store (except in compliance with all laws, ordinances and regulations pertaining thereto), release or allow the release of any hazardous substance or solid waste on the Mortgaged Property; (ii) neither directly nor indirectly transport or arrange for the transport of any hazardous substance (except in compliance with all laws, ordinances and regulations pertaining thereto); (iii) in the event of any material change in the laws governing the assessment, release or removal of hazardous materials, which change would lead a prudent lender in possession of the tests and information relative to the Mortgaged Property in the possession of Mortgagee to require additional testing to avail itself of any statutory insurance or limited liability, take all such action (including, without limitation, the conducting of engineering tests at the sole expense of -7- Mortgagor) as may be reasonably requested by Mortgagee to confirm to Mortgagee that no hazardous substance is or ever was stored, released or disposed of on the Mortgaged Property; and (iv) provide Mortgagee with written notice: (a) upon Mortgagor's obtaining actual knowledge of any potential or known release, or threat of release, of any hazardous substance at or from the Mortgaged Property; (b) upon Mortgagor's receipt of any notice to such effect from any Federal, State or other governmental authority; or (c) upon Mortgagor's obtaining actual knowledge of any incurrence of any expense or loss by such governmental authority in connection with the assessment, containment or removal of any hazardous material for which expense or loss Mortgagor may be liable or for which expense a lien may be imposed on the Mortgaged Property. For purposes of this Mortgage, the terms "hazardous substance" and "release" shall have the meanings specified in the Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA") and the terms "solid waste" and "disposal" (or "disposed") shall have the meanings specified in the Resource Conservation and Recovery Act of 1976 ("RCRA"); provided, in the event either CERCLA or RCRA is amended so as to change the meaning of any term defined thereby, such new meaning shall apply subsequent to the effective date of such amendment; and provided further, to the extent that the laws of the state where the Mortgaged Property is located establish a meaning for "hazardous substance," "release", "solid waste", or "disposal" which is broader than specified in either CERCLA or RCRA, such broader meaning shall apply. 7. INSURANCE. (a) Mortgagor shall at all times maintain insurance on the Mortgaged Property against loss or damage by fire, theft (excluding theft by employees), burglary, pilferage, loss in transit and such other hazards as Mortgagee shall reasonably specify, in amounts not to exceed those obtainable at commercially reasonable rates and under policies issued by insurers reasonably acceptable to Mortgagee. All premiums on such insurance shall be paid by Mortgagor and copies of the policies delivered to Mortgagee. Mortgagor will not use or permit the Mortgaged Property to be used in violation of any Applicable Law or in any manner which might render inapplicable any insurance coverage. (b) All insurance policies required under this Section 7 shall name Mortgagee, for the benefit of Lender, as an additional named insured and shall contain loss payable clauses in the form submitted to Mortgagor by Mortgagee, or otherwise in form and substance satisfactory to the Required Lenders, naming Mortgagee, for the benefit of Lender, as loss payee as its interest may appear, and providing that: (i) all proceeds thereunder shall be payable to Mortgagee, for the benefit of Lender, -8- (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 not be canceled, amended or terminated unless at least ten (10) days' prior written notice is given to Mortgagee. (c) Any proceeds of insurance referred to in this Section 7 which are paid to Mortgagee shall be, at the option of Mortgagee in its sole discretion, either (i) applied to rebuild, restore or replace the damaged or destroyed property, or (ii) applied to the payment or prepayment of the Secured Obligations; provided, however, that in the event that the proceeds from any single casualty do not exceed $500,000.00, then, upon Mortgagor's written request to Mortgagee and provided no Event of Default has occurred and is continuing, such proceeds shall be disbursed by Mortgagee to Mortgagor pursuant to such procedures as Mortgagee shall reasonably establish for application to the restoration or replacement of the damaged or destroyed property. 8. PAYMENT OF TAXES AND CLAIMS. Mortgagor shall pay or discharge: (a) prior to the date upon which same became delinquent, all taxes, assessments and governmental charges or levies imposed on the Mortgaged Property, and (b) when due 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 part of the Mortgaged Property; except that this Section 8 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 the reasonably anticipated liability therefor have been appropriately established. 9. TAXATION OF MORTGAGE. (a) Mortgagor shall pay all taxes, assessments, charges, expenses, costs and fees which may now or hereafter be levied upon, or assessed, or charged against, or incurred in connection with, the Notes, the Secured Obligations, this Mortgage or any other instrument now or hereafter evidencing, securing or otherwise relating to the Secured Obligations. (b) In the event of the passage after the date of this Mortgage of any law, rule or regulation by the United States, by any state or by any political subdivision of any thereof, changing in any manner the laws for the taxation of mortgages, security agreements or assignments of leases or rents, or debts secured thereby, or the manner of collection of any such tax, so as to affect adversely Mortgagee, this Mortgage, the Notes or the Secured Obligations, all amounts secured hereby shall become due, payable and collectible after thirty (30) days' notice from Mortgagee to Mortgagor; provided, however, that such acceleration of said indebtedness shall be deemed inoperative if Mortgagor is permitted by law to pay the whole of such tax in addition to all other payments required hereunder, without any penalty or other disadvantage thereby accruing to Mortgagee, and if Mortgagor in fact pays such tax prior to the expiration of such thirty (30) day period. -9- 10. U.C.C. (a) This Mortgage constitutes a security agreement under the Uniform Commercial Code as enacted by the State of Florida (the "U.C.C.") with respect to, among other things, the Rents, the Contracts, the Additional Property and the Proceeds or any part thereof, and Mortgagor hereby grants to Mortgagee a security interest in the Rents, the Contracts, the Additional Property and the Proceeds. At the request of Mortgagee, a financing statement or statements shall from time to time be executed by Mortgagee and Mortgagor or by Mortgagor alone and filed in the manner required to perfect said security interest under the U.C.C. Compliance with U.C.C. requirements relating to personal property shall not be construed as altering in any way the rights of Mortgagee as determined by this instrument under any other statutes or laws of the State of Florida, but is declared to be solely for the protection of Mortgagee in the event that such compliance is at any time held to be necessary to preserve the priority of Mortgagee's security interests in the Rents, the Contracts, the Additional Property and the Proceeds against any other claims. (b) Mortgagor warrants that (i) Mortgagor's (that is, "Debtor's") name, identity or corporate structure and residence or principal place of business are as set forth in Schedule 1 of EXHIBIT B attached hereto and by this reference made a part hereof; (ii) Mortgagor (that is, "Debtor") has been using or operating under said name, identity or corporate structure without change for the time period set forth in such Schedule 1 of EXHIBIT B; and (iii) and the location of the Mortgaged Property is upon the Real Property. Mortgagor covenants and agrees that Mortgagor will furnish Mortgagee with thirty (30) days' prior written notice of any change in the matters addressed by clauses (i) or (iii) of this Section 10(b) and Mortgagor will promptly execute any financing statements or other documents or statements deemed necessary by Mortgagee to prevent any filed financing statement from becoming misleading or losing its perfected status. (c) The mailing address of the "Secured Party" from which information concerning the security interest may be obtained, and the mailing address of "Debtor", are as set forth in Schedule 2 of EXHIBIT B attached hereto and by this reference made a part hereof. A statement indicating the types, or describing the items, of the Additional Property, the Rents and the Contracts is set forth hereinabove. The information contained in this Section 10 is provided in order that this Mortgage shall comply with the requirements of the U.C.C. for instruments to be filed as financing statements. 11. LEASES, TENANT CONTRACTS, ETC. Mortgagor may not lease the Mortgaged Property, or any portion thereof, to any Person without the prior written consent of Mortgagee, which consent shall not be unreasonably withheld or delayed. 12. RIGHT TO REMEDY DEFAULTS. In the event that Mortgagor should (a) fail to pay taxes, assessments, water and sewer charges or other lienable claims (except in case of contest as aforesaid) or insurance premiums, (b) fail to make necessary repairs, (c) permit waste, or (d) otherwise fail to comply with its obligations hereunder or under the Loan Agreement, the Notes, the Security Documents or any other document executed in connection with this Mortgage, then Mortgagee, at its election and at any time after five business days notice to Mortgagor, shall have -10- the right to make any payment or expenditure which Mortgagor should have made, or which Mortgagee deems advisable to protect the security of this Mortgage or the Mortgaged Property, without prejudice to any of Mortgagee's rights or remedies available hereunder or otherwise, at law or in equity. Mortgagee shall be the sole judge of the necessity of such payment and of the amount necessary to be paid with respect thereto. All such sums, as well as costs, advanced by Mortgagee pursuant to this Section 12 shall constitute Secured Obligations and shall be due immediately from Mortgagor to Mortgagee, shall be secured hereby, and shall bear interest at the rate provided for Revolving Credit Loans under the Loan Agreement. 13. 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) EVENT OF DEFAULT UNDER LOAN AGREEMENT. Any Event of Default (as defined in Section 11.1 of the Loan Agreement) shall occur under the Loan Agreement. (b) DEFAULT IN PERFORMANCE UNDER THE MORTGAGE. Mortgagor shall default in the performance of any term, covenant, condition or agreement contained in: (i) Sections 2(b), 4, 5, 7, 10(b) and 11 of this Mortgage and Mortgagee shall have given Mortgagor written notice of such default, or (ii) any other section of this Mortgage and such default shall continue for a period of thirty (30) days after written notice thereof has been given to Mortgagor by Mortgagee (or for a period of one hundred twenty (120) days if the default is not capable of being cured within such thirty-day period and the Mortgagor commences to cure within such thirty-day period and diligently proceeds to cure such default). 14. REMEDIES. Upon the occurrence of any Event of Default, Mortgagee shall have the right to exercise the remedies set forth in this Section 14. (a) ACCELERATION. (i) AUTOMATIC. Upon the occurrence of an Event of Default specified in Section 11.1(g) or (h) of the Loan Agreement, the principal of and the interest on the Notes at the time outstanding, and all other amounts owed to Mortgagee and Lender under this Mortgage, the Loan Agreement or any of the other Loan Documents, including without limitation the Reimbursement 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 Mortgage, the Loan Agreement or any of the other Loan Documents to the contrary notwithstanding. (ii) OPTIONAL. If any other Event of Default shall have occurred and be continuing, in every such event, Mortgagee may, at its option, declare the principal of and interest on the Notes at the time outstanding, and all other amounts owed to Mortgagee and Lender under this Mortgage, the Loan Agreement or any of the other Loan -11- Documents, including without limitation the Reimbursement 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 Mortgage, the Loan Agreement or the other Loan Documents to the contrary notwithstanding. (b) REMEDIES UNDER LOAN AGREEMENT. Upon the occurrence of an Event of Default hereunder, Mortgagee may elect to exercise any one or more of the remedies which are set forth in Section 11.2 of the Loan Agreement. (c) RIGHTS AS A SECURED CREDITOR. Upon the occurrence of an Event of Default hereunder, Mortgagee may exercise all of the rights and remedies of a secured party under the U.C.C. 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 Mortgaged Property (other than the Real Property, the buildings located thereon and any other property which would be deemed to be "real property" under applicable state law) or any part thereof in one of more parcels at public or private sale at any location chosen by Mortgagee, for cash, on credit or for future delivery, and at such price or prices and upon such other terms as Mortgagee may deem commercially reasonable. Mortgagor agrees that, to the extent notice of sale shall be required by law, at least ten (10) days' notice to Mortgagor 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. Mortgagee shall not be obligated to make any sale of the Mortgaged Property regardless of notice of sale having been given. Mortgagee 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. (d) REMEDIES FOLLOWING ACCELERATION. When the entire indebtedness secured hereby shall become due and payable, either upon maturity or upon the acceleration of such indebtedness pursuant to this Section 14 or the terms of the Loan Agreement, or otherwise, and shall not have been paid, then forthwith: (i) FORECLOSURE. Mortgagee may institute an action of mortgage foreclosure, or take such other action at law or in equity for the enforcement of this Mortgage and realization on the mortgage security or any other security herein or elsewhere provided for, as the law may allow, and may proceed therein to final judgment and execution for the entire unpaid balance of the principal debt, with interest at the rate stipulated in the Loan Agreement, together with all other sums due from Mortgagor in accordance with the provisions of the Loan Agreement, this Mortgage and any of the Security Documents, including all sums which may have been loaned by Mortgagee or any Lender to Mortgagor after the date of this Mortgage, and all sums which may have been advanced by Mortgagee for taxes, water or sewer rents, other lienable charges or claims, insurance or repairs or maintenance, and all costs of suit. (ii) POSSESSION; RECEIVER. Mortgagee may enter into possession of the Mortgaged Property, upon such legal action, if any, as the State of Florida may require, -12- or, in the alternative, Mortgagee shall be entitled as a matter of right to appointment of a receiver without regard to the solvency of Mortgagor or any other person liable for the debt secured hereby or the value of the Mortgaged Property, and regardless of whether Mortgagee has an adequate remedy at law; either Mortgagee or said receiver, as the case may be, may rent the Mortgaged Property, or any part thereof, for such term or terms and on such other terms and conditions as Mortgagee or such receiver may see fit, collect all rentals (which term shall also include sums payable for use and occupation) and, after deducting all costs of collection and administration expense, apply the net rentals to the payment of taxes, water and sewer rents, other lienable charges and claims, insurance premiums and all other carrying charges, and to the maintenance, repair or restoration of the Mortgaged Property, or in reduction of the principal or interest, or both, hereby secured, in such order and amounts as Mortgagee or said receiver may elect. Any lease or leases entered into by Mortgagee or said receiver pursuant to this Section shall survive foreclosure of the Mortgage and/or repayment of the Secured Obligations, except to the extent any applicable lease may provide otherwise. 15. MISCELLANEOUS PROVISIONS CONCERNING REMEDIES. (a) SEPARATE SALES. In the event of any sale under this Mortgage or pursuant to any order in any judicial proceeding or otherwise, the Mortgaged Property may be sold as an entirety or in separate parcels in such manner or order as Mortgagee in its sole discretion may elect; and if Mortgagee so elects it may sell or cause to be sold the Additional Property (which term shall, for purposes of this Section 15(a) be deemed to include, without limitation, the Rents and the Proceeds) at one or more separate sales in any manner permitted by the U.C.C.; and one or more exercises of the powers herein granted shall not extinguish nor exhaust such powers, until the entire Mortgaged Property is sold or the Secured Obligations are paid in full. If the Secured Obligations are now or hereafter further secured by any security agreement, chattel mortgages, pledges, contracts of guaranty, assignments of lease or other security, Mortgagee may at its option exhaust or cause to be exhausted the remedies granted under any of said security, either concurrently or independently, and in such order as it may determine. (b) RELEASES OF SECURITY. Neither Mortgagor nor any other person now or hereafter obligated for payment of all or any part of the sums now or hereafter secured by this Mortgage shall be relieved of such obligation by reason of the failure of Mortgagee to comply with any request of Mortgagor or of any other person so obligated to take action to foreclose on this Mortgage or otherwise enforce any provisions of the Mortgage or the Loan Agreement, or by reason of the release, regardless of consideration, of all or any part of the security held for the indebtedness secured by this Mortgage, or by reason of any agreement or stipulation between any subsequent owner of the Mortgaged Property and Mortgagee extending the time of payment or modifying the terms of this Mortgage or the Loan Agreement without first having obtained the consent of Mortgagor or such other person; and in the latter event Mortgagor and all such other persons shall continue to be liable to make payments according to the terms of any such extension or modification agreement, unless expressly released and discharged in writing by Mortgagee. No release of all or any part of the security as aforesaid shall in any way impair or affect the lien of this Mortgage or its priority over any subordinate lien. -13- (c) WAIVER OF APPRAISEMENT AND VALUATION. Mortgagor hereby waives, to the full extent it may lawfully do so, the benefit of any and all rights of stay, extension, appraisement, moratorium and redemption, now or hereafter available, and any and all rights of marshalling in the event of any sale of the Mortgaged Property or any part thereof or any interest therein pursuant to foreclosure as herein provided, and any right Mortgagor may have to require Mortgagee to obtain any bond or make any oath. 16. APPLICATION OF PROCEEDS. All proceeds from each sale of, or other realization upon, all or any part of the Mortgaged Property following an Event of Default shall be applied or paid over as provided in the Loan Agreement. 17. COUNSEL FEES. If Mortgagee (a) becomes a party to any suit or proceeding affecting the Mortgaged Property, title to the Mortgaged Property, the lien created by this Mortgage or Mortgagee's interest therein (including any proceeding in the nature of eminent domain) or (b) engages counsel to collect any of the indebtedness or to enforce performance of the agreements, conditions, covenants, provisions or stipulations of this Mortgage or the Loan Agreement, then all of Mortgagee's reasonable costs, expenses and counsel fees, whether or not suit is instituted, shall be paid to Mortgagee by Mortgagor, on demand, with interest at the rate provided in the Loan Agreement, and until paid such amounts shall be deemed to be part of the Secured Obligations evidenced by the Loan Agreement and secured by this Mortgage. 18. SALE A BAR AGAINST MORTGAGOR. To the extent applicable under Florida laws, any sale of the Mortgaged Property or any part thereof or any interest therein, whether pursuant to foreclosure or otherwise hereunder, shall be a perpetual bar against Mortgagor. 19. SEPARATE SUITS. Mortgagee shall have the right, at any time and from time to time, to sue for any sums required to be paid under this Mortgage, the Loan Agreement, the Notes, the Security Documents or any other Loan Documents, as the same become due and payable, without regard to whether or not the entire Secured Obligations shall be due, and without prejudice to the right of Mortgagee thereafter to enforce any appropriate remedy against Mortgagor, including an action of foreclosure or any other action for a default or defaults by Mortgagor existing at the time such earlier action was commenced. 20. RESTORATION OF PARTIES. In the event Mortgagee shall have proceeded to enforce any right or remedy under this Mortgage, and such proceedings are discontinued or abandoned for any reason, then Mortgagor and Mortgagee shall immediately be restored to their former positions and rights hereunder, and all rights, powers and remedies of Mortgagee shall continue as if no such proceeding had taken place. 21. SUBROGATION. To the extent permitted by applicable law and to the full extent of the Secured Obligations, Mortgagee and Lender are hereby subrogated to the liens, claims and demands, and to the rights of the owners and holders of each and every lien, claim, demand and other encumbrance on the Mortgaged Property which is paid or satisfied, in whole or in part, out of the proceeds of the Secured Obligations, and the respective liens, claims, demands and other encumbrances shall be and each of them is hereby preserved and shall pass to and be held by Mortgagee as additional collateral and further security for the Secured Obligations, to the same -14- extent they would have been preserved and would have been passed to and held by Mortgagee and Lender had they been duly and legally assigned, transferred, set over and delivered unto Mortgagee and Lender by assignment, notwithstanding the fact that the same may be satisfied and canceled of record. 22. NO WAIVER. No modification or waiver by Mortgagee of any right or remedy under this Mortgage shall be effective unless made in writing. No delay by Mortgagee in exercising any right or remedy hereunder, or otherwise afforded by law, shall operate as a waiver thereof or preclude the exercise thereof upon the occurrence of an Event of Default. No failure by Mortgagee to insist upon the strict performance by Mortgagor of each and every covenant and agreement of Mortgagor under the Notes or this Mortgage or the Loan Agreement shall constitute a waiver of any such covenant or agreement, and no waiver by Mortgagee of any Event of Default shall constitute a waiver of or consent to any subsequent Event of Default. No failure of Mortgagee to exercise its option to accelerate the maturity of the Secured Obligations, nor any forbearance by Mortgagee before or after the exercise of such option, nor any withdrawal or abandonment by Mortgagee of any action of or sale upon foreclosure hereunder or any of its rights under such action or sale, shall be construed as a waiver of any option, power or right of Mortgagee hereunder. 23. FURTHER ASSURANCES. Mortgagor will, at the expense of Mortgagor, and without expense to Mortgagee, do, execute, acknowledge and deliver all such further acts, deeds, conveyances, mortgages, assignments, security agreements, notices of assignment, transfers and assurances as Mortgagee shall from time to time reasonably require, for the better assuring, conveying, mortgaging, assigning, transferring and confirming unto Mortgagee the Mortgaged Property and rights hereby conveyed or assigned or intended now or hereafter to be conveyed or assigned, or which Mortgagor may be or may hereafter become bound to convey or assign to Mortgagee, or for carrying out the intention or facilitating the performance of the terms of this Mortgage, or for correcting this Mortgage, or for filing, registering or recording this Mortgage and, on demand, will execute and deliver, and hereby authorizes Mortgagee to execute in the name of Mortgagor to the extent it may lawfully do so, one or more financing statements, chattel mortgages or comparable security instruments, to evidence more effectively the security interest and lien hereof upon the Additional Property. Mortgagor forthwith upon the execution and delivery of this Mortgage, and thereafter from time to time, will cause this Mortgage and any security instrument required hereunder creating a security interest in the Additional Property and each instrument of further assurance to be filed, registered or recorded in such manner and in such places as may be required by any present or future law in order to publish notice of and to protect fully the security interest and lien hereof upon, and the interest of Mortgagee in, the Additional Property. 24. MORTGAGOR AS TENANT HOLDING OVER. In case of a sale upon foreclosure as provided in this Mortgage, Mortgagor, if then in possession, and any person in possession under Mortgagor, as to whose interest such sale was not made subject, shall, at the option of the purchaser at such sale, then become and be tenants holding over, and shall forthwith deliver possession to such purchaser, or be summarily dispossessed in accordance with the laws applicable to tenants holding over. -15- 25. SEVERABILITY. If any provision, paragraph, sentence, clause, phrase or word of this Mortgage, or the application thereof in any circumstance, is held invalid or unenforceable, the validity and enforceability of the remainder of this Mortgage, and of the application of any such provision, paragraph, sentence, clause, phrase or word in any other circumstance, shall not be affected thereby, it being intended that all rights, powers and privileges of Mortgagee hereunder shall be enforceable to the fullest extent permitted by law. 26. WAIVER OF HOMESTEAD. Mortgagor, for itself and family, hereby waives and renounces any and all homestead and exemption rights which he or his family may have under or by virtue of the Constitution or the laws of the United States or of any state, in and to the Mortgaged Property as against the collection of all amounts secured hereby or any part thereof, and does transfer, convey and assign to the holder hereof a sufficient amount of such homestead or exemption as may be allowed, including but not limited to such homestead or exemption as may be set apart in bankruptcy, up to an amount sufficient to pay the amounts secured hereby in full, with all costs of collection, and does hereby direct any trustee in bankruptcy having possession of such homestead or exemption to deliver to Mortgagee a sufficient amount of property or money set apart as exempt to be applied to the amounts secured hereby and does hereby appoint Mortgagee the attorney in fact for Mortgagor to claim any and all homestead exemptions allowed by law. Mortgagor hereby warrants that no one has any homestead rights in the Mortgaged Property or any part thereof. 27. POWER OF MORTGAGEE TO RECONVEY OR CONSENT. Without affecting the liability of Mortgagor or any other person for the payment of the Secured Obligations or any part thereof, including such portions of the Secured Obligations as may be due at the time of or after any release of any portion of the Mortgaged Property from the lien of this Mortgage, and without affecting the lien of this Mortgage upon any remainder of the Mortgaged Property which has not been so released for the full amount of the Secured Obligations then or thereafter secured hereby, and without affecting the rights and powers of Mortgagee with respect to such remainder of the Mortgaged Property, Mortgagee may, at its option, do any one or more of the following: (i) release all or any part of the Secured Obligations; (ii) extend the time or otherwise alter the terms of payment of all or any part of the Secured Obligations; (iii) accept additional or substitute security; (iv) release all or any part of the Mortgaged Property from the lien of this Mortgage; (v) consent to the making of any map or plat of all or any part of the Mortgaged Property; (vi) join in the granting of any easement upon all or any part of the Mortgaged Property; (vii) join in any extension agreement or any agreement subordinating or otherwise affecting the security title or charge hereof or the priority thereof. 28. NOTICES. All notices and communications hereunder shall be delivered in the manner and to the addresses specified in the Loan Agreement. 29. WAIVER OF RIGHTS. MORTGAGOR AND MORTGAGEE, BY ITS ACCEPTANCE HEREOF, EACH HEREBY WAIVES 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 MORTGAGOR OR MORTGAGEE ARISING OUT OF THIS MORTGAGE, THE COLLATERAL OR ANY ASSIGNMENT THEREOF OR BY REASON OF ANY OTHER CAUSE OR DISPUTE WHATSOEVER BETWEEN -16- MORTGAGOR AND MORTGAGEE OF ANY KIND OR NATURE. ALL WAIVERS BY MORTGAGOR AND MORTGAGEE IN THIS PARAGRAPH HAVE BEEN MADE VOLUNTARILY, INTELLIGENTLY AND KNOWINGLY, AFTER MORTGAGOR AND MORTGAGEE HAVE BEEN FIRST INFORMED BY COUNSEL OF THEIR OWN CHOOSING AS TO POSSIBLE ALTERNATIVE RIGHTS, AND HAVE BEEN MADE AS AN INTENTIONAL RELINQUISHMENT AND ABANDONMENT OF A KNOWN RIGHT AND PRIVILEGE. 30. AMENDMENT. This Mortgage cannot be changed or amended except by an agreement in writing signed by the party against whom enforcement of the change is sought. 31. CAPTIONS. The captions preceding the text of the sections or subsections of this Mortgage are inserted only for convenience of reference and shall not constitute a part of this Mortgage, nor shall they in any way affect its meaning, construction or effect. 32. ASSIGNMENT. All the provisions of this Mortgage and the Loan Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, except that Mortgagor may not assign or transfer any of its rights hereunder without the consent of Mortgagee, which consent shall not under this Mortgage or the Loan Agreement be unreasonably withheld. 33. BUSINESS PURPOSE. Mortgagor warrants that this Mortgage is delivered in connection with a business or commercial loan transaction. 34. WARRANTY OF TITLE. Mortgagor warrants and represents that Mortgagor has good title to the Mortgaged Property, is lawfully seized and possessed of the Mortgaged Property, and has the right to mortgage the same, that the Mortgaged Property is free and clear of all liens, restrictions, and encumbrances except any and all such liens, restrictions and encumbrances which would not materially and adversely affect Mortgagor's interest in or use (as set forth in Section 5 above) of the Mortgaged Property, and Mortgagor warrants and will forever defend the Mortgaged Property unto Mortgagee, its successors-in-title and assigns, against the claims of all persons whomsoever. 35. RIGHTS CUMULATIVE. The rights of Mortgagee granted and arising under the clauses and covenants contained in this Mortgage, the Loan Agreement and any and all other documents, instruments, or agreements relating to the Secured Obligations shall be separate, distinct and cumulative of other powers and rights which Mortgagee may have at law or in equity, and none of them shall be in exclusion of the others; and all of them are cumulative to the remedies for collection of indebtedness, enforcement of rights under mortgages and security agreements and preservation of security as provided by law. No act of Mortgagee shall be construed as an election to proceed under any one provision herein or under the Loan Agreement to the exclusion of any other provision, or as an election of remedies to the bar of any other remedy allowed at law or in equity, anything herein or otherwise to the contrary notwithstanding. 36. TIME OF THE ESSENCE. Time is of the essence with respect to each and every covenant, agreement and obligation of Mortgagor under this Mortgage, the Loan Agreement and -17- any and all other instruments now or hereafter evidencing, securing or otherwise relating to the Secured Obligations. 37. GOVERNING LAW. It is understood and agreed by the parties hereto that, to the extent permitted by law, the rights of such parties are governed by the laws of the State of Georgia and that only the validity of this Mortgage and the remedies of the parties hereunder, including foreclosure of this Mortgage, shall be governed and determined by the laws of the State of Florida. 38. SATISFACTION. If and when Mortgagor shall pay in full the Secured Obligations and there shall exist no further commitment by Mortgagee or Lender to make Loans to Mortgagor under the Loan Agreement or otherwise, all of the grants and conveyances under this Mortgage shall be and become null and void and Mortgagee, at Mortgagor's expense, shall execute and deliver to Mortgagor in proper form for recording a satisfaction or assignment of this Mortgage and UCC-3 termination statements for all UCC financing statements filed by or on behalf of Mortgagee in connection with the Mortgaged Property. 39. FUTURE ADVANCES. In Mortgagee's sole discretion, the Lender may (but in no way shall be obligated to) from time to time within twenty (20) years from the date of this Mortgage or within such lesser period of time as may in the future be provided by law as a prerequisite for the sufficiency of actual or record notice of optional future or additional advances as against the rights of creditors or subsequent purchasers for valuable considerations, make further advances to Mortgagor, or Mortgagor's permitted successors in title, which shall be collateralized by the lien of this Mortgage, provided that at no time shall the outstanding principal indebtedness collateralized by this Mortgage, including advances, exceed a sum which is five (5) times the principal amount of the Secured Obligations as shown on page one (1) of this Mortgage, plus interest and any disbursements made for the payment of taxes, levies or insurance or other matters on the Premises with interest on those disbursements. Mortgagor shall immediately upon request of Mortgagee execute and deliver to Mortgagee a note evidencing each and every such future advance which shall be of equal dignity with all other notes and a default in the payment of any one note shall constitute a default in the payment of all other notes. IN WITNESS WHEREOF, this Mortgage has been duly executed, delivered and sealed by Mortgagor as of the day and year first above written. -18- MORTGAGOR: Signed and acknowledged in the MERCER PRODUCTS COMPANY, INC., a presence of: New Jersey corporation /s/ ROBIN A. KAHAN --------------------------- Name: Robin A. Kahan ---------------------- (Print or type) By: /s/ KEITH OSTER -------------------------------- Name: Keith Oster ------------------------- Title: Vice President ------------------------ /s/ ROBIN A. KAHAN --------------------------- Name: Robin A. Kahan ---------------------- (Print or type) Attest: /s/ LOUIS MINTZ ---------------------------- Name: Louis Mintz ----------------------- Title: Assistant Secretary ---------------------- [CORPORATE SEAL] Address: 37235 State Road 19 Umatilla, Florida 32784 -19- STATE OF NEW YORK : : ss: COUNTY OF NEW YORK : The foregoing instrument was acknowledged before me this 21st day of April, 1998 by Robin A. Kahan of Mercer Products Company, Inc., a New Jersey corporation, on behalf of the corporation. He/She is personally known to me or has produced ___________________ as identification and did not take an oath. ------------------------------ Name: /s/ ROBIN A. KAHAN ------------------------- Serial Number: ---------------- Notary Public [NOTARIAL SEAL] My commission expires: -20- EXHIBIT B SCHEDULE 1 (Description of "Debtor") 1. The name and identity of Debtor: Mercer Products Company, Inc., a New Jersey corporation. 2. The principal place of business of Debtor is: 37235 State Road 19 Umatilla, Florida 32784 3. Debtor's Chief Executive Office in the State of Florida is located at the following address: 37235 State Road 19 Umatilla, Florida 32784 4. Debtor has been using or operating under said name and identity without change for the following time period: years months SCHEDULE 2 (Notice mailing addresses of "Debtor" and "Secured Party") 1. The mailing address of Debtor is: Mercer Products Company, Inc. 37235 State Road 19 Umatilla, Florida 32784 2. The mailing address of Secured Party is: NationsBank, N.A. 600 Peachtree Street, N.E. The Nations Bank Plaza 13th Floor Atlanta, Georgia 30308 Attention: Business Credit Division EX-10.14 14 EXHIBIT 10.14 [EXECUTION COPY] PLEDGE AGREEMENT THIS PLEDGE AGREEMENT, dated as of April 21, 1998, 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 (together with any successor Agent under the Loan Agreement, 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, as amended by Amendment No. 1, Waiver and Joinder Agreement dated as of a date on or about the date hereof (as so amended and as it may be further amended, modified, supplemented, extended or refinanced from time to time, the "Loan Agreement"), among the Pledgor, the sole Lender and the Agent. PRELIMINARY STATEMENT Pursuant to the Loan Agreement, the Lender has agreed to make certain financial accommodations to the Pledgor in the form of revolving credit loans under a $25,000,000 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 Lender 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. Upon the occurrence of an Event Default, the agent shall have the right, at any time in its discretion and without notice to the Pledgor, 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, 2 (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, (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 the capital stock the Borrowing Subsidiary. (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. 3 (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. 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 and other distributions made in respect of the Pledged Collateral; PROVIDED, HOWEVER, that any and all (A) dividends or distributions of stock of the Borrowing Subsidiary 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 4 (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 indorsement). (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 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 distributions 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 distributions 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 distributions; and (ii) all dividends and distributions 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 indorsement). 5 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, indorse and collect all instruments made payable to the Pledgor representing any dividend or other distribution that constitutes Pledged 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. 6 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 and has a Materially Adverse Effect. 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 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. 7 (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. 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 Loan Document 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, the Notes or any other Loan Document 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 8 (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. 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. 9 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. 10 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. PLEDGOR: BURKE INDUSTRIES, INC. [CORPORATE SEAL] By: /s/ KEITH OSTER ------------------ Name: Keith Oster --------------------- Title: Secretary --------------------- Attest: By: /s/ LOUIS MINTZ -------------------------- Name: Louis Mintz -------------------------- Title: Assistant Secretary -------------------------- Agent: NATIONSBANK, N.A. By: /s/ SHERRY D. LAIL --------------------- Name: Sherry D. Lail --------------------- Title: Vice-President --------------------- 11 ANNEX A Pledged Shares
Authorized Issued Certificate Company Shares Shares No. - ------- Mercer Products 1000 10 1 Company, Inc.
12 EX-10.15 15 EXHIBIT 10.15 CONSENT SOLICITATION STATEMENT DATED MARCH 30, 1998 BURKE INDUSTRIES, INC. SOLICITATION OF CONSENTS TO INDENTURE AMENDMENTS -------------------------- 10% SENIOR NOTES DUE 2007 ($110,000,000 PRINCIPAL AMOUNT OUTSTANDING) UNCONDITIONALLY GUARANTEED BY BURKE FLOORING PRODUCTS, INC., BURKE RUBBER COMPANY, INC. AND BURKE CUSTOM PROCESSING, INC. CONSENT PAYMENTS: $3.75 PER $1,000.00 PRINCIPAL AMOUNT OF EXISTING NOTES Burke Industries, Inc., a California corporation (the "Company" or "Burke"), is soliciting (the "Solicitation") the consents (the "Consents") of holders of record (the "Record Holders") as of March 26, 1998 (the "Record Date") of the outstanding $110.0 million aggregate principal amount of its 10% Senior Notes due 2007 (the "Existing Notes"), to certain amendments (the "Proposed Amendments") to the indenture governing the Existing Notes (the "Original Indenture"), including an amendment allowing the Company to issue and sell up to $30.0 million principal amount of Floating Interest Rate Senior Notes due 2007 of the Company (the "New Notes") to provide a portion of the financing for the acquisition by the Company (the "Mercer Acquisition") of Mercer Products Company, Inc. ("Mercer"). The Solicitation is being made upon the terms and is subject to the conditions set forth in this Consent Solicitation Statement and in the accompanying Consent. Adoption of the Proposed Amendments requires the consent of Record Holders of a majority in principal amount of the outstanding Existing Notes (the "Requisite Consents"). The Company will make consent payments (the "Consent Payments") of $3.75 cash per each $1,000.00 principal amount of Existing Notes to Holders (as defined herein) who have properly furnished, and not revoked, their Consents on or prior to the Expiration Date (as defined herein), provided that (i) the Requisite Consents are received, (ii) the Offering (as defined below) is consummated, (iii) the Mercer Acquisition is consummated and (iv) the First Supplemental Indenture (as defined below) is executed and delivered. Upon satisfaction of the conditions set forth in clauses (i), (ii) and (iii) above, it is anticipated that the Company and United States Trust Company of New York, the trustee under the Original Indenture (the "Trustee"), will execute a supplemental indenture implementing the Proposed Amendments (the "First Supplemental Indenture"). Simultaneously with the Solicitation, the Company is offering (the "Offering") for sale without registration under the Securities Act of 1933, as amended (the "Securities Act"), $30.0 million principal amount of New Notes which will be issued pursuant to a new indenture (the "New Indenture") providing for the issuance of the New Notes. Consummation of the Offering is conditioned upon closing of the Mercer Acquisition, the receipt of the Requisite Consents and the execution and delivery of the First Supplemental Indenture. A copy of the Company's preliminary Offering Memorandum dated March 30, 1998 (the "Offering Memorandum") relating to the Offering is enclosed herewith. The closing of the Mercer Acquisition is not conditioned on successful consummation of the Consent Solicitation as the Company has received a commitment for alternative financing from NationsBank, N.A. that provides adequate funds to enable the Company to consummate the Mercer Acquisition. See "Alternative Financing." The Solicitation Agent for the Consent Solicitation is: NATIONSBANC MONTGOMERY SECURITIES LLC THE SOLICITATION WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON APRIL 10, 1998, UNLESS EXTENDED BY THE COMPANY (SUCH DATE AND TIME AS IT MAY BE EXTENDED BY THE COMPANY, SHALL BE REFERRED TO AS THE "EXPIRATION DATE"). IF THE REQUISITE CONSENTS HAVE NOT BEEN RECEIVED BY 5:00 P.M., NEW YORK CITY TIME, ON OR PRIOR TO THE ORIGINAL EXPIRATION DATE, THE COMPANY MAY, IN ITS SOLE DISCRETION, TERMINATE THE SOLICITATION OR EXTEND THE SOLICITATION FOR A SPECIFIED PERIOD OR ON A DAILY BASIS UNTIL THE REQUISITE CONSENTS HAVE BEEN RECEIVED. Consents may be revoked by Holders at any time on or prior to the Expiration Date and will automatically expire if the Requisite Consents are not obtained on or prior to the Expiration Date. If the Proposed Amendments become effective, each present and future holder of the Existing Notes will be bound by the Proposed Amendments, whether or not such holder delivered a Consent. The Solicitation Agent for the Consent Solicitation is: NATIONSBANC MONTGOMERY SECURITIES LLC AVAILABLE INFORMATION The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance therewith, files reports and other information with the Securities and Exchange Commission (the "Commission"). Such reports and other information filed with the Commission are available for inspection and copying at the public reference facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at the Commission's Regional Offices located at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and at Seven World Trade Center, New York, New York 10048. Copies of such documents may also be obtained from the Public Reference Section of the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. In addition, copies of such documents may be obtained through the Commission's Internet address at http://www.sec.gov. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The following documents have been filed with the Commission by the Company and are hereby incorporated by reference in this Consent Solicitation Statement: 1. The Company's Registration Statement on Form S-4 and related Prospectus relating to the Exchange Offer (as defined herein) dated December 5, 1997. 2. All other reports filed with the Commission prior to the Expiration Date. Any statement contained in a document incorporated or deemed to be incorporated by reference herein shall be deemed to be modified or superseded for purposes of this Consent Solicitation Statement to the extent that a statement contained herein or in the enclosed Offering Memorandum or in any subsequently filed document which also is or is deemed to be incorporated by reference herein modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Consent Solicitation Statement. Copies of all documents which are incorporated herein by reference (not including the exhibits to such documents, unless such exhibits are specifically incorporated by reference in such documents) will be provided without charge to each person, including any beneficial Holder of Existing Notes, to whom this Consent Solicitation Statement and the Offering Memorandum is delivered, upon request. Copies of this Consent Solicitation Statement, as amended or supplemented from time to time, and any other documents (or parts of documents) that constitute part of this Consent Solicitation Statement will also be provided without charge to each such person, upon request. Requests should be directed to the Company's Information Agent (the "Information Agent"), D.F. King & Co., Inc. 3 This Consent Solicitation Statement and the Offering Memorandum contain certain forward-looking statements and information relating to the Company and Mercer that are based on the beliefs of management as well as assumptions made by and information currently available to management. Such forward-looking statements are principally contained in the Offering Memorandum in the sections "Offering Memorandum Summary," "Risk Factors," "Unaudited Pro Forma Combined Financial Statements," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business" and include, without limitation, the Company's expectation and estimates as to the Company's business operations following the Offering and the acquisition of Mercer, including the introduction of new products, future financial performance, including growth in net sales and earnings, cash flows from operations and the synergies resulting from the Mercer Acquisition. In addition, in those and other portions of the Offering Memorandum and this Consent Solicitation Statement, 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, including the risk factors described in the Offering Memorandum. In addition to factors that may be described elsewhere in the Offering Memorandum, the Company specifically wishes to advise readers that the factors listed under the caption "Risk Factors" could cause actual results to differ materially from those expressed in any forward-looking statement. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect (including the assumptions used in connection with the preparation of the Summary Unaudited Pro Forma Combined Financial Data), 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. No person has been authorized to give any information or make any representations other than those contained in this Consent Solicitation Statement and, if given or made, such information or representations must not be relied upon as having been authorized by the Company, the Solicitation Agent, the Information Agent or the Tabulation Agent. The Consent Solicitation is not being made to, and no Consents are being solicited from the Holders of Notes in any jurisdiction in which it is unlawful to make such solicitation or grant such Consents. The delivery of this Consent Solicitation Statement at any time does not imply that the information herein is correct as of any subsequent date. The information provided in this Consent Solicitation Statement is based upon information provided solely by the Company. The Solicitation Agent has not independently verified and does not make any representation or warranty, express or implied, or assume any responsibility, as to the accuracy or adequacy of the information contained herein. 4 SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND THE SUMMARY FINANCIAL AND STATISTICAL DATA AND FINANCIAL STATEMENTS APPEARING ELSEWHERE IN OR INCORPORATED BY REFERENCE INTO THIS CONSENT SOLICITATION STATEMENT. CAPITALIZED TERMS USED HEREIN AND NOT DEFINED HEREIN HAVE THE MEANINGS ASSIGNED TO SUCH TERMS IN THE OFFERING MEMORANDUM. THE COMPANY OVERVIEW 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, respectively ("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 relating to the Prior Recapitalization as described herein) over the same period. On March 5, 1998, the Company entered into a Stock Purchase Agreement with Sovereign Specialty Chemicals, Inc. ("Sovereign") and Mercer pursuant to which the Company will acquire from Sovereign all of the outstanding capital stock of Mercer. Mercer is a leading manufacturer of extruded plastic and vinyl flooring products such as vinyl cove base, transitional and finish mouldings, corners, stair treads and other accessories. On a pro forma basis, after giving effect to the Mercer Acquisition as if it had occurred on January 4, 1997, Burke would have generated $115.1 million and $22.4 million in revenues and EBITDA, respectively, in 1997. See "Acquisition of Mercer" and "Unaudited Pro Forma Combined Financial Statements." Mercer represents the fifth acquisition completed by Burke's current management team over the last five years. Burke's integration of these acquisitions has led to a dominant position in the aerospace seals market, opened new markets for its Flooring Products, improved operating efficiencies, consolidated overhead and strengthened technical capabilities. Management intends to continue to evaluate potential acquisitions as a way to augment Burke's internal growth, expand and strengthen existing product lines and enhance the Company's distribution and technological capabilities. 5 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 The Boeing Company's Commercial Airplane Group ("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 Advanced Tactical Fighter ("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 34.6% of the Company's total net sales in 1997. Management believes the Aerospace Products business is well positioned to benefit from the commercial aircraft build rates which increased in 1997 and are continuing to increase in 1998, along with the associated retrofit, refurbishment, replacement and upgrade projects that are required over the life of the aircraft. 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-Registered Trademark-, and other rubber-based flooring accessories for commercial and industrial applications in the western United States. The acquisition of Mercer significantly expands Burke's product offerings and distribution capabilities given Mercer's historically strong presence as a manufacturer of vinyl cove base and other vinyl-based flooring accessories in the eastern United States. 6 Both Burke's and Mercer's principal product offerings include vinyl cove base and rubber cove base, tile, stair treads, corners, shapes and other flooring accessories. Demand for 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. Mercer's sales were $24.9 million in 1997. Management believes that the acquisition of Mercer, which is already well established as a leading supplier of vinyl cove base and mouldings in the eastern United States, will enable it to increase revenues through the increased penetration of existing markets and the expansion of its product line to markets where vinyl cove base is traditionally more popular than rubber cove base, such as the midwestern and eastern United States. The Mercer Acquisition also presents the opportunity for cost savings through economies of scale and shared resources. 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, one of the nation's largest producers of floor covering accessories and maintains strong positions in its 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 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 7 distributors and are generally associated with superior levels of quality and customer service in their respective markets. Pursuant to the Mercer Acquisition, the Company will also be acquiring Mercer's strong relationships with distributors in the eastern United States and Mercer's trade name Uni-Color-Registered Trademark- color matching system, which is a widely recognized brand name in the flooring business. 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 LEADERSHIP 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 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: 8 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. 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 Industries ("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 original equipment manufacturers ("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 and by capitalizing on the strong East Coast presence in vinyl flooring products that Mercer has already established. - LEVERAGE BRAND NAME RECOGNITION AND EXISTING DISTRIBUTION CHANNELS. The Company intends to continue to capitalize on the BurkeBase trademark by expanding and upgrading its existing product line. In addition, the Company intends to capitalize on the strong brand name established by Mercer in the flooring business with Mercer's unique Uni-Color-Registered Trademark- color matching system. 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. COMMERCIAL PRODUCTS - INCREASE PENETRATION OF PUROSIL SILICONE HOSES. The Company believes it has yet to fully capitalize on the growth opportunities for its Purosil silicone hoses, particularly in the heavy-duty truck and bus aftermarket. New initiatives include 9 increasing customer share at a major private-label customer, initiating production of silicone hoses for a major new OEM customer and expanding into new product areas. - 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, such as the Mercer Acquisition, where it can expand and strengthen existing product lines and enhance 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. The Company's principal executive offices are located at 2250 South Tenth Street, San Jose, California 95112; telephone: (408) 297-3500. SIGNIFICANT RECENT DEVELOPMENTS ACQUISITION OF MERCER On March 5, 1998, the Company entered into a Stock Purchase Agreement with Sovereign and Mercer pursuant to which the Company will acquire from Sovereign all of the outstanding capital stock of Mercer for an aggregate of $35,750,000, subject to working capital and other adjustments. 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 mouldings, 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. Management believes the acquisition of Mercer will significantly enhance the Company's 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. 10 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 the 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. THE CLOSING OF THE MERCER ACQUISITION IS NOT CONDITIONED ON SUCCESSFUL CONSUMMATION OF THE CONSENT SOLICITATION AS THE COMPANY HAS RECEIVED A COMMITMENT FOR ALTERNATIVE FINANCING FROM NATIONSBANK, N.A. THAT PROVIDES ADEQUATE FUNDS TO ENABLE THE COMPANY TO CONSUMMATE THE MERCER ACQUISITION. SEE "ALTERNATIVE FINANCING." CONSUMMATION OF EXCHANGE OFFER On January 28, 1998, the Company successfully consummated its offer to exchange each of the Existing Notes that were issued on August 20, 1997 (the Closing Date of the recapitalization of Burke) that were not registered under the Securities Act, for the Exchange Notes which are registered under the Securities Act and are freely tradeable. 11 THE PROPOSED AMENDMENTS The Proposed Amendments to the Original Indenture would, among other things, (i) permit the Company to issue and sell up to $30.0 million of New Notes in the Offering, (ii) increase certain of the permitted indebtedness and permitted investment baskets contained in the indebtedness and restricted payment covenants in the Original Indenture to reflect the increased size of the Company after the closing of the Mercer Acquisition, (iii) modify the Lien covenant to enhance the Company's ability to use assets as collateral for new financing and (iv) make certain other amendments of a non-substantive nature to the Original Indenture. See Mark-Up of Original Indenture Provisions attached hereto as Schedule A. The Company believes that the Proposed Amendments will benefit the Holders by, among other things, (i) providing the Company with necessary capital to finance the Mercer Acquisition, thereby growing the Company and adding significant depth to its already strong product and distribution lines and product development capabilities and (ii) providing the Company with greater operating flexibility to permit it to continue to pursue new acquisitions. On a pro forma basis based on Mercer's actual 1997 financial results, Mercer would have contributed an additional $24.9 million and $4.8 million (excluding synergies and other adjustments) in additional revenues and EBITDA, respectively in Fiscal Year 1997. In addition, giving effect to consummation of the Offering and the Mercer Acquisition, on a pro forma basis for Fiscal Year 1997, interest coverage (EBITDA to cash interest expense) would increase from 1.6x (actual for the year ended December 31, 1997) to 1.7x (pro forma for the same period), assuming a 9.5% pro forma interest rate, and leverage (total debt to EBITDA) would decrease from 6.53x (actual at December 31, 1997) to 6.26x (pro forma at the same date). With the addition of Mercer, the Company is expected to achieve a critical mass that enhances debt protection for investors, although there can be no assurance on this point. Management believes that the purchase price of approximately $35.8 million for the Mercer Acquisition, before transaction costs (or 6.48x 1997 EBITDA before synergies but pro forma for adjustments outlined in the Offering Memorandum) is attractive to the Company and the Mercer Acquisition will expand significantly the Company's east coast presence in the vinyl flooring segment, utilizing Mercer's established brand names and product recognition. THE OFFERING For a description of the Offering and the proposed use of the net proceeds thereof, see the Offering Memorandum. Consummation of the Offering is conditioned upon closing of the Mercer Acquisition, the receipt of the Requisite Consents and the execution and delivery of the First Supplemental Indenture. There can be no assurance that the Offering will be consummated. RISK FACTORS In making a determination as to whether to Consent to the Proposed Amendments, each Holder should carefully consider all of the matters described herein and in the Offering Memorandum. There can be no assurance that any of the anticipated benefits to the Holders or 12 the Company will be realized. Holders should also consider those matters set forth under the section of the Offering Memorandum entitled "Risk Factors" beginning on page 14 thereof. 13 THE SOLICITATION The Solicitation . . . . . . . . . The Company is soliciting Consents of Holders to the Proposed Amendments to the Original Indenture. The Consent Payments . . . . . . . Cash payments of $3.75 for each $1,000.00 principal amount of the Existing Notes for which a Consent has been properly furnished, and not revoked, on or prior to the Expiration Date, provided that (i) the Requisite Consents have been received by the Company on or before such date, (ii) the Offering is consummated, (iii) the Mercer Acquisition is consummated and (iv) the First Supplemental Indenture is executed and delivered. Consent Payments will be made by check payable to the person designated in the Consent. Interest will not accrue on or be payable with respect to any Consent Payments. Expiration Date . . . . . . . . . 5:00 p.m., New York City time, on April 10, 1998, unless the Solicitation is extended by the Company, in which case the term "Expiration Date" means the latest date and time to which the Solicitation is extended. The Company may terminate the Solicitation or may extend the Solicitation for a specified period or on a daily basis. How to Consent . . . . . . . . . . A Holder desiring to consent to the Proposed Amendments should either (i) complete and sign the Consent, or a facsimile thereof, have the signature thereon (and on any proxy delivered therewith) guaranteed if required by the Consent and mail, fax or otherwise deliver the Consent, or such facsimile, together with a duly executed proxy if the Holder was not a Record Holder, and any other required documents to the Tabulation Agent at its address set forth on the back cover hereof or (ii) request the Holder's broker, dealer, commercial bank, trust company or other nominee to effect the Consent on its behalf. Consents must be delivered to the Tabulation Agent prior to the Expiration Date. The Company anticipates that the Depository Trust Company ("DTC"), as nominee Holder of the Existing Notes, will execute an omnibus proxy in favor of its respective participants ("DTC Participants") which will authorize each DTC 14 Participant to vote the Existing Notes owned by it and held in DTC's name. Only registered owners of Existing Notes as of the Record Date or their duly designated proxies, including, for the purposes of this Consent Solicitation, DTC Participants, are eligible to consent to the Proposed Amendments and receive the Consent Fee. See "The Solicitation -- How To Consent." Special Procedures for Beneficial Holders . . . . . . . . Any beneficial holder whose Existing Notes are held through a broker, dealer, commercial bank, trust company or other nominee and who wishes to consent should contact such holder promptly and instruct such holder to consent on its behalf. If such beneficial holder wishes to consent on its own behalf, such beneficial holder must obtain a proxy from the Record Holder authorizing the beneficial holder to vote Existing Notes on behalf of such Record Holder. See "The Solicitation--How to Consent." Conditions . . . . . . . . . . . It is anticipated that the Company, the Subsidiary Guarantors and the Trustee will execute the First Supplemental Indenture promptly following receipt of the Requisite Consents. Consequences to Non-Consenting Holders . . . . . . . . . . . . . If the Requisite Consents are obtained, and the Consent Fee is paid, non- consenting Holders will be bound by the Proposed Amendments but will not receive the Consent Fee. Holders . . . . . . . . . . . . . The term "Holder" means (i) any Person in whose name Existing Notes are registered on the books of the Company at the close of business on the Record Date (a "Record Holder") or (ii) any other person who has obtained a proxy substantially in the form attached to the Consent which authorizes such other person (or person claiming title by or through such other person) to vote Existing Notes on behalf of such Record Holder. Withdrawal Rights and Revocation . Consents with respect to the Existing Notes may be revoked by the Holders at any time prior to the Expiration Date, but may not be revoked thereafter. 15 Any Holder who revokes a Consent will not receive Consent Payments, unless such Consent is redelivered and received by the Tabulation Agent and accepted by the Company on or prior to the Expiration Date. See "The Solicitation--Revocation of Consents." Certain Tax Considerations . . . . For a discussion of certain U.S. federal income tax consequences of the Consent Solicitation to beneficial owners of Notes, see "Certain United States Federal Income Tax Consequences." Solicitation Agent . . . . . . . . The Company has retained NationsBanc Montgomery Securities LLC ("NationsBanc Montgomery") as its Solicitation Agent in connection with the Solicitation (the "Solicitation Agent"). Information Agent . . . . . . . . The Company has retained D.F. King & Co., Inc. as its Information Agent in connection with the Solicitation. Tabulation Agent . . . . . . . . . The Company has retained United States Trust Company of New York as its Tabulation Agent in connection with the Solicitation (the "Tabulation Agent").
16 PURPOSES AND EFFECTS SET FORTH BELOW IS A SUMMARY OF THE PROPOSED AMENDMENTS TO THE ORIGINAL INDENTURE FOR WHICH CONSENTS ARE BEING SOUGHT PURSUANT TO THIS SOLICITATION. THE DISCUSSION BELOW IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL AND COMPLETE TERMS OF THE ORIGINAL INDENTURE AND OF SUCH PROPOSED AMENDMENTS AS SET FORTH IN THE MARK-UP OF THE PROVISIONS OF THE ORIGINAL INDENTURE ATTACHED HERETO AS SCHEDULE A (THE "MARK-UP OF ORIGINAL INDENTURE PROVISIONS"), WHICH IS INCORPORATED HEREIN BY THIS REFERENCE. CONSUMMATION OF THE OFFERING IS CONDITIONED UPON CLOSING OF THE MERCER ACQUISITION, THE RECEIPT OF THE REQUISITE CONSENTS AND THE EXECUTION AND DELIVERY OF THE FIRST SUPPLEMENTAL INDENTURE. THERE CAN BE NO ASSURANCE THAT THE OFFERING WILL BE CONSUMMATED. EACH CAPITALIZED TERM APPEARING BELOW THAT IS NOT DEFINED HEREIN HAS THE MEANING CURRENTLY ASSIGNED TO SUCH TERM IN THE ORIGINAL INDENTURE. 1. AMENDMENT RELATING TO THE ISSUANCE AND SALE OF THE NEW NOTES As part of the financing for the Mercer Acquisition, the Company proposes to issue and sell up to $30.0 million of New Notes without registration under the Securities Act through NationsBanc Montgomery, as initial purchaser (the "Initial Purchaser"). The terms of the New Notes will be substantially identical to the terms of the Existing Notes, as amended by the Proposed Amendments, except for the interest and redemption provisions. The Original Indenture generally does not permit the Company or any Restricted Subsidiary to incur Indebtedness unless, on the date of such incurrence and after giving effect thereto on a pro forma basis, the Fixed Charge Coverage Ratio would have been equal to at least 2.0 to 1.0. Such covenant in its existing form would not permit the Company to offer and sell the New Notes in the aggregate amount proposed. To allow the Company to offer and sell the New Notes, the Company proposes to amend the Original Indenture to modify the Limitation on Indebtedness covenant to expressly permit Indebtedness evidenced by the New Notes and related guaranties. See Section 1010 in the Mark-Up of Original Indenture Provisions. The closing of the Mercer Acquisition is not conditioned on successful consummation of the Consent Solicitation. See "Alternative Financing." Management believes that the purchase price of approximately $35.8 million for the Mercer Acquisition, before transaction costs (or 6.48x 1997 EBITDA before synergies but pro forma for adjustments outlined in the Offering Memorandum) is attractive to the Company and the Mercer Acquisition will expand significantly the Company's east coast presence in the vinyl flooring segment, utilizing Mercer's established brand names and product recognition. 2. AMENDMENTS TO DEFINITION OF PERMITTED INDEBTEDNESS IN COVENANT REGARDING LIMITATION ON INDEBTEDNESS The Original Indenture generally does not permit the Company or any Restricted Subsidiary to incur Indebtedness unless, on the date of such incurrence and after giving effect thereto, the Fixed Charge Coverage Ratio would have been equal to at least 2.0 to 1.0. 17 Notwithstanding this general restriction, the Original Indenture permits the Company and its Restricted Subsidiaries to incur Permitted Indebtedness of various types. The Company believes that the increase of the three baskets described below in the amounts so proposed is appropriate given the increase in pro forma 1997 EBITDA to the Company after consummation of the Mercer Acquisition. On a pro forma basis based on Mercer's actual 1997 financial results, Mercer would have contributed an additional $24.9 million and $4.8 million (excluding synergies and other adjustments) in additional revenues and EBITDA, respectively in Fiscal Year 1997. In addition, giving effect to consummation of the Offering and the Mercer Acquisition, on a pro forma basis for Fiscal Year 1997, interest coverage (EBITDA to cash interest expense) would increase from 1.6x (actual for the year ended December 31, 1997) to 1.7x (pro forma for the same period), assuming a 9.5% pro forma interest rate, and leverage (total debt to EBITDA) would decrease from 6.53x (actual at December 31, 1997) to 6.26x (pro forma at the same date). With the addition of Mercer, the Company is expected to achieve a critical mass that enhances debt protection for investors, although there can be no assurance on this point. A. INCREASE OF PERMITTED INDEBTEDNESS UNDER THE BANK CREDIT AGREEMENT OR CREDIT FACILITIES BASKET. CLAUSE (i) OF THE THIRD PARAGRAPH OF THE LIMITATION ON INDEBTEDNESS COVENANT (SECTION 1010) OF THE ORIGINAL INDENTURE (THE "CREDIT AGREEMENT BASKET") PERMITS THE COMPANY AND ANY RESTRICTED SUBSIDIARY TO INCUR INDEBTEDNESS 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) $15.0 MILLION OR (y) THE AMOUNT OF THE BORROWING BASE, LESS ANY AMOUNTS APPLIED TO THE PERMANENT REDUCTION OF SUCH CREDIT FACILITIES PURSUANT TO SECTION 1016. Under the Proposed Amendments, the amount in clause (x) of the Credit Agreement Basket would be increased from $15.0 million to $25.0 million. See Section 1010 in the Mark-Up of Original Indenture Provisions. B. INCREASE OF PERMITTED INDEBTEDNESS UNDER ACQUISITION DEBT BASKET Clause (vii) of the third paragraph of the Limitation on Indebtedness covenant (Section 1010) of the Original Indenture (the "Acquisition Debt Basket") permits the Company and any Restricted Subsidiary to incur Indebtedness consisting of either (A) Capitalized Lease Obligations 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 18 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 Indebtedness under clauses (A) and (B) does not exceed $7.5 million at any one time outstanding. Under the Proposed Amendments, the amount of the Acquisition Debt Basket would be increased from $7.5 million to $10.0 million. See Section 1010 in the Mark-Up of Original Indenture Provisions. C. INCREASE OF PERMITTED INDEBTEDNESS UNDER PERMITTED DEBT BASKET. Clause (viii) of the third paragraph of the Limitation on Indebtedness covenant (Section 1010) of the Original Indenture (the "Permitted Debt Basket") permits the Company and any Restricted Subsidiary to incur 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. Under the Proposed Amendments, the amount of the Permitted Debt Basket would be increased from $10.0 million to $15.0 million. See Section 1010 in the Mark-Up of Original Indenture Provisions. 3. AMENDMENT TO COVENANT REGARDING LIMITATION ON LIENS The Original Indenture generally prohibits all Liens on property or assets of the Company or any Restricted Subsidiary other than Permitted Liens. Clause (ii) of the definition of Permitted Liens permits 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 the Credit Agreement Basket. The Proposed Amendments would amend clause (ii) of the definition of Permitted Liens to permit the Company to incur Liens securing the Bank Credit Agreement or one or more other credit facilities not only under the Credit Agreement Basket but also under the Permitted Debt Basket. As a result, the Company will have the ability to incur up to an additional $15.0 million of other Indebtedness under the Bank Credit Agreement or one or more other credit facilities which is secured by the assets of the Company or its Restricted Subsidiaries, thereby affording the Company additional financing options as it continues to grow and pursue attractive acquisition opportunities. See Section 1014 in the attached Mark-Up of the Original Indenture Provisions. 4. AMENDMENT TO DEFINITION OF PERMITTED INVESTMENTS The Original Indenture generally prohibits the Company and any Restricted Subsidiary from making any Investment in any person other than a Permitted Investment. Clause (j) of the definition of Permitted Investments in the Original Indenture expressly permits other Investments 19 that do not exceed $4.0 million in the aggregate at any time outstanding (the "Permitted Investments Basket"). Under the Proposed Amendments, the amount of the Permitted Investments Basket would be increased from $4.0 million to $7.5 million. Currently, the Permitted Investments Basket permits the Company to make minority investments. However, as part of the Proposed Amendments, the entire Permitted Investments Basket would be restricted to majority-owned investments. As explained more fully in Section 2 above, the Company believes that the increase in the Permitted Investments Basket is appropriate given the increased size of the Company upon consummation of the Mercer Acquisition and will facilitate the Company's ability to quickly seize potentially fruitful acquisition opportunities. See definition of Permitted Investments in the attached Mark-Up of the Original Indenture Provisions. 5. OTHER PROPOSED AMENDMENTS OF A NON-SUBSTANTIVE NATURE For a complete description of the other Proposed Amendments to the Original Indenture, please refer to the Mark-Up of Original Indenture Provisions. ALTERNATIVE FINANCING On March 13, 1998, the Company entered into a Commitment Letter with NationsBank, N.A., as agent (the "Agent") and NationsBanc Montgomery Securities LLC, as Arranger and Syndication Agent, pursuant to which the Agent has committed to lend up to $26.0 million to Mercer under a senior secured credit facility (the "Mercer Credit Facility"), secured by the stock, assets and properties of Mercer. If entered into, the obligations under the Mercer Credit Facility would be non-recourse to the Company and Mercer would be designated as an Unrestricted Subsidiary under the Original Indenture in order to comply with the terms of the Original Indenture. Thus, in the event that the Offering is not consummated, given (i) the amount of available working capital currently in Burke, (ii) additional equity to be provided by J.F. Lehman Equity Investors I, L.P. and Burke's other shareholders and (iii) potential available borrowings under the Mercer Credit Facility, the Company will have adequate funds available to consummate the Mercer Acquisition without delay. 20 THE SOLICITATION GENERAL Pursuant to Section 902 of the Original Indenture, in order to adopt the Proposed Amendments the Company must receive the Requisite Consents (valid and unrevoked Consents of Holders of not less than a majority in aggregate principal amount of the outstanding Existing Notes). As of the Record Date, $110.0 million aggregate principal amount of Existing Notes were issued and outstanding. The Proposed Amendments will become effective only upon (i) receipt of the Requisite Consents, (ii) consummation of the Offering, (iii) closing of the Mercer Acquisition and (iv) execution and delivery of the First Supplemental Indenture. There can be no assurance that the Offering will be consummated and the Proposed Amendments will become effective. If the Proposed Amendments become effective, they will be binding on all holders of Existing Notes and their successors and transferees, whether or not such holders consented to the Proposed Amendments. The term "Holder" shall mean (i) any Record Holder or (ii) any other person who has obtained a proxy substantially in the form attached to the Consent which authorizes such other person (or any person claiming title by or through such other person) to vote Existing Notes on behalf of such Record Holder. The Company anticipates that DTC, as nominee Holder of the Existing Notes, will execute an omnibus proxy in favor of the DTC Participants which will authorize each DTC Participant to vote the Existing Notes owned by it and held in DTC's name. The delivery of a Consent to the Proposed Amendments will not affect a Holder's right to sell or transfer the Existing Notes. Failure to deliver a Consent will have the same effect as if a Holder had voted "No" to the Proposed Amendments. CONSENT PAYMENTS If the Requisite Consents have been received on the Expiration Date and the Proposed Amendments become effective, the Company will pay, promptly to Holders of the Existing Notes whose Consents have not been properly revoked and had been received by the Tabulation Agent on or prior to the Expiration Date, Consent Payments in the amount of $3.75 for each $1,000.00 principal amount of the Existing Notes as to which such a Consent has been delivered and not revoked. Consents will expire if the Proposed Amendments have not been approved by the Requisite Consents by the Expiration Date. Interest will not accrue on or be payable with respect to any Consent Payments. RECORD DATE This Consent Solicitation Statement, form of Consent and Offering Memorandum (the "Solicitation Materials") are being sent to all persons who were Holders of record of the Existing Notes at the close of business on the Record Date (March 26, 1998). Such date has been fixed by the Company as the date for the determination of Holders entitled to give Consents pursuant to the Solicitation. The Company reserves the right to establish, from time to time, any new date as 21 such Record Date and, thereupon, any such new date will be deemed to be the "Record Date" for purposes of the Solicitation. HOW TO CONSENT All Consents that are properly completed, signed and delivered to the Tabulation Agent prior to the Expiration Date and not revoked prior to such date, will be given effect in accordance with the specifications thereof. The Solicitation Materials are being mailed to all Record Holders and as many beneficial holders of the Existing Notes as the Company is reasonably able to identify. Holders who desire to consent to the Proposed Amendments should so indicate by marking the appropriate box on, and signing and dating, the Consent included herewith and mailing, faxing or otherwise delivering it to the Tabulation Agent at the address listed on the back cover page hereof, in accordance with the instructions contained therein. However, if neither of the boxes on the Consent is checked, but the consent is otherwise properly completed and signed, the Holder will be deemed to have consented to the Proposed Amendments. Holders must consent to all of the Proposed Amendments or none of them. Only Holders (i.e. persons in whose name a Note is registered or their duly designated proxies) may execute and deliver a Consent. DTC is expected to grant an omnibus proxy authorizing DTC Participants to deliver a Consent. Accordingly, for the purposes of this Consent Solicitation, the term "Holder" shall be deemed to mean DTC Participants who held Notes through DTC as of the Record Date. In order to cause a Consent to be given with respect to Notes held through DTC, such DTC Participants must complete and sign the Consent Letter, and mail or deliver it to the Tabulation Agent at its address or facsimile set forth on the back cover page of this Consent Solicitation Statement pursuant to the procedures set forth herein and therein. A beneficial owner of an interest in Notes ("Beneficial Owner") held through a DTC Participant must complete and sign the Letter of Instructions and deliver it to such DTC Participant in order to cause a Consent to be given by such DTC Participant with respect to such Notes. Consents by the Record Holder(s) must be executed in exactly the same manner as the name(s) appear(s) on the Existing Notes. If Existing Notes to which a Consent relates are held by two or more joint Holders, all such Holders must sign the Consent. If a signature is by a trustee, executor, administrator, guardian, attorney-in-fact, officer of a corporation or other Holder acting in a fiduciary or representative capacity, such person should so indicate when signing and must submit proper evidence satisfactory to the Company of such person's authority so to act. If Existing Notes are held in different names, separate Consents must be executed covering each name. If a Consent is executed by a person other than the Record Holder(s) on the Record Date, it must be accompanied by a proxy in substantially the form included herewith, duly executed by such Record Holder(s), with signature guaranteed by a firm which is a participant in an authorized signature guarantee program (an "Eligible Institution"), confirming the right of the signatory to execute the Consent on behalf of such Record Holder(s). 22 If a Consent relates to fewer than all of the Existing Notes held of record as of the Record Date by the Record Holder providing such Consent, such Record Holder must indicate on the Consent the aggregate dollar amount (in integral multiples of $1,000.00) of such Existing Notes to which the Consent relates. Otherwise, the Consent will be deemed to relate to all such Existing Notes held by such Holder. A Consent Payment will be paid only for such portion of the Existing Notes to which a Consent relates. HOLDERS WHO WISH TO CONSENT SHOULD HAND DELIVER, SEND BY OVERNIGHT COURIER, OR FACSIMILE (FOLLOWED BY DELIVERY BY HAND OR OVERNIGHT COURIER) THEIR PROPERLY COMPLETED, EXECUTED AND DATED CONSENT FORMS TO THE TABULATION AGENT IN ACCORDANCE WITH THE INSTRUCTIONS SET FORTH HEREIN AND IN THE CONSENT. REVOCATIONS OF CONSENTS SHOULD BE SENT TO THE TABULATION AGENT. CONSENT PAYMENTS WILL ONLY BE PAID TO HOLDERS WHOSE CONSENTS ARE RECEIVED BY THE TABULATION AGENT ON OR PRIOR TO THE EXPIRATION DATE (AND IN THE CASE OF FACSIMILE TRANSMISSIONS, WHOSE ORIGINAL CONSENTS ARE RECEIVED BY THE TABULATION AGENT ON THE THIRD BUSINESS DAY AFTER THE EXPIRATION DATE). NEITHER CONSENTS NOR REVOCATIONS OF CONSENTS SHOULD BE SENT TO THE COMPANY, THE SOLICITATION AGENT OR THE INFORMATION AGENT. THE METHOD OF DELIVERY OF ALL DOCUMENTS, INCLUDING CONSENTS, PROXIES AND REVOCATIONS, IS AT THE ELECTION AND RISK OF THE HOLDER. IN NO EVENT SHOULD A HOLDER TENDER OR DELIVER CERTIFICATES EVIDENCING SUCH HOLDER'S EXISTING NOTES. THE COMPANY RESERVES THE RIGHT TO RECEIVE CONSENTS BY ANY OTHER REASONABLE MEANS OR IN ANY FORM THAT REASONABLY EVIDENCES THE GIVING OF A CONSENT. RECEIPT OF THE REQUISITE CONSENTS BY THE TABULATION AGENT WILL NOT OBLIGATE THE COMPANY TO CONSUMMATE THE OFFERING. All questions as to the validity, form, eligibility (including time of receipt) and acceptance and revocation of the Consents will be resolved by the Company, in its sole discretion, which resolution shall be final and binding. The Company reserves the right to reject any and all Consents not validly given or any Consents the Company's acceptance of which could, in the opinion of the Company or its counsel, be unlawful. The Company also reserves the right to waive any defects or irregularities or conditions of the Solicitation. The interpretation of the terms and conditions of the Solicitation (including the Consents and the instructions thereto) by the Company shall be final and binding on all parties. Unless waived, any defects or irregularities in connection with deliveries of Consents must be cured within such time as the Company shall determine. None of the Company, the Solicitation Agent, the Tabulation Agent, the Information Agent or any other person shall be under any duty to give notification of defects or irregularities with respect to deliveries of Consents, nor shall any of them incur any liability for failure to give such notification. 23 EXPIRATION DATE; EXTENSIONS; AMENDMENT The term "Expiration Date" means 5:00 p.m. New York City time, on April 10, 1998, unless the Company, in its sole discretion, extends the period during which the Solicitation is open, in which event the Expiration Date shall be the last date for which an extension is effective. In order to extend the Expiration Date, the Company will notify the Tabulation Agent of any extension by oral or written notice and will make a public announcement thereof, each prior to 5:00 p.m., New York City time, on the next business day after the previously scheduled Expiration Date. Such announcements may state that the Company is extending the Solicitation for a specified period of time or on a daily basis. Failure of any Holder or beneficial owner of Existing Notes to be so notified will not affect the extension of the Solicitation. The Company reserves the right to (i) extend the Solicitation or to terminate the Solicitation, and to accept Consents not previously accepted by giving oral or written notice of such extension, termination or acceptance to the Tabulation Agent, or (ii) amend the terms of the Solicitation in any manner. If the Solicitation is amended in any material manner, the Company will promptly disclose such amendment in a public announcement and the Company will extend the Solicitation for a period deemed by the Company to be adequate to permit Holders to deliver or revoke their Consents. Without limiting the manner in which the Company may choose to make a public announcement of any extension, amendment or termination of the Solicitation, the Company shall have no obligation to publish, advertise, or otherwise communicate any such public announcement, other than by making a timely press release and complying with any applicable notice provisions of the Original Indenture. REVOCATION OF CONSENTS Consents may be revoked by Holders at any time prior to the Expiration Date. All properly completed and executed Consents received by the Tabulation Agent will be counted, notwithstanding any transfer of Existing Notes to which such Consents relate or any beneficial interest therein, unless the Tabulation Agent receives from a Holder at any time prior to the Expiration Date, a properly completed and duly executed notice of revocation or a changed Consent bearing a date later than the date of the prior Consent. Until the Expiration Date, a Consent to such Proposed Amendments by a Holder of Existing Notes shall bind the Holder and every subsequent Holder of such Existing Notes or portion of such Existing Notes that evidences the same debt as the consenting Holder's Existing Notes, even if a notation of the Consent is not made on any such Existing Notes. However, as stated above, any such Holder (or a subsequent Holder which has received a proxy) may revoke the Consent as to an Existing Note or portion of an Existing Note if the Tabulation Agent receives notice of revocation before the Expiration Date. Therefore, a transfer of Existing Notes after the Record Date must be accompanied by a duly executed proxy if the subsequent transferee is to have revocation rights. 24 EFFECTIVE DATE OF THE PROPOSED AMENDMENTS The Company anticipates that the Company and the Trustee will execute the First Supplemental Indenture upon consummation of the Offering. Holders will not receive Consent Payments if the Proposed Amendments do not become operative. CONDITIONS The consummation of the Consent Solicitation (including the payment of Consent Payments in respect thereof) is conditioned on (i) there being received by the Tabulation Agent (and not revoked), prior to the Expiration Date, the Requisite Consents, (ii) the execution and delivery of the First Supplemental Indenture, (iii) the consummation of the Offering, (iv) the closing of the Mercer Acquisition and (v) the absence of any existing or proposed law or regulation which would, and the absence of any injunction or action or other proceeding (pending or threatened) which (in the case of any action or proceeding, if adversely determined) would, make unlawful or invalid or enjoin or delay the implementation of the Proposed Amendments, the entering into of the First Supplemental Indenture or the payment of any Consent Payments or question the legality or validity of any thereof. SOLICITATION AGENT, INFORMATION AGENT AND TABULATION AGENT The Company has retained NationsBanc Montgomery to serve as its Solicitation Agent, D.F. King & Co., Inc. to serve as its Information Agent and United States Trust Company of New York to serve as its Tabulation Agent in connection with the Solicitation. NationsBanc Montgomery has not been retained to render an opinion as to the fairness of the Solicitation. The Company has agreed to reimburse NationsBanc Montgomery for its out-of-pocket expenses, including the fees and expenses of its counsel, and will indemnify NationsBanc Montgomery against certain liabilities and expenses. At any time, the Solicitation Agent may trade the Existing Notes and the New Notes for its own account or for the accounts or for the accounts of customers and, accordingly, may have a long or short position in the Existing Notes and the New Notes. The Solicitation Agent and its affiliates have provided in the past, and are currently providing, other investment banking and/or financial advisory services to the Company. NationsBanc Montgomery is also the Initial Purchaser of the New Notes. See "Alternative Financing." Each of the Solicitation Agent, Tabulation Agent and Information Agent will receive a fee from the Company for serving in such capacities. THE COMPANY HAS NOT AUTHORIZED ANY PERSON (INCLUDING THE INFORMATION AGENT) TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS SOLICITATION OF CONSENTS OTHER THAN AS SET FORTH HEREIN AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. Requests for assistance in filling out and delivering Consents or for additional copies of this Consent Solicitation Statement or the Consent Letter may be directed to the Information 25 Agent at its address and telephone number set forth on the back cover of this Consent Solicitation Statement. FEES AND EXPENSES The Company will bear the costs of the Solicitation, including the fees and expenses of the Solicitation Agent, the Tabulation Agent and the Information Agent. The Company will pay the Trustee under the Original Indenture reasonable and customary compensation for its services in connection with the Solicitation, plus reimbursement for expenses. Brokers, dealers, commercial banks, trust companies and other nominees will be reimbursed by the Tabulation Agent, by application of funds provided by the Company, for customary mailing and handling expenses incurred by them in forwarding material to their customers. All other fees and expenses attributable to the Solicitation, other than expenses incurred by Holders of Existing Notes, will be paid by the Company. 26 CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES GENERAL The following discussion summarizes certain United States Federal income tax consequences to Holders resulting from the Solicitation. This summary is based on the Internal Revenue Code of 1986, as amended (the "Code"), existing and proposed Treasury regulations, administrative pronouncements and judicial decisions currently in effect, all of which are subject to change, possibly on a retroactive basis. The discussion below does not purport to deal with all aspects of United States Federal income taxation that may be relevant to particular investors in light of their personal investment circumstances, nor does it discuss the application of the United States Federal income tax laws to persons or entities subject to special treatment under the Code (for example, dealers in securities, banks, insurance companies, regulated investment companies, S corporations, nonresident aliens, foreign corporations and tax-exempt entities), nor does it address any aspect of gift, estate, state, local or foreign taxation. Holders should consult their own tax advisers regarding the tax consequences of the Solicitation. TREATMENT OF HOLDERS GENERALLY Regulations promulgated pursuant to Section 1001 of the Code provide rules for determining whether modifications to a debt instrument are significant and will result in a deemed exchange of the original debt instrument for a "new" debt instrument. Pursuant to the regulations, a consent payment generally is treated as increasing the yield of the debt instrument and an increase in yield is generally treated as causing a deemed exchange of the debt instrument unless the increase in yield falls within a prescribed "safe harbor" amount. The Consent Payments will satisfy the safe harbor in the regulations, and accordingly, the payment of the Consent Payment will not result in a deemed exchange of the Existing Notes held by consenting Holders for federal income tax purposes. Accordingly, a Holder will not recognize gain or loss as a result of the implementation of the Proposed Amendments, regardless of whether or not such Holder receives a Consent Payment, but consenting Holders receiving Consent Payments will recognize ordinary income upon receipt of such payment as discussed below. THE CONSENT PAYMENT There is no authority directly on point concerning the United States federal income tax consequences of receipt of the Consent Payment. In the absence of an administrative or judicial decision to the contrary with respect to such payments, the Company intends to treat Consent Payments paid to consenting Holders as a separate fee for consenting to the Proposed Amendments which constitutes ordinary income to such Holder for United States Federal income tax purposes. 27 PROPOSED AMENDMENTS The federal income tax consequences of the adoption of the Proposed Amendments depend upon whether the Proposed Amendments result in a deemed exchange of the Notes for new Notes under Section 1001 of the Code. The Treasury Regulations provide that a modification that adds, deletes or alters customary accounting or financial covenants is not a significant modification and therefore does not result in a deemed exchange. The Company believes that the adoption of the Proposed Amendments merely alters the financial covenants contained in the Notes and therefore should not result in a deemed exchange for federal income tax purposes. Accordingly, holders should not recognize any gain or loss as a result of the proposed amendments becoming effective. However, receipt of the consent payments will result in taxable income to the holders as described above. BACKUP WITHHOLDING Under United States Federal income tax law, in certain circumstances, a consenting Holder may be subject to backup withholding at the rate of 31% with respect to the Consent Payment received by such Holder, unless such consenting Holder (i) is a corporation or is otherwise exempt and, when required, demonstrates this fact, or (ii) provides a correct taxpayer identification number, certifies as to no loss of backup withholding and otherwise complies with the applicable requirements of the backup withholding rules. 28 SCHEDULE A MARK-UP OF ORIGINAL INDENTURE PROVISIONS [Note: Additions to Original Indenture are bold underscored; deletions are marked by strike-through notation] SECTION 101. DEFINITIONS. <#>"Additional New Notes" means up to $20.0 million in aggregate principal amount of New Notes having identical terms to the New Notes that, subject to compliance with Article 10 of the New Indenture, may be issued after the New Closing Date pursuant to the New Indenture. "Mercer Acquisition" means the acquisition by the Company of all of the outstanding capital stock of Mercer Products Company, Inc. pursuant to a Stock Purchase Agreement dated March 5, 1998 among the Company, Mercer and Sovereign Specialty Chemicals, Inc. "New Closing Date" means the date on which the New Notes are originally issued under the New Indenture. "New Indenture" means the indenture entered into on the New Closing Date pursuant to which the New Notes are issued, as it may be supplemented or amended from time to time. "New Notes" means Floating Interest Rate Senior Notes due August 15, 2007 to be issued in connection with the Mercer Acquisition and shall include (i) any notes having substantially identical terms issued in exchange for such New Notes or any Additional New Notes pursuant to a registration rights agreement and (ii) any Additional New Notes that may be issued pursuant to the New Indenture. "New Notes Guarantee" means any guarantee of the New Notes issued by a Restricted Subsidiary of the Company pursuant to the New Indenture. "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, 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 A-1 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 <#>in any Person, a majority of the equity ownership and Voting Stock of which is owned, directly or indirectly, by the Company and/or one or more of the Subsidiaries of the Company, that do not exceed $7.5 million in the aggregate at any time outstanding. "Series A Preferred Stock" means, <#>collectively, the Series A Cumulative Redeemable Preferred Stock of the Company, <*>par value $0.01 per share. <#>no par value and the Series B Cumulative Redeemable Preferred Stock of the Company, no par value, in each case issued on the Closing Date. A-2 <#>"Series C Preferred Stock" means the Convertible Preferred Stock of the Company issued on the New Closing Date. SECTION 1010. LIMITATION ON INDEBTEDNESS OR 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. 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 A-3 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 <#>$25.0 million or (y) the 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 <#>(i) the Notes (other than the Additional Notes) <*>and<#>, (ii) the Note Guarantees (including any Note Guarantees issued pursuant to Section 1021<*>); <#>of this Indenture), (iii) the New Notes (other than any Additional New Notes) and (iv) the New Notes Guarantees (including any New Notes Guarantees issued pursuant to Section 1021 of the New Indenture); (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 A-4 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 Indebtedness under clauses (A) and (B) does not exceed <*>$7,500,000 <#>$10.0 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 <#>$15.0 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. A-5 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 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 A-6 (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. <#>For purposes of this "Limitation on Restricted Payments" covenant, the accrual of dividends on the Series C Preferred Stock shall not be treated as a Restricted Payment. 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 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 A-7 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 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. A-8 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. 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 A-9 $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; (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<#>, the offering of the New Notes and the Mercer Acquisition; 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. A-10 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 <#>aggregate principal amount of the outstanding Indebtedness permitted by <*>clause <#>clauses (i) <#>and (viii) 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 <#>(a) the Notes or any Note Guarantee <#>or (b) any New Notes or any New Notes Guarantees, provided that both the Notes or any related Note Guarantee and the New Notes or any related New Notes Guarantee are secured equally and ratably with the obligation or liability secured by such Lien; (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; A-11 (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; (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. A-12 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 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 <#>New Notes, PRO RATA in proportion to the respective principal amounts outstanding of the Notes and New Notes, the maximum principal amount (expressed as a multiple of $1,000) of Notes and <*>Additional <#>New Notes that may be purchased <*>with <#>out of 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 <#>New 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 <#>New Notes validly tendered and not withdrawn by holders thereof exceeds the Excess A-13 Proceeds, the Notes and <*>Additional <#>New 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. (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: A-14 (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. A-15 BURKE INDUSTRIES, INC. SOLICITATION OF CONSENTS TO INDENTURE AMENDMENTS In order to give a Consent, a Holder should mail, hand deliver, send by overnight courier or facsimile (confirmed by physical delivery) a properly completed and duly executed Consent Letter, and any other required document, to the Tabulation Agent at its address set forth below. Any questions or requests for assistance or for additional copies of this Consent Solicitation Statement or related documents may be directed to the Information Agent at one of its telephone numbers set forth below. A Holder may also contact the Solicitation Agent at its telephone number set forth below or such Holder's broker, dealer, commercial bank, trust company or other nominee for assistance concerning the Consent Solicitation. The Tabulation Agent for the Solicitation is: UNITED STATES TRUST COMPANY OF NEW YORK By Overnight Courier: By Hand: By Registered or Certified Mail: United States Trust Company United States Trust Company United States Trust Company of New York of New York of New York 770 Broadway, 13th Floor 111 Broadway, Lower Level P.O. Box 844, Cooper Station New York, New York 10003 New York, New York 10006 New York, New York 10276-0844 Attn: Corporate Trust Services Attn: Corporate Trust Services Attn: Corporate Trust Services By Facsimile Transmission (212) 420-6152 Confirm by Telephone (800) 548-6565
The Information Agent for the Solicitation is: D.F. KING & CO., INC. 77 Water Street, 20th Floor New York, New York 10005 Banks and Brokers Call Collect (212) 269-5550 All Others Call Toll-Free (800) 859-8508 The Solicitation Agent for the Solicitation is: NATIONSBANC MONTGOMERY SECURITIES LLC 100 North Tryon Street, 7th Floor Charlotte, North Carolina 28255 Attn: Liability Management Group (704) 388-4807 or Toll-Free (888) 292-0070 EX-10.16 16 EXHIBIT 10.16 BURKE INDUSTRIES, INC. CONSENT TO AMENDMENTS TO INDENTURE With Respect To 10% SENIOR NOTES DUE 2007 -------------------- Pursuant to the Consent Solicitation Statement dated March 30, 1998 THIS FULLY COMPLETED AND EXECUTED CONSENT FORM SHOULD BE HAND DELIVERED, SENT BY OVERNIGHT COURIER, OR FACSIMILE (FOLLOWED BY DELIVERY BY HAND OR OVERNIGHT COURIER) AS FOLLOWS: - ------------------------------------------------------------------------------- THE SOLICITATION WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON APRIL 10, 1998 (AS SUCH TIME MAY BE EXTENDED BY THE COMPANY, THE "EXPIRATION DATE"). CONSENTS MAY BE REVOKED IN ACCORDANCE WITH THE PROCEDURES SET FORTH IN THE ACCOMPANYING CONSENT SOLICITATION STATEMENT AND IN THIS CONSENT FORM AT ANY TIME UP TO THE EXPIRATION DATE, BUT WILL BECOME IRREVOCABLE THEREAFTER. - ------------------------------------------------------------------------------- The Tabulation Agent for the Solicitation is: UNITED STATES TRUST COMPANY OF NEW YORK By Overnight Courier: By Hand: By Registered or Certified Mail: United States Trust Company United States Trust Company United States Trust Company of New York of New York of New York 770 Broadway, 13th Floor 111 Broadway, Lower Level P.O. Box 844, Cooper Station New York, New York 10003 New York, New York 10006 New York, New York 10276-0844 Attn: Corporate Trust Attn: Corporate Trust Services Attn: Corporate Trust Services Services By Facsimile Transmission (212) 420-6152 Confirm by Telephone (800) 548-6565
DELIVERY OF THE INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR TRANSMISSION OF THIS CONSENT FORM VIA FACSIMILE TRANSMISSION OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY. THE INSTRUCTIONS ACCOMPANYING THIS CONSENT FORM SHOULD BE READ CAREFULLY BEFORE THIS CONSENT FORM IS COMPLETED. INSTRUCTIONS MAY BE FOUND AT THE END OF THE ATTACHED EXHIBIT A FOR CONVENIENCE. The undersigned is a Holder (as defined in the Consent Solicitation Statement) of 10% Senior Notes Due 2007 (the "Existing Notes") of Burke Industries, Inc. (the "COMPANY") issued under the Indenture dated as of August 20, 1997 (the "ORIGINAL INDENTURE") between the Company, the Subsidiary Guarantors and United States Trust Company of New York (the "TRUSTEE"). - ------------------------------------------------------------------------------- As a Holder of such Existing Notes, the undersigned hereby CONSENTS / / DOES NOT CONSENT / / - ------------------------------------------------------------------------------- with respect to each of the proposed amendments (the "PROPOSED AMENDMENTS") to be made to the Original Indenture under which such Holder holds Existing Notes, which Proposed Amendments are described in the Company's Consent Solicitation Statement of even date herewith (the "CONSENT SOLICITATION STATEMENT"). IF NONE OF THE BOXES IS CHECKED, BUT THIS FORM OF CONSENT IS OTHERWISE PROPERLY COMPLETED AND SIGNED, THE COMPANY WILL DEEM THE HOLDER TO HAVE CONSENTED TO THE PROPOSED AMENDMENTS. BY EXECUTION HEREOF, THE UNDERSIGNED ACKNOWLEDGES RECEIPT OF THE CONSENT SOLICITATION STATEMENT AND THE COMPANY'S PRELIMINARY OFFERING MEMORANDUM DATED MARCH 30, 1998. Holders must consent to all the Proposed Amendments or none of them. All capitalized terms used herein without definition shall have the meanings ascribed to them in the Consent Solicitation Statement. Following the Expiration Date, assuming the Requisite Consents have been obtained, the Offering has been consummated and the Mercer Acquisition has closed, the Company will deliver a certification to the Trustee stating that the Requisite Consents have been received and accepted. Thereafter, the Company and the Trustee shall execute the First Supplemental Indenture. Upon the Company's and the Trustee's execution of the First Supplemental Indenture (the "Effective Date"), the Proposed Amendments will be binding on all Holders of the outstanding Existing Notes, including non-consenting Holders and subsequent holders. Unless otherwise specified by the undersigned, this Consent form relates to all Existing Notes of which the undersigned is the Holder. If this form relates to less than all of the Existing Notes as to which the undersigned is a Holder, the specific Existing Notes to which this Consent relates shall be identified on the table attached hereto in Exhibit A. If no such identification is made, this Consent form shall relate to all Existing Notes of which the undersigned is Holder. A consent hereby given, if effective, will be binding upon the Holder of the Existing Notes who gives such consent and upon any subsequent transferee or transferees of such Existing Notes, unless the Tabulation Agent receives on or before the Expiration Date from a Holder or subsequent transferee a properly completed and duly executed notice of revocation or changed Consent bearing a date no later than the Expiration Date. THE UNDERSIGNED, BY COMPLETING THE BOX ENTITLED "DESCRIPTION OF EXISTING NOTES" IN THE ATTACHED EXHIBIT "A" AND BY SIGNING THIS CONSENT FORM, MAY BE DEEMED TO HAVE CONSENTED TO THE PROPOSED AMENDMENTS WITH RESPECT TO SUCH EXISTING NOTES AND TO HAVE MADE CERTAIN REPRESENTATIONS AS DESCRIBED HEREIN AND IN THE CONSENT SOLICITATION STATEMENT. ONLY RECORD HOLDERS OF EXISTING NOTES AND PERSONS AUTHORIZED TO SIGN BY RECORD HOLDERS AS EVIDENCED BY THE EXECUTED FORM OF PROXY IN THE ATTACHED EXHIBIT "A" ARE ENTITLED TO CONSENT TO THE PROPOSED AMENDMENTS. IF THE UNDERSIGNED IS NOT THE RECORD HOLDER OF THE EXISTING NOTES, THE UNDERSIGNED MUST HAVE THE RECORD HOLDER SIGN THE FORM OF PROXY APPEARING IN THE ATTACHED EXHIBIT "A." THE SOLICITATIONS ARE NOT BEING MADE TO, NOR WILL CONSENT FORMS BE ACCEPTED FROM OR ON BEHALF OF, HOLDERS IN ANY JURISDICTION IN WHICH THE MAKING OF THE SOLICITATION OR THE ACCEPTANCE OF SUCH CONSENT FORMS WOULD NOT BE IN COMPLIANCE WITH THE LAWS OF SUCH JURISDICTION. 2 PLEASE READ THIS ENTIRE CONSENT FORM CAREFULLY BEFORE SIGNING BELOW Holders who wish to consent to the Proposed Amendments must complete the box below entitled "DESCRIPTION OF EXISTING NOTES" contained in Exhibit "A" hereto and sign below. If the "Aggregate Principal Amount of Existing Notes as to which Consent is Given" in column (4) of such box is left blank, the Holder delivering this Consent form may be deemed to have given its Consent as to all Existing Notes owned by such Holder. Consents must be received by the Tabulation Agent, as specified above, before 5:00 p.m., New York City time, on April 10, 1998, unless such date is extended by the Company, in its sole discretion. - ------------------------------------------------------------------------------- TO CONSENT TO PROPOSED AMENDMENTS, PLEASE SIGN BELOW (See Instructions 1, 2 and 3) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Signature(s) of Holder(s) Date PLEASE TYPE OR PRINT INFORMATION BELOW Name(s): ----------------------------------------------------------------- Capacity: ----------------------------------------------------------------- Address: ----------------------------------------------------------------- (Including Zip Code) Area Code and Telephone Number: ---------------------------------------------------- SIGNATURE GUARANTEE (If required: see Instruction 3) Signature(s) Guaranteed by an Eligible Institution: ---------------------------------------------------- (Authorized Signature) ---------------------------------------------------- (Title) ---------------------------------------------------- (Name of Eligible Institution) Dated: ---------------------------------------------------------------------- - ------------------------------------------------------------------------------- IMPORTANT--READ CAREFULLY Consents by Holder(s) of Existing Notes must be executed in exactly the same name(s) as the Existing Notes are held. If Existing Notes to which a Consent relates are held by two or more joint Holders, all such Holders must sign the Consent. If a signature is by a trustee, executor, administrator, guardian, attorney-in-fact, officer of a corporation or other Holder acting in a fiduciary or representative capacity, such person should so indicate when signing and must submit proper evidence to the Information Agent (satisfactory to the Company) of such person's authority to so act. If Existing Notes are held in different names, separate Consents must be executed covering each name. Except in the case of DTC Participants, who are expected to sign pursuant to an omnibus proxy delivered by DTC, if a Consent is executed by a person other than the Record Holder(s), it must be accompanied by a proxy in substantially the form included herewith, duly executed by such Record Holder(s), with the signature guaranteed by 3 an Eligible Institution, confirming the right of the signatory to execute the Consent on behalf of such Record Holder(s). BACKUP WITHHOLDING INFORMATION Under U.S. Federal income tax law, in certain circumstances, a consenting Holder may be subject to backup withholding at the rate of 31% of any Consent Payment made to the Holder, unless the consenting Holder (i) is a corporation or is otherwise exempt and, when required, demonstrates this fact, or (ii) provides a correct taxpayer identification number, certifies as to no loss of exemption from backup withholding and otherwise complies with the applicable requirements of the backup withholding rules. Backup withholding is not an additional tax. Rather, the tax liability of persons subject to backup withholding will be reduced by the amount of tax withheld. If withholding results in an overpayment of taxes, a refund may be obtained from the Internal Revenue Service. A Holder whose Consent is accepted and who is not an exempt recipient must provide the Company with his or her correct taxpayer identification number ("TIN") on Substitute Form W-9 below, or if such Holder is an exempt foreign person, submit a substitute Form W-8 below in order to avoid backup withholding. If such Holder is an individual, the taxpayer identification number generally is his or her social security number. If the Existing Notes are in more than one name or are not in the name of the actual owner, consult the enclosed Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9 for additional guidelines on which number to report. In addition, if the Company is not provided with the correct taxpayer information, the Holder may be subject to a $50 penalty imposed by the Internal Revenue Service. See the enclosed Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9 for additional instructions. Holders who are exempt recipients (including corporations) are not subject to these backup withholding and reporting requirements. 4 PAYOR'S NAME: BURKE INDUSTRIES, INC. (see instruction 5) - -------------------------------------------------------------------------------- Business name: - -------------------------------------------------------------------------------- Please check appropriate box: / / Individual/Sole / / Corporation / / Partnership / / Other proprietor - -------------------------------------------------------------------------------- SUBSTITUTE PART 1 - PLEASE PROVIDE YOUR TIN IN Social Security FORM W-9 THE BOX AT RIGHT AND CERTIFY BY Number or Employee SIGNING AND DATING BELOW Identification Number -------------------------------------------------------------- Department of PART 2 - Certification--Under the Treasury Penalties of Perjury, I certify that: PART 3 - Internal Revenue Service (1) The number shown on this form is my correct Taxpayer Identification Number (or I am waiting for a number to be issued to me). Payor's Request (2) I am not subject to backup Awaiting TIN for Taxpayer withholding because (a) I am Identification exempt from backup withholding or Number ("TIN") (b) I have not been notified by the Internal Revenue Service / / ("IRS") that I am subject to backup withholding as a result of failure to report all interest or dividends, or (c) the IRS has notified me that I am not longer subject to backup withholding. -------------------------------------------------------------- Certification Instructions - You must cross out item (2) in Part 2 above if you have been notified by the IRS that you are subject to backup withholding because of underreporting interest or dividends on your tax return. However, if after being notified by the IRS that you were subject to backup withholding you received another notification from the IRS stating that you are no longer subject to backup withholding do not cross out item (2). SIGNATURE: Date 1998 ------------------------ ---------------- - -------------------------------------------------------------------------------- NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP WITHHOLDING OF 31% OF ANY CONSENT PAYMENTS MADE TO YOU PURSUANT TO THE SOLICITATION. PLEASE REVIEW THE ENCLOSED GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 FOR ADDITIONAL DETAILS. YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE BOX IN PART 3 OF THE SUBSTITUTE FORM W-9. - -------------------------------------------------------------------------------- CERTIFICATE OF PERSON (AWAITING) TAXPAYER IDENTIFICATION NUMBER I certify under penalties of perjury that a taxpayer identification number has not been issued to me and either (a) are mailed or delivered an application to receive a taxpayer identification number to the appropriate Internal Revenue Service Center or Social Security Administration Office or (b) I intend to mail or deliver an application in the near future. I understand that if I do not provide a taxpayer identification number within sixty (60) days, 31% of all reportable payments made to me thereafter will be withheld until I provide a number. SIGNATURE: Date 1998 ------------------------ ---------------- - -------------------------------------------------------------------------------- 5 - -------------------------------------------------------------------------------- Name: --------------------------------------------------------- SUBSTITUTE Address: --------------------------------------------------------- FORM W-8 TIN (if any) --------------------------------------------------------- Department of the I (we) certify under penalties of perjury that: Treasury Internal Revenue Service 1. I am (we are) not a citizen of the United States and I am neither a lawful Non-U.S. Persons permanent resident of the United States Only nor have I been, nor do I reasonably expect to be present in the United States for a period aggregating 183 or Taxpayer more days during the calendar year; or Identification Number ("TIN") 2. I am (we are) a foreign corporation, partnership, estate or trust. --------------------------------------------------------- Signature: Date: -------------------- ------------- Signature: Date: -------------------- ------------- --------------------------------------------------------- Accepted by: Signature: Date: -------------------- ------------- Printed Name: Title: ----------------- ------------ - -------------------------------------------------------------------------------- NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP WITHHOLDING OF 31% OF ANY CONSENT PAYMENTS MADE TO YOU. PLEASE REVIEW THE ENCLOSED GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 FOR ADDITIONAL DETAILS. 6 EXHIBIT A - -------------------------------------------------------------------------------- DESCRIPTION OF EXISTING NOTES - -------------------------------------------------------------------------------- Name(s) and Address(es) of Certificate(s) as to which Consent is Given Record Holder(s) (Attach additional list, if necessary) or Cede & Co. Participant(s) - -------------------------------------------------------------------------------- Aggregate Principal Amount of Existing Notes as to Aggregate Principal which Consent Amount of Existing is Given* Certificate or Notes (Must be an Cede & Co. Represented by integral Account Certificate(s) or multiple Number(s) Held in Account(s) of $1,000) ---------------------------------------------------------- ---------------------------------------------------------- ---------------------------------------------------------- ---------------------------------------------------------- ---------------------------------------------------------- - -------------------------------------------------------------------------------- * If the Consent form relates to less than the aggregate principal amount of Existing Notes registered in the name of the Record Holder(s), or held by Cede & Co. for the account of the Participant(s) named above, list the certificate or account numbers and principal amounts of Existing Notes to which this Consent form relates. Otherwise, this Consent form may be deemed to relate to the aggregate principal amount of Existing Notes registered in the name of, or held by Cede & Co. for the account of, such Record Holder(s) or Participant(s). - -------------------------------------------------------------------------------- 7 FORM OF PROXY WITH RESPECT TO THE SOLICITATION The undersigned hereby irrevocably appoints __________________________________ as attorney and proxy of the undersigned, with full power of substitution, to execute and deliver the form of Consent on which this form of proxy is set forth with respect to the Existing Notes in accordance with the terms of the Solicitation, with all the power of the undersigned would possess if consenting personally. THIS PROXY IS IRREVOCABLE AND IS COUPLED WITH AN INTEREST AND SHALL EXPIRE ON THE DATE ON WHICH THE PROPOSED AMENDMENTS BECOME EFFECTIVE. The aggregate principal amount and serial numbers of Existing Notes as to which Proxy is given are set forth below. If such information is not provided in the boxes below, this Proxy will be deemed to be given as to the total principal amount of Existing Notes held by the Holder. - -------------------------------------------------------------------------------- Aggregate Principal Amount of Existing Note(s) Certificate Number(s) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 8 FORM OF PROXY IMPORTANT--READ CAREFULLY To authorize a proxy this proxy must be executed by the Holder(s) of the Existing Notes in exactly the same name(s) as the Existing Notes are held. If Existing Notes to which this proxy relates are held by two or more joint holders, all such holders must sign this proxy. If a signature is by a trustee, administrator, guardian, attorney-in-fact, officer of a corporation or other Holder acting in a fiduciary or representative capacity, such person should so indicate when signing and submit to the Information Agent appropriate evidence (satisfactory to the Company) of such person's authority so to act. - -------------------------------------------------------------------------------- TO CONSENT TO PROPOSED AMENDMENTS, PLEASE SIGN BELOW (See Instructions 1, 2, and 3) - -- > X -------------------------------------------------------------------------- - -- > X -------------------------------------------------------------------------- Signature(s) of Holder(s) Date PLEASE TYPE OR PRINT INFORMATION BELOW Name(s): ----------------------------------------------------------------- Capacity: ---------------------------------------------------------------- Address: ----------------------------------------------------------------- (Including Zip Code) Area Code and Telephone Number: -------------------------------------------------------- SIGNATURE GUARANTEE (If required: see Instruction 3) Signature(s) Guaranteed by an Eligible Institution: --------------------------------------------------------- (Authorized Signature) --------------------------------------------------------- (Title) --------------------------------------------------------- (Name of Eligible Institution) Dated: ------------------------------------------------------------------ - -------------------------------------------------------------------------------- 9 - -------------------------------------------------------------------------------- SPECIAL PAYMENT INSTRUCTIONS (See Instructions 3 and 4) To be completed ONLY if checks for the Consent Payment are to be issued in the name of someone other than the person who submits this Consent form. Issue to: Name: ---------------------------------------------------------------------- (Please Print) Address: ---------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (Social Security Number or Employer Identification Number) A correct taxpayer identification number must also be provided on the Substitute Form W-9 included herein. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SPECIAL PAYMENT INSTRUCTIONS (See Instructions 3 and 4) To be completed ONLY if checks for the Consent Payment are to be sent to someone other than the person who submits this Consent form or to an address other than that shown in the box entitled "DESCRIPTION OF EXISTING NOTES" above in this Consent form. Mail to: Name: ---------------------------------------------------------------------- (Please Print) Address: ---------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- INSTRUCTIONS TO FORM OF CONSENT 1. DELIVERY OF CONSENT FORM. A properly completed form of Consent, including a valid and unrevoked Consent, or a facsimile thereof duly executed by the Holder with any required signature guarantee(s), and any other documents required by this Consent form, must be received by the Tabulation Agent at its address set forth herein on or prior to the Expiration Date. The method of delivery of this Consent form and any other required documents is at the election and risk of the consenting Holder, and except as otherwise provided below, the delivery will be deemed made when actually received by the Tabulation Agent. If such delivery is by mail, it is recommended that Holders use registered mail with return receipt requested. In all cases, sufficient time should be allowed to assure timely delivery. NO DOCUMENTS SHOULD BE SENT TO THE COMPANY, THE SOLICITATION AGENT, THE INFORMATION AGENT OR THE TRUSTEE. If Existing Notes are held in different names, separate Consents must be executed covering each name. Except in the case of DTC Participants, who are expected to sign pursuant to an omnibus proxy delivered by DTC, if a Consent is executed by a person other than the Record Holder(s), it must be accompanied by a proxy in substantially the form included herewith, duly executed by such Record Holder(s), with the signature guaranteed by an Eligible Institution, confirming the right of the signatory to execute the Consent on behalf of such Record Holder(s). All questions as to the validity, form, eligibility (including time of receipt) and acceptance and revocations of Consents will be resolved by the Company in its sole discretion, which resolution shall be final and binding. The Company reserves the right to reject any and all Consents not validly given or any Consents the Company's acceptance of which could, in the opinion of the Company or its counsel, be unlawful. The Company also reserves the right to waive any defects or irregularities or conditions of the Solicitations. The interpretation of the terms and conditions of the Solicitations (including the Consents and the instructions thereto) by the Company shall be final and binding on all parties. Unless waived, any defects or irregularities in connection with deliveries of the Consents must be cured within such time as the Company shall determine. Neither the Company, the Tabulation Agent nor any other person shall be under any duty to give notification of defects or irregularities with respect to deliveries of Consents, nor shall any of them incur any liability for failure to give such notification. 2. CONSENT TO PROPOSED AMENDMENTS; REVOCATION OF CONSENTS. This form of Consent and the Consent Solicitation Statement are being sent to all persons who are Record Holders. Only Holders will be eligible to consent to the Proposed Amendment and be entitled to receive or direct receipt of Consent Payments. The term "Record Holder" means any person who is a holder of record of Existing Notes on the close of business on the Record Date. The term "Holder" means (i) any Record Holder or (ii) any other person who has obtained a proxy, substantially in the form included with this Consent, which authorizes such other person (or any person claiming title by or through such other person) to vote Existing Notes on behalf of such Record Holder. The Company anticipates that DTC, as nominee Holder of the Existing Notes, will execute an omnibus proxy in favor of the DTC Participants which will authorize each DTC Participant to vote the Existing Notes owned by such participant and held in DTC's name. Except in the case of DTC Participants who are expected to sign pursuant to an omnibus proxy delivered by DTC, if a Consent is executed by a person other than the Record Holder(s), it must be accompanied by a proxy in substantially the form included herewith, duly executed by such Record Holder(s), with signature guaranteed by an Eligible Institution, confirming the right of the signatory to execute the Consent on behalf of such Record Holder(s). Consents by DTC Participants whose Existing Notes were registered in the name of Cede & Co. as of the Record Date should be signed in the manner in which their names appear on the position listing of Cede & Co. with respect to the Existing Notes. The Solicitation will expire at 5:00 P.M., New York time, on April 10, 1998, unless extended by the Company. Consents with respect to the Existing Notes may be revoked by a Holder at any time prior to the Expiration Date. CONSENTS SHOULD BE SENT TO THE TABULATION AGENT, NOT TO THE COMPANY, THE SOLICITATION AGENT, THE INFORMATION AGENT OR TRUSTEE. IN NO EVENT SHOULD A RECORD HOLDER OF THE EXISTING NOTES TENDER OR DELIVER ANY EXISTING NOTES. All properly completed and executed Consents received by the Tabulation Agent and accepted by the Company will be counted, notwithstanding any transfer of Existing Notes to which such Consents relate, unless the Tabulation Agent receives from a Holder on or before the Expiration Date a properly completed and duly executed notice of revocation or a changed Consent bearing a date no later than the Expiration Date. Until the Expiration Date, a Consent to the Proposed Amendments by a Holder of an Existing Note shall bind the Holder and every subsequent holder of an Existing Note or portion of an Existing Note that evidences the same debt as the consenting Holder's Existing Note, even if notation of the Consent is made on any such Existing Note. However, any such Holder (or a subsequent holder which has received a proxy) may revoke the Consent as to an Existing Note or portion of an Existing Note if the Tabulation Agent receives notice of revocation on or before the Expiration Date. Therefore, a transfer of Existing Notes after the Record Date must be accompanied by a duly executed proxy if the subsequent transferee is to have revocation rights. Notices of revocation given by (i) any Holder must be completed, signed, dated and delivered to the Tabulation Agent (accompanied by any proxy or other required documents) in the same manner as would be required for a Consent by such Holder and (ii) any subsequent holder (other than a Holder) must be accompanied by information sufficient to enable the Company and the Tabulation Agent to identify the Existing Notes covered by the Consent which such holder desires to revoke and determine such holder's rights to revoke the same. 3. SIGNATURES ON FORM OF CONSENT; GUARANTEES OF SIGNATURE. Consents by Holder(s) must be executed in exactly the same name(s) as the Existing Notes are held. If Existing Notes to which a Consent relates are held by two or more joint Holders, all such Holders must sign the Consent. If a signature is by a trustee, executor, administrator, guardian, attorney-in-fact, officer of a corporation or other Holder acting in a fiduciary or representative capacity, such person should so indicate when signing and must submit proper evidence to the Tabulation Agent (satisfactory to the Company) of such person's authority so to act. If Existing Notes are held in different names, separate Consents must be executed covering each name. Except in the case of DTC Participants, if a Consent is executed by a person other than Record Holder(s), it must be accompanied by a proxy in substantially the form included herewith, duly executed by such Record Holder(s), with the signature guaranteed by an Eligible Institution, confirming the right of the signatory to execute the Consent on behalf of such Record Holder(s). Consents by DTC Participants whose Existing Notes were registered in the name of Cede & Co. as of the Record Date should be signed in the manner in which their names appear on the registration listing of Cede & Co. with respect to the Existing Notes. 4. SPECIAL PAYMENT AND DELIVERY INSTRUCTIONS. Consenting Holders should indicate in the applicable box the name and address to which the Consent Payment is to be issued or sent, if different from the name and address of the person submitting this Consent form. In the case of issuance or payment in a different name, the TIN of the person named must also be indicated and a Substitute Form W-9 or Form W-8 for such recipient must also be completed. See Instructions 5. If no such instructions are given, the Consent Payment will be sent to the name and address of the person signing this Consent form. 5. SUBSTITUTE FORM W-9 (OR FORM W-8). The consenting Holder is required to provide the Trustee (as payor) with his or her correct TIN on the Substitute Form W-9 or Substitute W-8, as applicable, included in this Consent form. In the case of a consenting Holder who has completed the box entitled "SPECIAL PAYMENT INSTRUCTIONS" above, however, the correct TIN on the Substitute Form W-9 or Substitute Form W-8, as applicable, should be provided for the recipient of the Consent Payment delivered pursuant to such instructions. Failure to provide the information on the Consent form will cause the Trustee to withhold 31% of any Consent 12 Payments made to the consenting Holder or such recipient, as the case may be, until such information is received. See "BACKUP WITHHOLDING INFORMATION" above. 6. EXPIRATION DATE; EXTENSIONS; AMENDMENT. The term "Expiration Date" means 5:00 p.m., New York time, on April 10, 1998, unless the Company, in its sole discretion, extends the period during which the Solicitation is open, in which case the term "Expiration Date" means the latest date and time to which the Solicitation is extended. In order to extend an Expiration Date, the Company will notify the Information Agent of any extension by oral or written notice and will make a public announcement thereof, each prior to 5:00 p.m., New York time, on the next business day after the previously scheduled Expiration Date. Such announcements may state that the Company is extending the Expiration Date of the Solicitation for a specified period of time or on a daily basis. The Company reserves the right (i) to extend the Solicitation or to terminate the Solicitation, and to accept Consents not previously accepted by giving oral or written notice of such delay, extension, termination or acceptance to the Information Agent or (ii) to amend the procedural terms of the Solicitation in any manner. If the Solicitation is amended in a manner determined by the Company to constitute an adverse change to the Holders, the Company will promptly disclose such amendment in a public announcement and the Company will extend the Solicitation for a period deemed by the Company to be adequate to permit the Holders to deliver or revoke their Consents. Without limiting the manner in which the Company may choose to make a public announcement of any extension, amendment or termination of the Solicitation, the Company shall have no obligation to publish, advertise or otherwise communicate any such public announcement other than by making a timely press release and complying with any applicable notice provisions of the Original Indenture. 7. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Questions with respect to the terms of the Solicitation or relating to the procedure for consenting, as well as requests for additional copies of the Consent Solicitation Statement and this Consent form, should be directed to the Information Agent. 13 EX-10.22 17 EXHIBIT 10.22 ELECTION FORM I. CONVERTIBLE PREFERRED STOCK OFFERING MEMORANDUM I acknowledge receipt of a copy of the Memorandum from David E. Worthington, dated April 1, 1998 (the "Memorandum"), on behalf of Burke Industries, Inc. (the "Company"). All terms used below which are defined in the Memorandum have the same meanings below. II. SUBSCRIPTION Subject to the terms and conditions hereof, I hereby offer and agree to purchase the number of shares of Convertible Preferred Stock of the Company issuable upon the investment of the amount set forth above my signature below. I acknowledge that if I elect not to purchase my maximum PRO RATA share of the Convertible Preferred Stock in the Preferred Stock Offering, JFLEI will purchase such remaining unsubscribed shares of the Convertible Preferred Stock. I agree that this Election Form is irrevocable. If the Preferred Stock Offering is, however, cancelled or withdrawn for any reason, the Company shall return to me the funds tendered with this Election Form (with any allocable interest). This Election Form may be accepted only by written acknowledgment by the Company as set forth below and no sale of Convertible Preferred Stock shall be deemed to have been made hereunder prior to such written acceptance. III. REPRESENTATIONS AND WARRANTIES I understand that the shares of the Convertible Preferred Stock have not been registered under the federal Securities Act of 1933, as amended (the "Securities Act") or registered or qualified under the securities or blue sky laws of any state and are being offered and sold in reliance upon an exemption from federal registration provided in Section 4(2) of the Securities Act (and Regulation D promulgated thereunder) and similar exemptions under state securities or blue sky laws. I hereby make the following agreements, representations, declarations, acknowledgments and warranties with the intent that they may be relied upon in determining the availability of such exemptions and my suitability as a purchaser of the Convertible Preferred Stock. (1) I am an "accredited investor" (as such term is defined in Rule 501 of Regulation D promulgated under the Securities Act) by reason of one of the following: (a) The undersigned is a bank as defined in Section 3(a)(2) of the Securities Act or any savings and loan association or other institution as defined in Section 3(a)(5)(A) of the Securities Act acting in its individual or fiduciary capacity; (b) The undersigned is a trust with total assets in excess of $5,000,000, not formed for the specific purpose of acquiring the Convertible Preferred Stock; (c) I am a director or executive officer of the Company; (d) I have an individual net worth, or a joint net worth with my spouse, in excess of $1,000,000; (e) I had an individual income in each of 1996 and 1997 in excess of $200,000 and reasonably anticipate that I will have income in excess of $200,000 in 1998; (f) I had a joint income with my spouse in excess of $300,000 in each of 1996 and 1997 and reasonably anticipate reaching the same joint income level with my spouse in 1998; (g) The undersigned is a broker or dealer registered pursuant to Section 15 of the Securities Exchange Act of 1934, as amended; (h) The undersigned is an insurance company as defined in Section Section 2(13) of the Securities Act; (i) The undersigned is an investment company registered under the Investment Company Act of 1940 or a business development company as defined in Section 2(a)(48) of the Securities Act; or (j) The undersigned is an entity (including a corporation or partnership) in which all of the equity owners individually are accredited investors as described above. All information which I have provided or will provide to the Company, including but not limited to my and, if applicable, my spouse's financial position and knowledge of financial and business matters, is true, correct and complete. I will promptly provide to the Company written notice 1 of any material changes in my financial position or, if applicable, that of my spouse that could affect my status as an "accredited investor," and such information will be true, correct and complete. I understand that the Company will rely in a material degree upon the representations contained herein. (2) I am a bona fide resident and domiciliary of the state included in the address set forth after my signature. (If the undersigned is a corporation, trust, partnership or other entity, the undersigned has its principal place of business at the address set forth after the undersigned's signature hereto and, except as may be otherwise indicated therein, was not organized for the specific purpose of acquiring the Convertible Preferred Stock.) (3) I have the full capacity, power and authority to execute and deliver this Election Form and to subscribe for and purchase the Convertible Preferred Stock. My purchase of the Convertible Preferred Stock and my execution and delivery of this Election Form have been authorized by all necessary action on my behalf. This Election Form is my legal, valid and binding obligations and is enforceable against me in accordance with its terms. (4) I have such knowledge and experience in financial affairs that I am capable of evaluating the merits and risks of an investment in the Convertible Preferred Stock. I have not relied in connection with this investment upon any representations, warranties or agreements other than those set forth in this Election Form or the Memorandum. My financial situation is such that I can afford to bear the economic risk of holding the Convertible Preferred Stock for an indefinite period of time, and I can afford to suffer the complete loss of my investment in the Convertible Preferred Stock. (5) I am subscribing for the shares of Convertible Preferred Stock for my own account and not with a view to or for sale in connection with any distribution of all or any part of the shares of the Convertible Preferred Stock. I have no contract, undertaking, agreement or arrangement with any person to sell, transfer or pledge to such person or any other person any or all of the shares of Convertible Preferred Stock for which I am subscribing, and I have no present plans or intentions to enter into any such contract, undertaking, agreement or arrangement. I will acquire title to the shares of the Convertible Preferred Stock as set forth in my own name. (6) None of the Company or any officer, employee, agent or affiliate of the Company has made any representations or warranties or statements to me, other than as are set forth in the Memorandum. (7) I am not relying on the Company with respect to any tax considerations involved in an investment in the Convertible Preferred Stock. (8) I understand that certain legends as required by applicable federal and state securities laws will be placed on any certificate or certificates representing the shares of Convertible Preferred Stock. (9) I understand that neither the federal Securities and Exchange Commission nor the securities administrator of any state has passed upon the adequacy or accuracy of the information set forth in the Memorandum or made any finding or determination as to the fairness of the investment in the shares of Convertible Preferred Stock or any recommendation or endorsement of the shares of the Convertible Preferred Stock as an investment. No contrary representation has been made to the undersigned. (10) At the Company's request, I will promptly furnish such additional information and execute such other instruments or documents as may reasonably be required by the Company in connection with my purchase of the Convertible Preferred Stock. IV. ACCEPTANCE I understand and agree that this Election Form may be rejected by the Company if the Preferred Stock Offering is not consummated for any reason. The undersigned acknowledges and agrees that this Election Form and any documents submitted herewith shall survive (i) changes in the transactions, documents and instruments described in the Memorandum which are not material, (ii) the death or disability of the undersigned and (iii) the acceptance of this Election Form by the Company. V. GENERAL PROVISIONS This Election Form and the representations and warranties contained herein shall be binding on my heirs, executors, administrators and other successors. If the subscriber for Convertible Preferred Stock is a corporation, trust, partnership or other entity (an "organization"), the terms "I", "me" or "my" and similar as used herein shall be deemed to refer to the organization. If the subscriber is a married couple, such terms shall be deemed to refer to both husband and wife. All representations and warranties contained herein or made in writing by me in connection with the transactions contemplated by this Election Form shall survive the execution and delivery of this Election Form, any investigation at any time made by or on behalf of the Company and the issuance and sale of the shares of the Convertible Preferred Stock. 2 I have executed this Election Form, either in an individual capacity or pursuant to due authorization on behalf of an organization. Number of Shares...................................... -------- Aggregate Purchase Price ($1,000 per Share)........... $ --------
Date and Place Executed: Date April ___, 1998 [NAME OF SUBSCRIBER] Place: ------------------------ By: ------------------------------------------ Its: ----------------------------------------- ----------------------------------------- ----------------------------------------- Address of Subscriber Please check to indicate form of ownership of, or organization of entity acquiring the Convertible Preferred Stock. _____ INDIVIDUAL _____ CORPORATION _____ TENANTS-IN-COMMON: _____ PARTNERSHIP Both parties must sign. _____ TRUST _____ JOINT TENANTS WITH RIGHT OF SURVIVORSHIP: Both parties must sign. _____ COMMUNITY PROPERTY ACCEPTANCE The foregoing Agreement is accepted, subject to the terms and conditions thereof. BURKE INDUSTRIES, INC. By: ----------------------------------------------- Its: ---------------------------------------------- Dated: April ____, 1998 EX-10.30 18 EXHIBIT 10.30 EXHIBIT 10.30 [LOGO] SOVEREIGN SPECIALTY CHEMICALS, INC. March 20, 1998 Mr. Rolland Childs Land Co. Leasing & New Development Co. 432 S. Bently Avenue Los Angeles, CA 90049 Re: Consent ------- Dear Mr. Childs: Sovereign Specialty Chemicals, Inc. ("Sovereign") has entered into a Stock Purchase Agreement, dated March 5, 1998, pursuant to which Sovereign proposes to sell all of the outstanding shares of common stock of Mercer Products Company, Inc. to Burke Industries, Inc. We hereby request your consent to this transaction for purposes of the Standard Industrial/Commercial Single-Tenant Lease-Gross, dated June 22, 1994, as amended, 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 Products Company, Inc. Please indicate such consent by executing the signature line below and returning this letter to my attention. Please contact me if you have any questions. Sincerely, Lowell D. Johnson Vice President and Chief Financial Officer Consent: Landco. By: /s/ Roland G. Childs -------------------- Title: Partner -------------------- Date: 3/30/98 -------------------- AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE--GROSS (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, June 22, 1994 is made by and 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 ("Lessor") and Mercer Products Co. Inc. Subsidiary of LaPorte plc ("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 9070 Bridgeport, Rancho Cucamonga, California 91730 located in the County of San Bernardino State of California and generally described as (describe briefly the nature of the property) an approximately 22,653 square foot free-standing concrete tilt-up building including parking for approximately 27 cars on the south side of the building. ("Premises"). (See Paragraph 2 for further provisions.) 1.3 TERM: 5 years and 3 months ("Original Term") commencing August 1, 1994 ("Commencement Date") and ending October 31, 1999 ("Expiration Date"). (See Paragraph 3 for further provisions.) 1.4 EARLY POSSESSION: Upon execution of the lease, but no sooner than 7/22/94 ("Early Possession Date"). (See Paragraphs 3.2 and 3.3 for further provisions.) 1.5 BASE RENT: $6,116.00 per month ("Base Rent"), payable on the 1st day of each month commencing November 1, 1994 (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: $12,799.00 as Base Rent for the period November, 1994 and the last month of the lease. 1.7 SECURITY DEPOSIT: $6,116.00 ("Security Deposit"). (See Paragraph 5 for further provisions.) 1.8 PERMITTED USE: Office and warehousing of vinyl flooring products (See Paragraph 6 for further provisions.) 1.9 INSURING PARTY: Lessor is the "Insuring Party." $1,545.00 is the "Base Premium." (See Paragraph 8 for further provisions.) 1.10 REAL ESTATE BROKERS: The following real estate brokers (collectively, the "Brokers") and brokerage relationships exist in this transaction and are consented to by the Parties (check applicable boxes): CB Commercial represents /X/ Lessor exclusively ("Lessor's Broker"); / / both Lessor and Lessee, and Collins Fuller Corporation represents /X/ Lessee exclusively ("Lessee's Broker"); / / both Lessee and Lessor. (See Paragraph 15 for further provisions.) Initials: ------ ------ PAGE 1 GROSS - -C- 1990--American Industrial Real Estate Association FORM 105 G-R-12/91 1.11 GUARANTOR: The obligations of the Lessee under this Lease are to be guaranteed by N/A ("Guarantor"). (See Paragraph 37 for further provisions.) 1.12 ADDENDA. Attached hereto is an Addendum or Addenda consisting of Paragraphs 49 through 53 and Exhibits ________________________________________ all of which constitute a part of this Lease. 2. PREMISES. 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. 3.2 EARLY POSSESSION. If Lessee totally or partially occupies the Premises prior to the Commencement Date, the obligation to pay Base Rent shall be abated for the period of such early possession. All other terms of this Lease, however, shall be in effect during such period. Any such early possession shall not affect nor advance the Expiration Date of the Original Term. Initials: ------ ------ PAGE 2 GROSS 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, expenses, 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 increase 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 disturb 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 of 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 five (5) business days give a written notification of same, which notice shall include an explanation of Lessor's reasonable objections to the change in use. Initials: ------ ------ PAGE 3 GROSS 6.2 HAZARDOUS SUBSTANCES. (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 person 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, 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 shall indemnify, protect, defend and hold Lessor, its agents, employees, lenders and ground lessor, if any, and the Premises, harmless from and against any and all loss of rents and/or damages, liabilities, judgments, costs, claims, liens, expenses, penalties, permits and attorney's and consultant's fees arising out of or involving any Hazardous Substance or storage tank brought onto the Premises by or for Lessee or under Lessee's control. 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 created or suffered by Lessee, 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 the 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 Initials: ------ ------ PAGE 4 GROSS 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.), 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, (whether or not such portion of the Premises requiring repair, 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 Lessees use, any poor 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), ceilings, floors, windows, doors, plates glass, skylights, landscaping, driveways, parking lots, fences, retaining walls, signs, sidewalks, and parkways located in, on, about, or adjacent to the Premises, but excluding foundations, the exterior roof and the structural aspects of 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, Lease, 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. (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, Initials: ------ ------ PAGE 5 GROSS (iv) landscaping and irrigation systems, (v) roof covering and drain maintenance and (vi) asphalt and parking lot maintenance. 7.2 LESSOR'S OBLIGATIONS. Upon receipt of written notice of the need for such repairs and subject to Paragraph 13.5, Lessor shall, at Lessor's expense, keep the foundations, exterior roof and structural aspects of the Premises in good order, condition and repair, Lessor shall not, however, be obligated to paint the exterior surface of the exterior walls or to maintain the windows, doors or plate glass or the interior surface of exterior walls. Lessor shall not, in any event, have any obligation to make any repairs until Lessor receives written notice of the need for such repairs. 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, or about the Premises. The term "Trade Fixtures" shall means 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 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 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. Initials: ------ ------ PAGE 6 GROSS 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 OF PREMIUM INCREASES. (a) Lessee shall pay to Lessor any insurance cost increase ("Insurance Cost Increase") occurring during the term of this Lease. "Insurance Cost Increase" is defined as any increase in the actual cost of the insurance required under Paragraphs 8.2(b), 8.3(a) and 8.3(b), ("Required Insurance"), over and above the Base Premium, as hereinafter defined, calculated on an annual basis. "Insurance Cost Increase" shall include, but not be limited to, increases resulting from the nature of Lessee's occupancy, any act or omission of Lessee, requirements of the holder of a mortgage or deed of trust covering the Premises, increased valuation of the Premises, and/or premium rate increase. If the parties insert a dollar amount in Paragraph 1.9, such amount shall be considered the "Base Premium." In lieu thereof, if the Premises have been previously occupied, the "Base Premium" shall be the annual premium applicable to the most recent occupancy. If the Premises have never been occupied, the "Base Premium" shall be the lowest annual premium reasonably obtainable for the Required insurance as of the commencement of the Original Term, assuming the most nominal use possible of the Premises. In no event, however, shall Lessee be responsible for any portion of the premium cost attributable to liability insurance coverage in excess of $1,000,000 procured under Paragraph 8.2(b) (Liability Insurance Carried By Lessor). (b) Lessee shall pay any such Insurance Cost Increase to Lessor within thirty (30) days after receipt by Lessee of a copy of the premium statement or other reasonable evidence of the amount due. If the insurance policies maintained hereunder cover other property besides the Premises, Lessor shall also deliver to Lessee a statement of the amount of such Insurance Cost Increase attributable only to the Premises showing in reasonable detail the manner in which such amount was computed. Premiums for policy periods commencing prior to, or extending beyond, the term of this Lease shall be prorated to coincide with the corresponding Commencement or Expiration of the Lease term. 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 Initials: ------ ------ PAGE 7 GROSS 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 $1,000,000 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. 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, or the amount required by Lenders, but in no event more than the commercially reasonable and available insurable value thereof if, by reason of the unique nature or age of the improvements involved, such latter amount is less than full replacement cost. Lessee Owned Alterations and Utility Installations shall be insured by Lessee under Paragraph 8.4. 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, but not including plate glass insurance. 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. (b) RENTAL VALUE. Lessor 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. (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. Since 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. 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 Initials: ------ ------ PAGE 8 GROSS 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. Lessee shall cause to be delivered to Lessor certified copies of, or certificates evidencing the existence and amounts of, the insurance, and with the additional insureds, required under Paragraph 8.2(a) and 8.4. No such policy shall be cancelable 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. 8.6 WAIVER OF SUBROGATION. Without affecting any other rights or remedies, Lessee and Lessor ("Waiving Party") each hereby release and relieve the other, and waive their entire right to recover damages (whether in contract or in tort) against the other, for loss of or damage to the Waiving Party's property arising out of or incident to the perils required to be insured against under Paragraph 8. The effect of such releases and waivers of the right to recover damages shall not be limited by the amount of insurance carried or required, or by any deductibles applicable thereto. 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 consultant's 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 by or results from 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 Initials: ------ ------ PAGE 9 GROSS 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 land 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 and 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. 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 thereof 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 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. Initials: ------ ------ PAGE 10 GROSS 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 this time has an execrable 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, unless Lessee is legally responsible therefor (in which case Lessee shall make the investigation and remediation thereof required by Applicable Law 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) investigate and remediate such Hazardous Substance Condition, if required, as soon as reasonably possible at Lessor's expense, 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 (12) 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 Initials: ------ ------ PAGE 11 GROSS 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 funds 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. Lessor shall pay the Real Property Taxes, as defined in Paragraph 10.2, applicable to the Premises; provided, however, that Lessee shall pay, in addition to rent, the amount if any, by which Real Property Taxes applicable to the Premises increase over the fiscal tax year during which the Commencement Date occurs ("Tax Increase"). Subject to Paragraph 10.1(b), payment of any such Tax Increase shall be made by Lessee within thirty (30) days after receipt of Lessor's written statement setting forth the amount due and the computation thereof. 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. (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 Tax Increase to be paid in advance to Lessor by Lessee, either: (i) in a lump sum amount equal to the amount 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 Tax Increase to be paid. When the actual amount of the applicable Tax Increase is known, the amount of such equal monthly advance payment shall be adjusted as required to provide the fund needed to pay the applicable Tax Increase 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 Tax Increase as the same becomes due, Lessee shall pay to Lessor, upon Lessor's demand, such additional sums as are necessary to pay such obligation. 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. (c) ADDITIONAL IMPROVEMENTS. Notwithstanding paragraph 10.1(a) hereof, Lessee shall pay to Lessor upon demand therefor the entirety of any increase in Real Property Taxes assessed by reason of Alterations or Utility Installations placed upon the Premises by Lessee or at Lessee's request. 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 Initials: ------ ------ PAGE 12 GROSS 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 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 Lessee's 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 the Leases, 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 Initials: ------ ------ PAGE 13 GROSS 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. Initials: ------ ------ PAGE 14 GROSS (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 the 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. 13. 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 occurring 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 a 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" 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 Initials: ------ ------ PAGE 15 GROSS 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 recission 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 Lease 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 of 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's 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 Initials: ------ ------ PAGE 16 GROSS 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 the 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 attorney's 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 of 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 Initials: ------ ------ PAGE 17 GROSS 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 if 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 a 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 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 Lessee's 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 Lease 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 reaming, 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. 15.1 The Brokers named in Paragraph 1.10 are the procuring causes of this Lease. 15.2 Upon execution of this Lease by both Parties, Lessor shall pay to said Brokers jointly, or in such separate shares as they may mutually designate in writing, a fee as set forth in a separate written agreement between Lessor and said Brokers. 15.3 Lessee and Lessor each represent and warrant to the other that it has had no dealings with any person, firm, broker or finder (other than the Brokers, if any named in Paragraph 1.10) 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 other than said named Brokers 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 such unnamed broker, finder or other similar Initials: ------ ------ PAGE 18 GROSS party by reason of any dealings or actions of the indemnifying Party, including any costs, expenses, attorney's fees reasonably incurred with respect thereto. 15.4 Lessor and Lessee hereby consent to and approve all agency relationships, including any dual agencies, indicated in Paragraph 1.10. 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. 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 Initials: ------ ------ PAGE 19 GROSS 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. 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 the 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 Initials: ------ ------ PAGE 20 GROSS 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 involving any remedies Lessee may have by reason thereof. If any Lender shall elect to have the Lease and/or any Option granted hereby superior to the lien of its Security Device, notwithstanding the relative dates of the documentation or recordation thereof. 30.2 ATTORNMENT. Subject to the non-disturbance 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 brings an action or proceeding to enforce the terms hereof or declare rights hereunder, the Prevailing Party (as hereinafter defined) 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, Party 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 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 consultation 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 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 roof, as do not unreasonably interfere with the conduct of Lessee's business. Initials: ------ ------ PAGE 21 GROSS 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 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 lessor 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(a) (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 maybe 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. 37. GUARANTOR. 37.1 If there are to be any Guarantors of this Lease per Paragraph 1.11, the form of the guaranty to be executed by each such Guaranty shall be in the form most recently published by the American Industrial Real Estate Association, and each said Guarantor shall have the same obligations as lessee under this Lease, including but not limited to the obligation to provide the Tenancy Statement and Information called for by Paragraph 16. 37.2 It shall constitute a Default of the Lessee under this Lease if any such Guarantor fails or refuses, upon reasonable request by Lessor to give: (a) evidence of the due execution of the guaranty called for by this lease, including the authority of the Guarantor (and of the party signing on Guarantor's behalf) to obligate such Guarantor on said guaranty, and including in the case of a corporate Guarantor, a certified copy of a resolution of its board of directors authorizing the making of such guaranty, together with a certificate of incumbency showing the signature of the persons authorized to sign on its behalf, (b) current financial statements of Guarantor as may from time to time be requested by Lessor, (c) a Tenancy Statement, or (d) written confirmation that the guaranty is still in effect. 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; (b) the right to first refusal to lease other property of Lessor or the right of first offer to lease other property of Lessor; (c) the right to purchase the Premises, or the right of first refusal to purchase the Premises, or the Initials: ------ ------ PAGE 22 GROSS right of first offer to purchase the Premises, or the right to purchase other property of Lessor, or the right of first refusal to purchase other property of Lessor, or the right of first offer to purchase other property of Lessor. 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. 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 us 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. Initials: ------ ------ PAGE 23 GROSS 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 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. OTHER. 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 person 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 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 Initials: ------ ------ PAGE 24 GROSS 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 ______________________________________ Executed at Mercer Products Co. Inc. on _______________________________________________ on June 27, 1994 By LESSOR: By LESSEE: The Childs Family Trust u/t/a/ of 4/30/81 and the Mercer Products Co. Inc. Subsidiary of LaPorte plc A.G. Gardner Family trust u/t/a/ of 3/5/81 dba LANDCO By: ______________________________________________ By: ________________________________________________ Name Printed: Roland A. Childs Name Printed: Michael T. Vaden Title: Trustee of the A.J. Gardner Family Trust Title: President By: ______________________________________________ By: ________________________________________________ Name Printed: Allan J. Gardner Name Printed: ______________________________________ Title: Trustee of the A.J. Gardner Family Trust Title: _____________________________________________ Address: c/o Roland A. Childs Address: 37235 S.R. 19 432 S. Bentley Ave., Los Angeles, CA 90049 Umatilla, FL 32784 Tel. No. (310) 476-3209 Fax No. (310) 476-0111 Tel No. (904) 357-4119 Fax No. (904) 357-9660
PAGE 25 GROSS NOTICE: These forms are often modified to meet changing requirement 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, Los Angeles, CA 90071. (213) 687-8777. Fax No. (213) 687-8616. GENERAL PROVISIONS ADDENDUM TO STANDARD LEASE Dated: June 22, 1994 By and Between (Lessor) Landco (Leasee) Mercer Products Co. Inc. Subsidiary of LaPorte plc Property Address 9070 Bridgeport, Rancho Cacamonga, CA 91730 51. TENANT IMPROVEMENTS Lessor shall, at Lessor's sole cost and expense, provide the following: a. Steam clean the carpets in the office area b. Repaint all office walls c. Replace any stained or damaged ceiling tiles in the office area d. Repair or replace foil instructions in the warehouse area, if necessary e. Provide pest control in the offices and warehouse, if necessary 52. OPTION TO TERMINATE LEASE ON JULY 31, 1997 a. Lessor hereby grants to Lessee the option to terminate the term of this lease on July 31, 1997 upon each and all of the following terms and conditions: (i) Lessee gives to Lessor and Lessor actually receives a notice on or before January 31, 1997 of Lessee's intention to terminate the Lease on July 31, 1997. If the notification of the exercise of this option is not so given and received, this option shall automatically expire; (ii) The provisions of this Paragraph 39, including the provision relating to default of Lessee set forth in Paragraph 39.4 of this Lease are conditions of this Option; (iii) Within 30 days of Lessee's written notification of the exercise of this option, Lessee shall pay Lessor $40,098.00. 53. PROFESSIONAL LICENSES Allan J. Gardener, a Trustee of The A.J. Gardner Family Trust is a state of California Real Estate Licensee. Roland A. Childs, a Trustee of The Childs Family Trust is both a State of California Real Estate Licensee and member of the State of California Bar. Lessee is urged to obtain real estate advice from real estate brokers and legal advice from independent lawyers. Initials: Initials: ----------- ----------- ----------- ----------- 54. Option to Terminate Lease on July 31, 1998 a. Lessor hereby grants to Lessee the option to terminate the term of this lease on July 31, 1998 upon each and all of the following terms and conditions: (i) Lessee gives to Lessor and Lessor actually receives a notice on or before January 31, 1998 of Lessee's intention to terminate the Lease on July 31, 1998. If the notification of the exercise of this option is not so given and received, this option shall automatically expire; (ii) The provisions of this Paragraph 39, including the provision relating to default of Lessee set forth in Paragraph 39.4 of this Lease are conditions of this Option; (iii) Within 30 days of Lessee's written notification of the exercise of this option, Lessee shall pay Lessor $20,049.00. 55. Lessee has right to assign Lease at anytime with prior approval of Lessor. Initials: Initials: ----------- ----------- ----------- ----------- RENT ADJUSTMENT(S) ADDENDUM TO STANDARD LEASE Dated: June 22, 1994 By and Between (Lessor) 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 (Leasee) Mercer Products Co. Inc. Subsidiary of LaPorte plc Property Address: 9070 Bridgeport, Rancho Cacamonga, CA 91730 Paragraph 49 A. RENT ADJUSTMENTS: The monthly rent for each month of the adjustment period(s) specified below shall be increased using the method(s) indicated below: I. COST OF LIVING ADJUSTMENT(S) (COL) [INTENTIONALLY OMITTED] II. MARKET RENTAL VALUE ADJUSTMENT(S) (MRV) [INTENTIONALLY OMITTED] Initials: Initials: ----------- ----------- ----------- ----------- Initials Initials: ----- ------ ----- ------ RENT ADJUSTMENTS Page 1 of 2 NOTICE: These forms are often modified to meet changing requirement 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, Los Angeles, CA 90071. (213) 687-8777. Fax No. (213) 687-8616. - -C-1990-American Industrial Real Estate Association FORM 105G-R-12/91 /X/ III. FIXED RENTAL ADJUSTMENT(S) (FRA) The monthly rent payable under paragraph 1.5 ("Base Rent") of the attached Lease shall be increased to the following amounts on the dates set forth below:
On (Fill in FRA Adjustment Date(s)): The New Base Rental shall be: November 1, 1996 $ 6,683.00 _____________________________________ $__________________ _____________________________________ $__________________ _____________________________________ $__________________
B. NOTICE: Unless specified otherwise herein, notice of any escalations other than Fixed Rental Adjustment(s) shall be made specified in paragraph 23 of the attached Lease. C. BROKER'S FEE: The Real Estate Brokers specified in paragraph 1.10 of the attached Lease shall be paid a Brokerage Fee for each adjustment specified above in accordance with paragraph 15 of the attached Lease. Initials: Initials: ----------- ----------- ----------- ----------- Initials Initials: ----- ------ ----- ------ RENT ADJUSTMENTS Page 2 of 2 NOTICE: These forms are often modified to meet changing requirement 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, Los Angeles, CA 90071. (213) 687-8777. Fax No. (213) 687-8616. - -C-1990-American Industrial Real Estate Association FORM 105G-R-12/91 EX-10.31 19 EXHIBIT 10.31 CONSENT OF LESSOR Reference is made to an Agreement of Lease dated as of December 1, 1988 as amended by an Extension and First Amendment of Lease dated as of January 13, 1994, an Extension and Second Amendment of Lease dated as of January 23, 1995 and a Third Amendment and Extension of Agreement of Lease dated as of March 1997 (as amended, the "Lease") between RTC PROPERTIES, INC., a New York corporation, as lessor ("Lessor"), and MERCER PRODUCTS CO., INC., a New Jersey corporation, as lessee ("Lessee"), concerning certain premises including a portion of Building 10, as more particularly described in the Lease (the "Premises"), and to a Guaranty agreement dated as of August 20, 1990 (the "Guaranty") from Laporte Group p.l.c. ("LAPORTE"), a company organized under the laws of England to RTC Properties, Inc. guaranteeing the obligations of Lessee under the Lease. WHEREAS, Lessor consented to an assignment of the Lease to Sovereign Specialty Chemicals, L.P. or any of its subsidiaries (collectively "SOVEREIGN") under a stock purchase agreement dated May 22, 1997 pursuant to which Laporte, Inc., an affiliate of LAPORTE, sold all of the outstanding shares of Lessee to SOVEREIGN; WHEREAS, SOVEREIGN entered into a stock purchase agreement with Burke Industries, Inc., a California corporation (the "PURCHASER") pursuant to which SOVEREIGN will transfer all of the shares of Lessee to PURCHASER; WHEREAS, the aforementioned transfer of stock to PURCHASER is deemed an assignment of the Lease pursuant to Section 27.01 of the Lease, requiring the prior consent of Lessor; WHEREAS, Lessee, SOVEREIGN and PURCHASER have requested Lessor's consent to the assignment; WHEREAS, SOVEREIGN has agreed to provide additional security in the amount of $25,000.00 for the faithful performance and observance of the terms, covenants and conditions of the Lease by Lessee; WHEREAS, Lessor has agreed to the release of LAPORTE from the Guaranty, under the terms and conditions herein, in consideration of the execution and delivery of a guaranty of Lessee's obligations under the Lease by PURCHASER, under the terms and conditions herein, and in consideration of the execution and delivery of the Fourth Amendment of Lease by Lessee. NOW, THEREFORE, Lessor hereby certifies to Lessee and SOVEREIGN as follows: 1. Subject to and upon all of the terms, covenants and conditions of the Lease and the terms and conditions herein set forth, Lessor hereby consents to the assignment of the Lease occasioned by the transfer of the stock of Lessee from SOVEREIGN to PURCHASER. 1 2. Subject to compliance with all terms and conditions herein set forth, Lessor releases LAPORTE of and from any liability or obligation under or with respect to the Guaranty of the Lease, arising out of the covenants, terms, conditions and agreements to be performed or observed by Lessee, its successors and assigns, under the Lease from and after the date hereof. 3. This Consent and the release contained in paragraph 2, above, is contingent upon the execution and delivery to Lessor, simultaneously herewith, of a guaranty agreement in the form of Exhibit A, attached hereto, from PURCHASER, guaranteeing the obligations of Lessee under the Lease arising from and after the date hereof. 4. This Consent and the release contained in paragraph 2, above, is also contingent upon the execution and delivery to Lessor, simultaneously herewith, of a Fourth Amendment of Lease in the form of Exhibit B, attached hereto. 5. Nothing herein contained shall be construed as a waiver of any other provisions of the Lease and in the case of any conflict between the Lease and the assignment documents, the provisions of the Lease shall prevail. IN WITNESS WHEREOF, this Consent has been executed this 21st day of April, 1998. RTC PROPERTIES, INC. By: /s/ Martin F. Ytuarte ------------------------- Martin F. Ytuarte 2 AGREEMENT OF LEASE, dated as of December 1, 1988, ______________________ made by and between RTC PROPERTIES, INC., a New York corporation having an office at 1185 Avenue of the Americas, New York, New York ("Lessor"), and Mercer Products Co., Inc. ___________________, a __________________________ having an office at 190 Murray Street, Newark, New Jersey 07114 ("Lessee"); W I T N E S S E T H WHEREAS, Lessor is the owner of the land known and designated as Lot 20 in Block 294 on the current tax map of The Town of Kearny, New Jersey __________________ (the "Land"), the Building (as such term is hereinafter defined) situate on the Land and designated by Lessor as Building 10 and the Building Equipment (as such term is hereinafter defined); WHEREAS, the Land and Building are part of in industrial park (the "Facility") known and designated as lots 20, 12, 13 and 14 in Block 294 an said current tax map; WHEREAS, Lessor desires to lease to Lessee, and Lessee desires to hire from Lessor, A PORTION OF THE Building together with the Building Equipment attached or appurtenant thereto, + in connection with the operation and maintenance thereof, as set forth in Exhibit A annexed hereto (referred to collectively herein as the "Premises"); + located therein and used solely NOW, THEREFORE, in consideration of the foregoing and of the covenants, conditions and agreements hereinafter set forth, Lessor and Lessee agree as follows: ARTICLE FIRST DEMISE AND TERM OF DEMISE SECTION 1.01. Lessor, in consideration of the rents hereinafter reserved and of the covenants, agreements and conditions herein contained on the part of Lessee to be paid, observed and fulfilled, does hereby demise and lease the Premises to Lessee and Lessee hereby hires the same from Lessor; TOGETHER WITH: (a) A non-exclusive right of ingress and egress, between the Premises and a public thoroughfare, over such private roadway or roadways, on or adjacent to the Facility, as may from time to time be designated in writing by Lessor (such private roadway or roadways are referred to collectively herein as the "private roadway"); (b) A non-exclusive right to use such sanitary sewers and storm sewers as may from time to time be appurtenant to the Premises (collectively, the "sewers"); and (c) An exclusive right to park motor vehicles in the parking area designated in Plan A of exhibit A annexed hereto as the "Parking Area" (such parking area being sometimes referred to as the "parking lot"), SUBJECT, NEVERTHELESS, to all the terms and conditions of this Lease which are applicable to the Premises, including the rights of Lessor, Lessor's agents, employees, permittees, utility companies and other persons, to pass over the parking lot for all purposes at any time and to maintain and operate poles, wires, lines, cables, pipes, boxes and other fixtures and facilities in, over, under and upon the parking lot; SUBJECT, HOWEVER, to the following: (1) State of title of the Premises at the date of this Lease and at the Commencement Date (as such term is hereinafter defined); (2) Any state of facts which an accurate survey of the Premises may show; (3) All present and future zoning, ordinances, laws, regulations, requirements and orders, including building restrictions and regulations; and all other present and future ordinances, laws, regulations, requirements and orders of all departments, boards, bureaus, commissions and bodies, of any municipal, county state or federal governments now or hereafter having or acquiring jurisdiction of the Premises; (4) Taxes, Legal Requirements and Insurance Requirements (as such terms are hereinafter defined); (5) Covenants, easements and restrictions affecting the Premises and the revocable nature of any restriction, easement, agreement, ordinance or right affecting the Premises, provided the same do not materially interfere with use and occupancy of the Premises as provided for herein, (6) The physical condition of the Premises on the date of this Lease, subject to the terms and conditions of that certain Work Letter (the "Work Letter") dated of even date herewith between Lessor and Lessee, (7) Utility company rights and easements, if any, to maintain and operate poles, wires, lines, cables, pipes, boxes and other fixtures and facilities in, over and upon the Premises. (8) Rights of Lessor, other tenants of the Facility, its and their agents, employees and permittees, and other persons, to use the private roadway, railroad siding, sewers, wires, conduits, pipes, railroad tracks, roads, and other rights of way crossing, situated on or affecting the Premises, and (9) The matters referred to in Section 28.01; TO HAVE AND TO HOLD the Premises unto Lessee, its successors and assigns, for a term ("Term") commencing on the earlier of the date that Lessee uses or occupies the Premises or the date of substantial completion of the items of Work described in the Work Letter _______________ ("Commencement Date" and expiring at noon on April 30, 1994 ("Expiration Date"), unless the same shall terminate pursuant to any of the terms, covenants or conditions of this Lease or pursuant to law. 2 ARTICLE SECOND RENT SECTION 2.01 Lessee shall pay to Lessor or to such other person as Lessor may from time to time designate, at the address specified in or pursuant to Section 2.03, during the Term, fixed rent ("Fixed Rent"), over and above the other and additional payments to be made by Lessee is hereinafter provided, of Eighty Eight Thousand Five Hundred ($88,500.00) Dollars per annum. The Fixed Rent shall be paid in advance in equal monthly installments of Seven Thousand Three Hundred Seventy Five ($137,375.00) Dollars each on the first day of each and every month during the Term, except that the first full monthly installment is being paid by Lessee to Lessor simultaneously with Lessee's execution and delivery hereof. SECTION 2.02. If Lessee shall fail to pay as and when due under this Lease any Additional Rent (as such term is hereinafter defined), and such failure shall not be remedied within the grace period (if any) applicable thereto under this Lease, Lessor shall have all of the rights and remedies provided in this Lease as in the case of default in the payment of the Fixed Rent. Except is otherwise specifically provided in this Lease, the Fixed Rent and Additional Rent Shall be paid without notice, demand, apartment, deduction or set-off of any kind whatsoever. The Fixed Rent and Additional Rent are sometimes referred to collectively herein as "rent". SECTION 2.03. Lessee shall pay the rent to Lessor in lawful money of the United States of America which shall be legal render for all debts, public and private, at the time of payment, at the office of Lessor at River Terminal Development Company, Port Kearny, South Kearny, New Jersey, or to such other person of persons and/or at such other place or places as Lessor may designate from time to time by notice to Lessee. Such payments may be made by check of Lessee, subject to collection, and any such check shall be drawn on a bank which is a member of The New York Clearing House Association and shall be payable to the order of Lessor or to such other person or persons as Lessor may designate from time to time by notice to Lessee. SECTION 2.04. Any obligation of Lessee for payment of rent which shall have accrued with respect to any period during the Term shall survive the expiration or termination of this Lease. SECTION 2.05. If the Commencement Date is other than the first day of a calendar month, then Fixed Rent lot the calendar month in which the Commencement Date occurs shall be provided on a per diem basis and Lessee shall receive in appropriate credit therefor against the installment of Fixed Rent coming due on the first day of the first full calendar month following the Commencement Date. 3 ARTICLE THIRD TAXES AND ESCALATION RENT SECTION 3.01. Subject to the provisions of Section 3.07, Lessee shall, as Additional Rent, pay and discharge, or cause to be paid and discharged, all such taxes, assessments, use and occupancy taxes in respect of this Lease and any subleases made hereunder, water and sewer charges, rates and rents, water meter charges and all such other charges, taxes, levies and sums of every kind or nature whatsoever, general and special, extraordinary as well as ordinary, whether or not now within the contemplation of the parties, as shall or may during the Term be assessed, levied, charged or imposed upon or become a lien on the Land or Building, or any part thereof of anything appurtenant hereto, or the sidewalks, streets or roadways in front of, adjacent to or appurtenant to the Land, or which, if imposed on Lessee or in respect of the Land or Building and if not paid by Lessee, would be collectible from Lessor, or which have been so assessed, levied, charged or imposed prior to the Term (but, in the last-mentioned case, only with respect to a period falling within the Term). All taxes, assessments, levies and charges described in this Section (including penalties and interest thereon) are sometimes herein referred to as "Impositions" of "Taxes". SECTION 3.02. A. Lessee shall be deemed to have complied with Section 3.01 only if payment of Impositions is made by or on behalf of Lessee not less than twenty (20) days prior to the expiration of the period within which payment is permitted without penalty or interest. Lessee shall promptly procure official receipts from the appropriate taxing authority, if obtainable, evidencing such payment and Shall, within ten (10) days after the receipt of said official receipts furnish copies of the same to Lessor or, if such receipts are not obtainable, such other evidence of payment as Lessor shall reasonably request. B. Notwithstanding the provisions of Sections 3.01 and 3.04 and Paragraph A of this Section 3.02, Lessor, at its option, may at any time elect to require Lessee to pay the amount of the Impositions to Lessor, rather than directly to the taxing authority, in which case Lessor shall be responsible for the payment of such Impositions to the taxing authority. Such election shall be made by notice from Lessor to Lessee. In the event that such notice is given, Lessee shall thereafter, and until otherwise directed by Lessor, pay to Lessor, as Additional Rent the amount of the Impositions; such payment shall be made promptly upon receipt of Lessor's bill to Lessee therefor, whether or not the Impositions are then due and payable by Lessor. SECTION 3.03. An official bill, search, certificate of receipt, made or given by any officer legally authorized to make or give the same, showing that any such Imposition is due and payable or a lien upon or charge against the Land or Building on the date stated therein, or has been paid, shall be prima facie evidence that such Imposition was due and payable or a lien or was paid, as the case may be. SECTION 3.04. A. Lessee shall not have the right to contest the amount, validity and/or application of any imposition. [PARTS A, ALL OF B, C, AND PART OF D INTENTIONALLY OMITTED] 4 B. Any tax refund obtained by Lessor pertaining to periods within the Term shall be the property of Lessee, after deducting therefrom Lessor's costs and expenses in obtaining such refund, to the extent to which such refund may be based on a payment by Lessee. Lessee will fully cooperate with Lessor with respect to such appeal of the proceeding relating thereto including executing any documents or pleadings reasonably required for such purposes, supplying Lessor with such information, data and documents is may be necessary in connection therewith and permitting Lessor to make such appeal and conduct any such proceedings either in Lessor's or, if required by law in order to make such appeal or proceeding effective, Lessee's name, but in no event will Lessee impose any charge for such cooperation, nor will Lessor be obligated to pay Lessee's legal fees in connection with such appeal. Payment by Lessee of the real estate tax contested by Lessor shall be made under protest if Lessor so requests, and if permitted by law, and Lessee shall take such action and execute such documents as Lessor may reasonably request to preserve Lessor's contest. SECTION 3.05. A. On the Expiration Date at on the date on which this Least shall sooner terminate, an Impositions of every kind and nature provided to be paid by Lessee under this Article THIRD, whether accrued or prepaid, as the case may be, shall be apportioned between Lessor and Lessee, subject to the claims, it any, of Lessor against Lessee under this Lease. B. If by law any assessment for a Public improvement with respect to the Land or Building is payable ________________________________________________. SECTION 3.06. If, at any time during the Term, the methods of taxation prevailing at the commencement of the Term shall be altered so that in lieu of or as a substitute, in whole or in part, for the taxes, assessments, levies, impositions or charges now or hereafter levied, assessed or imposed on real estate and the improvements thereon, there shall be levied, assessed or imposed any tax or other charge on or in respect of the Land, Building and/or Premises or the rents, income or gross receipts of Lessor therefrom (including any county, town, municipal, state or federal levy), then such tax or charge shall be deemed in Imposition, but only to the extent that such Imposition would be payable if the Land, Building and Premises, or the rent income or gross receipts received therefrom, were the only property of Lessor subject to such Imposition, and Lessee shall pay and discharge the same as herein provided in respect of the payment of Impositions. SECTION 3.07. If and so long as the Premises and the parking lot and appurtenances alone do not constitute a separate tax lot, Lessor shall determine the amount of Impositions in respect of the Facility, Land and Building which is allocable to the Premises and the parking lot and appurtenances by any such method as Lessor may adopt from time to time and Lessee shall pay the same to Lessor as if the notice provided for in Paragraph 8 of Section 3.02 had been given. SECTION 3.08. Lessee shall pay and discharge, or cause to be paid and discharged, the following items, regardless of to whom and how incurred: 5 A. All charges for fire alarm service, security service, sprinkler service, gas, electricity, steam, heat, sewer, water and all other utility or similar service or services furnished to the Premises during the Term; B. All fees and charges of the state, county, town or other local government or of any governmental bureau, department or lawful authority whatsoever for the maintenance or use, during the Term of any space in, over, under, or adjacent to any public thoroughfare adjacent to the Premises or the Facility, or for the maintenance, use or occupancy during the Term of any part or the Premises or anything appurtenant thereto; C. All charges for private roadway and sewer service, maintenance and repair; and D. All taxes and assessments, if any, which shall or may during the Term be charged, levied, assessed or imposed upon, or become a lien, upon, the personal property of Lessee used in the operation at the Premises and the parking lot and appurtenances and which if not paid by Lessee would be collectible from Lessor. SECTION 3.09. As used herein: [TEXT FROM THIS SECTION INTENTIONALLY OMITTED] A. The term "Index" shall mean either (i) the Consumer Price Index for Urban Wage Earners and Clerical Workers - Revised, U.S. City Average, All Items, published by the Bureau of Labor Statistics of the United States Department of Labor (or any successor agency of the United States) for the United States, ("Consumer Price Index"), computed on the basis of + equals 100 or (ii) in the event that the Consumer Price Index ceases to use the + average of 100 as the basis of calculation or it a substantial change is made in the terms or number of items contained in the Consumer Price Index, then the Index shall be the Consumer Price Index at the time in effect but adjusted to the figure that would have been arrived at had the manner of computing the Consumer Price Index in effect at the date of this Lease not been altered, and for such purpose if instructions are issued for the conversion of the old Consumer Price Index to the new Consumer Price Index the same shall be followed, or (iii) in the event that the Consumer Price Index is not available or may not lawfully be used for the purpose of determining increases in rents, the Index shall be a successor or substitute index to the Consumer Price Index, appropriately adjusted, and for such purpose if instructions are issued for the conversion of the Consumer Price Index to the successor or substitute Index the same shall be followed. When referring to an Escalation Year, Index shall mean the average of the monthly computation for the twelve months of such Escalation Year. + 1982-1984 B. The term "Base Level" shall mean the Index in effect on the first day of the month in which this Least is entered into. SECTION 3.10. [SECTION 3.10, INCLUDING SUBSECTIONS A, B, C, AND D WERE INTENTIONALLY OMITTED] SECTION 3.11. [SECTION 3.11, INCLUDING SUBSECTIONS A AND B WERE INTENTIONALLY OMITTED] 6 ARTICLE FOURTH USE OF PREMISES SECTION 4.01. Lessee shall have the right to use the Premises for warehousing, distribution and office use incidental thereto and for no other purpose. SECTION 4.02. Lessee shall not use or occupy the Premises, or suffer or permit the Premises or any part thereof to be used, in any manner, or anything to be done therein, or suffer or permit anything to be brought into or kept therein, which would in any way, in the sole judgment of Lessor, do or tend to do any of the following: (a) violate any of the provisions of the Underlying Lease or the Superior Mortgage (as such terms are hereinafter defined); (b) violate any Legal Requirements or Insurance Requirements (as such terms are hereinafter defined); (c) make void or voidable any insurance policy then in force with respect to the Building, Building Equipment or any other building or improvement on the Facility; (d) make unobtainable from reputable insurance companies authorized to do business in the State of New Jersey at standard rates any fire or other casualty insurance with extended coverage, or rental, liability or boiler insurance, or other insurance provided for in Section 10.01 or required to be furnished by Lessor under the terms of the Underlying Lease or the Superior Mortgage with respect to the Building, Building Equipment or any other building or improvement on the Facility; (e) cause, or be likely to cause, physical damage to the Premises or the Facility or any party thereof; (f) constitute a public or private nuisance; (g) impair the appearance, character or reputation of the Facility; (h) discharge or cause the discharge of objectionable substances, fumes, vapors or odors; (i) impair or interfere with or lend to impair or interfere with the use of the Facility by, or occasion discomfort, annoyance or inconvenience to, Lessor or any of the other tenants of Lessor or occupants of the Facility; (j) cause Lessee to default in the observance and performance of any of its other obligations to be observed and performed under this Lease; and (k) interfere with the effectiveness or accessibility of the utility, mechanical, electrical and other systems installed or located anywhere at the Facility. The provisions of this Section, and the application thereof, shall not be deemed to be limited in any way to or by the provisions of any other Section of this Article or any of the rules and regulations adopted by Lessor from time to time. SECTION 4.03. If any governmental license or permit (including, if Lessor shall so require, a certificate of occupancy) shall be required for the proper and lawful conduct of Lessee's business in the Premises or any part thereof, then Lessee, at its sole cost and expense, shall duly procure and thereafter maintain such license or permit and submit the same to inspection by Lessor. Lessee shall at all times comply with the terms and conditions of each such license or permit, but in no event shall failure to procure and maintain same by Lessee affect Lessee's obligations hereunder. SECTION 4.04. Lessee shall not use or occupy the Premises, or suffer or permit anyone to use or occupy the Premises, in violation of any certificate of occupancy issued for the Building. The statement in Section 4.01 as to the nature of the business to be conducted by Lessee in the Premises shall not be deemed or construed to constitute a representation or guaranty by Lessor that such business may be conducted in the Premises or is lawful or permissible under any certificates of occupancy issued for the Building, or otherwise permitted by law. 7 SECTION 4.05. Lessee shall not place, or suffer or permit anyone to place, a load upon any floor of the Building that exceeds the floor load per square foot that such floor was designed to carry and which is allowed by certificate, rule, regulation, permit or law, nor shall Lessee overload, or suffer or permit anyone to overload, any wall, roof, land surface, pavement, landing or equipment on the Premises, the Facility or any private roadway or railroad siding. Equipment in the Building shall be placed and maintained by Lessee, at Lessee's sole cost and expense, in such manner as shall, in Lessor's judgment, be sufficient to absorb vibration and noise and prevent annoyance or inconvenience to Lessor or any of the other tenants of Lessor at the Facility. SECTION 4.06. Lessee shall not use, or suffer or permit anyone to use, on or across the Premises, or any part of the Facility or any private roadway, any equipment having caterpillar type tracks or tires, or any other equipment which would be damaging to the Premises, or the road surface or black-topping thereon. SECTION 4.07. Lessee shall not, and shall not suffer or permit anyone, on the Premises, at the Facility or on any private roadway or railroad siding, to (a) load or unload, or otherwise deal in or handle, any dirt, salt, garbage, fertilizer, pumice, packaged or unpackaged chemicals, munitions, incendiary materials, "red label" goods or other dangerous or hazardous materials, (b) incinerate or burn any material whatsoever in an open or contained incinerator or fire on the Premises or at the Facility, or (c) load, unload, receive, store, stockpile, fragment, process, sell, purchase, trade, or otherwise handle or deal in scrap metal or other scrap material (including, without limitation, used automobiles or other used or surplus materials). In no event shall Lessee or any person use the Premises as a truck terminal. SECTION 4.08. [NOTE: ORIGINAL SECTION 4.08 WAS INTENTIONALLY OMITTED] SECTION 4.09. Lessee shall not place any signs upon the Premises or at the Facility without the prior written consent of Lessor in each instance. SECTION 4.10. The right of Lessee to use the private roadway shall be upon and subject to the following conditions: (a) all use shall be non-exclusive and only as is necessary for ingress and egress of vehicles to and from the Premises, such vehicles to be either (i) automobiles of employees of Lessee, or Lessee's customers, who are engaged in operations at the Premises, or of persons seeking access to the Premises for business purposes incidental to the use of the Premises permitted to Lessee hereunder, or (ii) trucks engaged in delivering merchandise to and removing merchandise from the Premises; (b) the right shall be exercised in a manner which will not hamper, interfere with or prevent the reasonable use of the private roadway by others; (c) Lessee shall not cause, suffer or permit the private roadway to be obstructed and shall comply with all rules and regulations of Lessor relating to the use of the private roadway which are now in effect or which may hereafter be promulgated for the safe and efficient use of the Facility, and shall fully comply with all directions of Lessor relating to the use thereof; (d) Lessor shall not be liable for any inconvenience, delay or loss to Lessee (or any person claiming through or under Lessee) by reason of interruption of use by Lessee of any private roadway; (e) Lessor reserves the right, at its sole option, to change the private roadway designation at any time and from time to time; and 8 (f) no private roadway designation shall be required if and so long as the Premises are adjacent to a public thoroughfare. SECTION 4.11. The right of Lessee to use the parking lot shall be upon and subject to the following conditions: (a) all use shall be only for parking of automobiles of employees of Lessee, or Lessee's customers, who are engaged in operations at the Premises and parking of trucks engaged in delivering merchandise to and removing merchandise from the Premises; (b) the right shall be exercised in a manner which will not hamper, interfere with or prevent the reasonable use of the Facility by others; (c) Lessee shall not cause, suffer or permit the parking lot to be obstructed and shall comply with all rules and regulations of Lessor relating to the use of parking areas which are now in effect or which may hereafter be promulgated for the safe and efficient use of the Facility, and shall fully comply with all directions of Lessor relating to the use thereof; and (d) Lessor shall not be liable for any inconvenience, delay or loss to Lessee (or any person claiming through or under Lessee) by reason of interruption of use by Lessee of the parking lot. ARTICLE FIFTH POSSESSION AND CONDITION OF PREMISES SECTION 5.01. Lessee has inspected the Premises and the parking lot and the state of title thereto and (a) Lessee accepts the Premises and the parking lot in their state and condition on the Commencement Date and without any representation or warranty, express or implied, in fact or by law, by Lessor, and without recourse to Lessor, as to the title thereto, the nature, condition or usability thereof or as to the use or occupancy which may be made thereof, and (b) Lessor shall not be liable for any latent or patent defects in the Premises or in any private roadway, sewers or parking area. SECTION 5.01. If for any reason, Lessor is unable to deliver possession of the Premises to Lessee on the Commencement Date, then this Lease and the validity thereof shall not be affected thereby and Lessee shall not be entitled to terminate this Lease, to claim actual or constructive eviction, partial or total, or to be compensated for loss or injury suffered as a result thereof, nor shall the same be construed in any wise to extend the Term, but, notwithstanding the provisions of Section 1.01, the Commencement Date shall be deemed to occur only if and when possession of the Premises is made available to Lessee. If permission is given to Lessee to enter into the possession of the Premises or to occupy premises other than the Premises prior to the date specified as the commencement of the Term, Lessee covenants and agrees that such occupancy shall be deemed to be under all terms, covenants, conditions and provisions of this Lease (including, without limitation, the obligation to pay rent on a PER DIEM basis at the rate herein provided to be paid during the Term). 9 ARTICLE SIXTH UTILITIES AND OTHER SERVICES SECTION 6.01. Lessor shall not be required to furnish to Lessee any facilities or services of any kind whatsoever during the Term, such as, but not limited to, fire alarm, security, sprinkler or railway service, water, steam, heat, gas, hot water, electricity, light and power and any of the services described in Section 6.02. Lessor shall not be required to make any alterations, rebuildings, replacements, changes, additions, improvements or repairs during the Term, except as herein expressly provided. If, however, Lessor shall furnish any of the foregoing to Lessee, then Lessee shall pay Lessor's standard charge therefor, promptly upon demand, as Additional Rent. SECTION 6.02. Without limiting any other provision of this Article or of Article SEVENTH (and, in particular, without in any way increasing Lessor's obligations, or diminishing Lessee's obligation to repair and maintain the Premises and the parking lot), Lessee agrees to pay Lessor promptly upon demand, as Additional Rent, an amount equal to eight tenths (0.8%) percent of the cost which Lessor, at its option, may incur from time to time in furnishing or obtaining security protection or guard service for or in managing, equipping, cleaning (including snow plowing and related services), lighting, repairing, replacing and otherwise maintaining, the fences, lawns, shrubbery, roads, parking areas, private roadways and curbs at the Facility (including the cost of such services or of any independent contractor engaged by Lessor to provide any of such services). Lessee agrees that the provisions of Section 15.02 shall be applicable to such services. ARTICLE SEVENTH REPAIR AND MAINTENANCE SECTION 7.01. During the Term, Lessor, at its sole cost and expense, shall repair the following portions of the Premises: foundation, roof, exterior walls and structural steel; PROVIDED, HOWEVER, that the condition requiring repair does not arise, directly or indirectly, out of the manner of use of the Premises by, or any act or omission of, Lessee or any person claiming through or under Lessee or any servant, employee, invitee, agent or contractor of Lessee or any such person and PROVIDED, FURTHER, that Lessee shall give Lessor prompt notice, in reasonable detail, identifying the condition requiring repair. SECTION 7.02. Except as otherwise expressly provided in this Lease, Lessee assumes the sole responsibility for the condition, operation, maintenance, repair (structural and otherwise) and management of the Premises. Particularly, but without limitation of the immediately foregoing covenant, Lessee, except as otherwise provided in this Lease, at its sole cost and expense and in order to assure to Lessor the payment of the rent hereunder, shall (a) take good care of the Premises and keep the same and all parts thereof, including, without limitation, the Building Equipment, roof, foundations, walls, fences, lawns, shrubbery, roads, parking lots, and appurtenances thereto, together with any and all alterations, additions and improvements therein or thereto, and any and all sewers, or private roadways, in good order and condition, subject to reasonable wear and tear (provided that in no event shall Lessee permit the same to become or be 10 in a state of disrepair), suffering no waste or injury, and (b) promptly make all needed repairs and replacements, interior or exterior, structural or otherwise, ordinary as well as extraordinary, foreseen as well as unforeseen, in and to the Premises, including any roads, parking lots, and appurtenances, and in and to any and all sewers and private roadways. If Lessee shall be required to replace any Building Equipment pursuant to the provisions hereof, Lessee shall promptly replace the same with other Building Equipment (title to which will immediately vest in Lessor), free of superior title, liens or claims, and of at least equal utility and value. All repair and replacements required or authorized under this Lease shall be constructed and installed in accordance with all applicable Legal Requirements and Insurance Requirements and shall be equal in quality and class to the original work. Lessee, further, shall not permit the accumulation of refuse matter, nor permit anything to be done upon the Premises which would invalidate or prevent the procurement of any insurance policies which may at any time be required pursuant to the provisions of this Lease. Lessee shall not obstruct or permit the obstruction of any roadway or thoroughfare upon or adjacent to the Facility, nor of any sewers or private roadway. Lessee shall keep all sidewalks, parking lots, curbs, roadways and thoroughfares upon or adjacent to the parking lot, and all private roadways, clean and free of snow and ice. Lessee, at its sole cost and expense, shall maintain and take good care of the lawns and shrubbery on or adjacent to the parking lot. SECTION 7.03. If and when any repairs or replacements are required to be performed under Section 7.02 and are not performed, then Lessor may give notice thereof to Lessee (which may be given orally in the case of emergencies) and Lessor, at its option, may elect either to perform such repairs and replacements as the agent of Lessee or to allow Lessee to perform the same, but in either case such repairs and replacements shall be performed at the sole cost, expense and risk of Lessee. If Lessor shall elect to perform any item of repair or replacement as aforesaid, then Lessee shall pay Lessor's standard charge therefor, promptly upon demand, as Additional Rent. In the event of any dispute concerning such Additional Rent, Lessee shall pay the same as demanded by Lessor and such payment may be without prejudice to Lessee's position if Lessee so requests at the time of payment. If the dispute shall be determined in Lessee's favor, Lessor shall forthwith pay Lessee the amount of Lessee's overpayment of Additional Rent. ARTICLE EIGHTH LESSEE TO COMPLY WITH LAWS SECTION 8.01. Lessee shall promptly comply with: (a) the requirements of every statute, law, ordinance, regulation, rule, requirement, order or directive, now or hereafter made by any Federal, state, or local government or any department, political subdivision, bureau, agency, office or officer thereof, or of any other governmental authority having jurisdiction with respect to and applicable to (i) the Premises and appurtenances thereto, (ii) the condition, equipment, maintenance, use or occupation of the Premises, including the making of an alteration or addition in or to any structure upon, connected with, or appurtenant to the Premises, (iii) the Facility or any space adjacent to the Premises, or (iv) any railroad siding, sewers or private roadway (all of the foregoing being referred to collectively herein as "Legal Requirements"); and 11 (b) the rules, regulations, orders and other requirements of any insurance rating or regulatory organization having jurisdiction of, and which are applicable to, the Premises or the Facility and of any liability, casualty or other insurance policy which either Lessor or Lessee is required hereunder to maintain or may maintain hereunder (all of the foregoing being referred to collectively herein as "Insurance Requirements"); whether or not such compliance involves structural repairs or changes or be required on account of any particular use to which the Premises, or any part, may be put, and whether or not any such Legal Requirements or Insurance Requirements be of a kind not now within the contemplation of the parties hereto. SECTION 8.02. Without limiting the generality of the provisions of Section 8.01 or any other provisions of this Lease, Lessee, at its sole cost and expense, shall comply with, and observe and perform all of the obligations of Lessor and/or Lessee under, the New Jersey Environmental Cleanup Responsibility Act, N.J.S.A. 13:1K-6 et seq. and the rules, regulations, requirements, orders and directives issued thereunder (collectively, "ECRA"), insofar as the same may pertain to the use, or the manner of use, of the Facility, the Premises or any appurtenance thereto by Lessee or any other person during the Term or during any other period when Lessee or any person claiming under Lessee may be permitted to enter upon the Facility, the Premises or any appurtenance thereto, and, among other things, Lessee shall: (a) Not permit or allow the Premises or the parking lot to be used in a manner so as to be considered an "industrial establishment" as such term is used in ECRA without the prior written consent of Lessor; (b) At all times during the Term keep Lessor advised of the "Standard Industrial Classification" (as such term is used in ECRA) of Lessee and each other person using the Premises; (c) File as and when required by ECRA all forms, notices, affidavits, certifications, plans, declarations, reports and other information as may be necessary or desirable with respect to ECRA; (d) Make or cause to be made all such soil, water and other tests as may be necessary or desirable with respect to ECRA; (e) Furnish Lessor with a copy of each of the items referred to in the preceding clauses, and with copies of all correspondence pertaining to ECRA, as and when available; and (f) Give Lessor prompt notice if, as and when Lessee becomes aware of any use, spill, discharge or other event at the Facility or the Premises concerning a hazardous substance or waste to which ECRA may pertain. The provisions of this Section shall survive the expiration or termination of this Lease. 12 ARTICLE NINTH ENTRY ON PROPERTY BY LESSOR SECTION 9.01. Lessee shall permit Lessor, Lessor's agents, and its invitees, to enter the Premises, or any part thereof, at all reasonable times for the purpose of (a) inspecting the same, (b) curing defaults of Lessee, (c) showing the same to mortgagees, appraisers or prospective lenders, purchasers or lessees, (d) observing the performance by Lessee of its obligations under this Lease, (e) performing any act or thing which Lessor may be obligated or have the right to do under this Lease or otherwise, and (f) any other reasonable purpose. Lessor and any furnishers of utility or other services shall have the right to maintain existing utility, mechanical, electrical and other systems and to enter upon the Premises to make such repairs, replacements or alterations therein or in or to the Premises as may, in the opinion of Lessor, be deemed necessary or advisable. Lessor shall not be liable for inconvenience, annoyance, disturbance, loss of business or other damage to Lessee or any subtenant by reason of making any repairs or the performance of any work, or on account of bringing materials, tools, supplies and equipment into or through the Premises during the course thereof and the obligations of Lessee under this Lease shall not be affected thereby. The rights provided in this Article shall be exercised so as to minimize interference with the use and occupancy of the Premises by Lessee. Nothing contained in this Article shall impose, or shall be construed to impose, upon Lessor any obligation to maintain the systems referred to in this Article, or the Premises or anything appurtenant thereto, or to make repairs, replacements or alterations thereof or thereto, or to create any liability for any failure so to do. If during the last month of the Term Lessee has removed all or substantially all of its property, Lessor may, without notice, enter the Premises and alter the same without affecting Lessee's liability under this Lease. ARTICLE TENTH INSURANCE SECTION 10.01. Lessor may keep the Premises insured, during the Term, against loss or damage by any and all risks and hazards, and with coverage against loss of rents. Such insurance (herein sometimes referred to as "Lessor's fire (casualty) insurance") shall be in such amounts, with such coverage and such insurers, as Lessor, in its sole discretion, may determine. Lessor may maintain such insurance under a "blanket" policy or policies. All policies shall name Lessor as the insured, and any mortgagee, as the interest of such mortgagee may appear, by standard mortgagee clause without contribution, with proceeds payable to Lessor. Such policies shall be held by Lessor and the loss, if any, shall be adjusted with the insurance companies solely by Lessor. The cost of all premiums and other charges for maintaining the insurance provided for in this Section shall be borne solely by Lessee and Lessee shall pay to Lessor, promptly upon demand, as Additional Rent hereunder, all such cost. In the event of any dispute concerning such Additional Rent, Lessee shall pay the same as demanded by Lessor and such payment may be without prejudice to Lessee's position if Lessee so requests at the time of payment. If the dispute shall be determined in Lessee's favor, Lessor shall forthwith pay Lessee the amount of Lessee's overpayment of Additional Rent. Lessee shall not take out separate insurance concurrent in form or contributing in the event of loss with that provided for in this Section. 13 SECTION 10.02. A. Lessee shall obtain and keep in full force and effect during the Term, at its own cost and expense, (a) public liability insurance (with a contractual liability endorsement covering the matters set forth in Article FIFTEENTH) having a combined single limit of not less than $3,000,000, protecting Lessor, the lessor under the Underlying Lease and Lessee as insureds (and naming each such person as an insured party) against any and all claims for personal injury, death or property damage occurring in, upon, adjacent to or connected with the Premises, the Facility, the private roadway, or any part thereof; and (b) insurance (herein sometimes referred to as "Lessee's fire (casualty) insurance") against loss or damage by any and all risks and hazards to Lessee's Property (as such term is hereinafter defined) for the full insurable value thereof, protecting Lessor, the holder of the Superior Mortgage, the lessor under the Underlying Lease and Lessee as insureds (and naming each such person as an insured party). All such insurance to be obtained by Lessee described in clauses (a) and (b) of the preceding sentence shall be written as primary insurance not contributing with any coverage that Lessor may carry. Whenever, in Lessor's judgment, good business practice indicates the need for additional insurance coverage or different types of insurance, Lessee shall, upon demand, obtain such insurance at its own expense. B. Said insurance is to be written in form and substance satisfactory to Lessor by a good and solvent insurance company of recognized standing, admitted to do business in the State of New Jersey, which shall be reasonably satisfactory to Lessor. Lessee shall procure, maintain and place such insurance and pay all premiums and charges therefor and upon failure to do so Lessor may, but shall not be obligated to, procure, maintain and place such insurance or make such payments, and in such event the Lessee agrees to pay the amount thereof, plus interest at the maximum legal rate then prevailing, to Lessor on demand as Additional Rent. Lessee shall cause to be included in all such insurance policies a provision to the effect that the same will not be cancelled or modified except upon 60 days prior written notice to Lessor. Each such Lessee's fire (casualty) insurance policy shall contain an agreement by the insurer that the act or omission of one insured will not invalidate the policy as to any other insured. Not less than 10 days prior to the Commencement Date the original insurance policies shall be deposited with Lessor. Any renewals, replacements or endorsements thereto shall also be deposited with Lessor, not less than 60 days prior to the expiration date of the policy being renewed, replaced or endorsed, to the end that said insurance shall be in full force and effect at all times during the Term. SECTION 10.03. Each party agrees to use its best efforts to include in each of its insurance policies (insuring the Premise and Lessor's property therein, in the case of Lessor, and insuring Lessee's Property and any other interest of Lessee with respect to the Premises, in the case of Lessee, against loss occasioned by fire or other casualty) a waiver of the insurer's right of subrogation against the other party, or if such waiver should be unobtainable or unenforceable, (a) an express agreement that such policy shall not be invalidated if the insured waives or has waived before the casualty the right of recovery against any party responsible for a casualty covered by the policy, or (b) any other form of permission for the release of the other party, or (c) the inclusion of the other party as an additional insured, but not a party to whom any loss shall be payable. Any policy under Section 10.02 which shall name Lessor as an additional insured shall contain agreements by the insurer that the policy will not be cancelled without at least 60 days prior notice to Lessor that the act or omission of Lessee will not invalidate the policy as to 14 Lessor, and that the addition of Lessor as a named insured does not in any way obligate Lessor to pay any insurance premium. SECTION 10.04. As long as Lessor's fire (casualty) insurance policies then in force include the waiver of subrogation or agreement or permission to release liability referred to in Section 10.03 or name Lessee as an additional insured, Lessor hereby waives (a) any obligation on the part of Lessee to make repairs to the Premises necessitated or occasioned by fire or other casualty that is an insured risk under such policies, and (b) any right of recovery against Lessee for any loss occasioned by fire or other casualty that is an insured risk under such policies. In the event that at any time Lessor's fire (casualty) insurance carriers shall not include such or similar provisions in Lessor's fire (casualty) insurance policies, the waivers set forth in the foregoing sentence shall be deemed of no further force or effect. SECTION 10.05. Lessee hereby waives (and agrees to cause any other permitted occupants of the Premises to execute and deliver to Lessor written instruments waiving) any right of recovery against Lessor, the lessor under the Underlying Lease, the holder of the Superior Mortgage, any other tenants or occupants of the Facility, and any servants, employees, agents or contractors of Lessor, or of any such lessor or holder or of any such other tenants or occupants, for any loss occasioned by fire or other casualty whether or not an insured risk under Lessee's fire (casualty) insurance policies. Lessee, or any other permitted occupant of the Premises, as the case may be, shall look solely to the proceeds of Lessee's fire (casualty) insurance policies to compensate Lessee or such other permitted occupant for any loss occasioned by fire or other casualty. SECTION 10.06. Except to the extent expressly provided in Section 10.04, nothing contained in this Lease shall relieve Lessee of any liability to Lessor or to its insurance carriers which Lessee may have under law or the provisions of this Lease in connection with any damage to the Premises by fire or other casualty. SECTION 10.07. Nothing contained herein shall be deemed to impose upon Lessor any duty to procure or maintain any kinds of insurance or any particular amounts or limits of any such kinds of insurance. ARTICLE ELEVENTH DAMAGE OR DESTRUCTION SECTION 11.01. If the Premises or any part thereof shall be damaged by fire or other casualty, Lessee shall give prompt notice thereof to Lessor and Lessor shall proceed with reasonable diligence to repair or cause to be repaired such damage. Except as provided in Section 11.05, the Fixed Rent shall be abated to the extent that the Premises shall have been rendered Untenable (as such term is hereinafter defined), such abatement to be from the date of such damage or destruction to the date the Premises shall be substantially repaired or restored or rebuilt. 15 SECTION 11.02. If the Premises shall be totally damaged or rendered wholly Untenantable by fire or other casualty, and Lessor has not terminated this Lease pursuant to Section 11.03 and Lessor has not completed the making of the required repairs and restored and rebuilt the Premises and/or access thereto within 6 months from the date of such damage or destruction, and such additional time after such date (but in no event to exceed 6 months), as shall equal the aggregate period Lessor may have been delayed in doing so by Unavoidable Delays (as such term is hereinafter defined) or adjustment of insurance, Lessee may serve notice on Lessor of its intention to terminate this Lease, and if within 30 days thereafter Lessor shall not have completed the making of the required repairs and restored and rebuilt the Premises, this Lease shall terminate on the expiration of such 30 day period as if such termination date were the Expiration Date, and the Fixed Rent and Additional Rent shall be apportioned as of such date of sooner termination and any prepaid portion of Fixed Rent and Additional Rent for any period after such date shall be refunded by Lessor to Lessee, subject to the claims, if any, of Lessor against Lessee hereunder or otherwise. SECTION 11.03. If the Premises shall be totally damaged or rendered wholly Untenantable by fire or other casualty or if the premises shall be so damaged by fire or other casualty that substantial alteration or reconstruction shall, in Lessor's opinion, be required, then and in any of such events Lessor may, at its option, terminate this Lease and the Term and estate hereby granted, by giving Lessee 30 days notice of such termination, within 90 days after the date of such damage. In the event that such notice of termination shall be given, this Lease and the Term and estate hereby granted shall terminate as of the date provided in such notice of termination (whether or not the Term shall have commenced) with the same effect as if that were the Expiration Date, and the Fixed Rent and Additional Rent shall be apportioned as of such date of sooner termination, and any prepaid portion of Fixed Rent and Additional Rent for any period after such date shall be refunded by Lessor to Lessee, subject to the claims, if any, of Lessor against Lessee hereunder or otherwise. SECTION 11.04. Lessor shall not be liable for any inconvenience or annoyance to Lessee or injury to the business of Lessee resulting in any way from such damage by fire or other casualty or the repair thereof. Lessor will not carry insurance of any kind on Lessee's Property, and Lessor shall not be obligated to repair any damage thereto or replace the same. SECTION 11.05. Except as expressly provided in Section 10.04, nothing herein contained shall relieve Lessee from any liability to Lessor or to its insurers in connection with any damage to the Premises by fire or other casualty if Lessee shall be legally liable in such respect. Notwithstanding any of the foregoing provisions of this Article, if, by reason of some action or inaction on the part of Lessee or any of its employees, agents or contractors, Lessor or the lessor under the Underlying Lease or the holder of the Superior Mortgage shall be unable to collect all of the insurance proceeds (including rent insurance proceeds) applicable to damage or destruction of the Premises by fire or other cause, then, without prejudice to any other remedy which may be available against Lessee, the abatement of Fixed Rent provided for in this Article shall not be effective to the extent of the uncollected insurance proceeds. SECTION 11.06. This Lease shall be considered an express agreement governing any case of damage to or destruction of the Premises or any part thereof by fire or other casualty, and 16 any law providing for such a contingency in the absence of such express agreement, now or hereafter enacted, shall have no application in such case. ARTICLE TWELFTH CURING DEFAULTS; FEES AND EXPENSES SECTION 12.01. If Lessee shall default in the full and prompt performance of any covenant herein and to be performed on Lessee's part, Lessor, without being under any obligation to do so and without thereby waiving such default, may perform such covenant for the account and all at the expense of Lessee and may enter upon the Premises for any such purpose and take all action thereon as may be necessary therefor. All sums so paid by Lessor in connection with the payment or performance by it of any of the obligations of Lessee hereunder and all actual and reasonable costs, expenses and disbursements paid in connection therewith or enforcing or endeavoring to enforce any right under or in connection with this Lease, or pursuant to law, together with interest thereon at the maximum legal rate from the respective dates of the making of each such payment, shall constitute Additional Rent payable by Lessee under this Lease and shall be paid by Lessee or Lessor upon demand by Lessor. The provisions of this Section shall survive the expiration or termination of this Lease. ARTICLE THIRTEENTH CONDITIONAL LIMITATIONS -- DEFAULT PROVISIONS SECTION 13.01. A. If any one or more of the following events shall happen and shall not have been cured within any applicable grace period herein provided: (a) if default shall be made in the due and punctual payment of Fixed Rent or Additional Rent payable by Lessee under this Lease when and as the same shall become due and payable; or (b) if default shall be made by Lessee in the performance of, or compliance with, any of the covenants, agreements or conditions contained in this Lease (other than those referred to in any other subdivision of this Subsection) and such defaulting shall continue for a period of thirty (30) days after notice thereof from Lessor to Lessee; or (c) if Lessee shall abandon the Premises; or (d) if Lessee shall file a voluntary petition in bankruptcy or insolvency, or shall be adjudicated a bankrupt or insolvent, or shall file any petition or answer seeking any reorganization, arrangement, composition, readjustment, liquidation, dissolution, or similar relief under the present or any future federal bankruptcy act or any other present or future applicable federal, state or other statute or law, or shall make an assignment for the benefit of creditors or shall seek or consent to or acquiesce in the appointment of any trustee, receiver or liquidator of Lessee or of all or any part of Lessee's property, or shall generally 17 not pay its debts as they become due or shall admit in writing its inability to pay its debts; or (e) if, within 60 days after the commencement of any proceedings against Lessee, whether by the filing of a petition or otherwise, seeking any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under the present or any future federal bankruptcy act or any other present of future applicable federal, state or other statute or law, such proceeding shall not have been dismissed, or if, within 60 days after the appointment of any trustee, receiver liquidator of Lessee, or of all or any part of Lessee's property, without the consent or acquiescence of Lessee, such appointment shall not have been vacated or otherwise discharged, or if any execution or attachment shall be issued against Lessee or any of Lessee's property pursuant to which the Premises shall be taken or occupied or attempted to be taken or occupied; or (f) if any event shall occur or any contingency shall arise whereby this Lease or the estate hereby granted or the unexpired balance of the Term would, by operation of law or otherwise, devolve upon or pass to any person other than Lessee, except as is expressly permitted under Article TWENTY-SEVENTH, or if default shall be made by Lessee in the performance of, or compliance with, the covenants, agreements and conditions set forth in Article TWENTY-SEVENTH; or (g) if Lessee shall default in the observance or performance of any term, covenant or condition on Lessee's part to be observed or performed under any other lease covering space at or adjacent to the Facility or any other lease with Lessor; or (h) if Lessee's obligations under this Lease shall have been guaranteed by any person other than Lessee and such person shall default in the observance or performance of any term, covenant or condition to be observed or performed by such person under the instrument or agreement containing such guarantees or if at any time, the guaranty of Lessee's obligations under the Lease, executed and delivered by The Dexter Corporation ("Guarantor") to Lessor simultaneously herewith, shall not be valid, binding or enforceable, or (i) if any financial statement or other information furnished to Lessor or Lessee in connection with this Lease is materially false or misleading; or (j) if Lessee shall default in the observance or performance of any term, covenant or condition on Lessee's part to be observed or performed under the provisions of Section 33.11, Section 33.12, or Section 33.13; or (k) if Lessee is the subject of a Chapter 11 reorganization under the Bankruptcy Reform Act of 1978 and such reorganization is not confirmed within 18 months from the time of the filing of a voluntary or involuntary petition thereunder (it being understood that in such event Lessee consents to the termination of the automatic stay provisions of Section 362 of such Act); 18 then and in any such event (herein sometimes called an "Event of Default") Lessor may give written notice ("Termination Notice") to Lessee specifying such Event of Default or Events of Default and stating that this Lease and the Term shall expire and terminate on the date specified in the Termination Notice, which shall be at least three (3) days after the giving of the Termination Notice, and on the date specified therein this Lease and the Term and all rights of Lessee under this Lease shall expire and terminate, it being the intention of Lessor and Lessee hereby to create conditional limitations, and Lessee shall remain liable as provided in Article FOURTEEN and in accordance with those provisions of this Lease which are specifically stated herein to survive the expiration or termination of this Lease. B. Notwithstanding the provisions of Section 13.01A, if there shall be an Event of Default at any time or from time to time under the provisions of subdivision (a) of Section 13.01A, Lessor may, in lieu of giving a Termination Notice, at any time after the occurrence of any such Event of Default and during the continuance thereof, institute an action for the recovery of the Fixed Rent and/or Additional Rent in respect of which an Event of Default shall have occurred and be continuing. Neither the commencement of any such action for the recovery of Fixed Rent and/or Additional Rent not the prosecution thereof shall be deemed a waiver of Lessor's right to give a Termination Notice in respect of any such Event of Default during the continuance thereof and Lessor may, notwithstanding the commencement and prosecution of any such action, give a Termination Notice and terminate this Lease pursuant to Section 13.01A at any time during the continuance of such Event of Default. C. If, at any time (a) Lessee shall be comprised of 2 or more persons, or (b) Lessee's obligations under this Lease shall have been guaranteed by any person other than Lessee, or (c) Lessee's interest in this Lease shall have been assigned, the word "Lessee", as used in subdivisions (d), (e) and (k) of Section 13.01A shall be deemed to mean any one or more of the persons primarily or secondarily liable for Lessee's obligations under this Lease. Any monies received by Lessor from or on behalf of Lessee during the pendency of any proceeding of the types referred to in said subdivisions (d), (e) and (k) of Section 13.01A shall be deemed paid as compensation for the use and occupation of the Premises and the acceptance of any such compensation by Lessor shall not be deemed an acceptance of rent or a waiver on the part of Lessor of any rights under Section 13.01. D. If default shall be made in the due and punctual payment of Fixed Rent and/or Additional Rent payable by Lessee under this Lease when and as the same shall become due and payable and such default shall continue for fifteen (15) days, Lessee shall pay Lessor, as Additional Rent, a late charge in an amount equal to the lesser of (a) two (2%) percent of the total amount of Fixed Rent and/or Additional Rent in default for each month or portion thereof for which such Fixed Rent and/or Additional Rent is in default or (b) the maximum amount permissible by law. E. In the event Lessor institutes any proceeding to terminate this Lease or to recover Fixed Rent and/or Additional Rent based upon the occurrence of an Event of Default, Lessee shall pay Lessor, as Additional Rent, all costs and expenses, including attorneys' fees, incurred by Lessor in any such proceeding, provided Lessor is either successful on the merits or such 19 proceeding is ultimately settled or otherwise disposed of by termination of the Lease or agreement to pay the Fixed Rent and/or Additional Rent which is the subject of the proceeding. SECTION 13.02. In the event that this Lease shall be terminated as in this Article provided, Lessor or Lessor's agents may, immediately, or at any time thereafter, without further notice and without being liable for any damages therefor, enter upon and re-enter the Premises and possess and repossess itself thereof, by summary proceedings, ejecting or otherwise, and may dispossess Lessee and remove Lessee and all other persons and their property from the Premises and may have, hold and enjoy the Premises and the right to receive all income of and from the same. No re-entry by Lessor pursuant to this Article shall be deemed an acceptance of a surrender of this Lease or shall absolve or discharge Lessee from any liability under this Lease. SECTION 13.03. In the event that this Lease shall be terminated as in this Article provided, Lessor may, at any time or from time to time thereafter, relet the Premises, or any part thereof, for such term or terms (which may be greater or less than the period which would otherwise have constituted the balance of the Term) and on such conditions (which may include concessions or free rent) as Lessor (in its sole discretion) may determine, to any tenant which it may deem suitable and satisfactory and for any use and purpose it may deem appropriate and may collect and receive the rents therefor. No reletting shall be deemed an acceptance of a surrender of this Lease or shall relieve Lessee of any liability under this Lease or otherwise affect any such liability. Lessor, at its option, may make such repairs, replacements, alterations, additions, improvements, decorations and other physical changes in and to the Premises as Lessor, in its sole discretion, considers advisable or necessary in connection with any such reletting or proposed reletting, without relieving Lessee of any liability under this Lease or otherwise affecting any such liability. Lessor shall in no way be responsible or liable for any failure to relet the Premises, or any part thereof, or for any failure to collect any rent due upon such reletting. Lessor shall not in any event be required to pay Lessee (but shall credit Lessee, to the extent set forth in Article FOURTEENTH, with) any sums received by Lessor on a reletting of said premises whether or not in excess of the rent reserved in this Lease. SECTION 13.04. Lessee, on its own behalf and on behalf of all persons claiming through or under Lessee, including all creditors, does hereby waive any and all rights and privileges, so far as is permitted by law, which Lessee and all such persons might otherwise have under any present or future law, to (i) the service of any notice of intention to re-enter or to institute legal proceedings to that end, (ii) redeem the Premises, (iii) re-enter or repossess the Premises, or (iv) restore the operation of this Lease, after Lessee shall have been dispossessed by a judgment or by warrant of any court or judge, or after any re-entry by Lessor or alter any expiration or termination of this Lease and the Term, whether such dispossess, re-entry, expiration or termination shall be by operation of law or pursuant to the provisions of this Lease. The words "re-enter," "reentry" and "re-entered" as used in this Lease shall not be deemed to be restricted to their technical legal meanings. SECTION 13.05. In the event that Lessee shall dispute the validity or amount, or the time or manner of payment of, any rent claimed by Lessor to be due from Lessee under this Lease, Lessee shall nevertheless pay the same and such payment may be without prejudice to Lessee's position if Lessee so requests at the time of payment. If the dispute shall be determined in 20 Lessee's favor, Lessor shall forthwith pay Lessee the amount of Lessee's overpayment of such rent. Lessee's failure to observe and perform the provisions of this Section shall be deemed a default under subdivision (a) of Section 13.01A. ARTICLE FOURTEENTH MEASURE OF DAMAGES IN EVENT OF DEFAULT SECTION 14.01. A. In the event that this Lease be terminated pursuant to Article THIRTEENTH as a result of an Event of Default on the part of Lessee and whether or not the Premises be relet, Lessor shall be entitled to retain all monies, if any, paid by Lessee to Lessor, whether as advance rent or otherwise, but such monies shall be credited by Lessor against any rent due at the time of such termination, or, at Lessor's option, against any damages payable by Lessee, and Lessor shall be entitled to recover from Lessee, and Lessee shall pay to Lessor, the following: (a) All rent to the date upon which this Lease and the Term shall have terminated; and (b) All expenses incurred by Lessor in recovering possession of the Premises (including summary proceedings), restoring the Premises to good order and condition, maintaining the Premises in good order and condition while vacant, altering or otherwise preparing the same for reletting and in reletting the Premises (including brokerage commissions and legal expenses), the same to be paid by Lessee to Lessor on demand; and (c) The amount by which the rent, but for the termination of this Lease, would have been payable under this Lease from the date of termination to the Expiration Date exceeds the rental and other income, if any, collected by Lessor in respect of the Premises, or any part thereof, subject nevertheless to the provisions of Section 13.03, said amounts to be due and payable for the period which otherwise would have constituted the unexpired portion of the Term (that is to say, upon each of such days Lessee shall pay to Lessor the amount of deficiency then existing). B. Whether or not Lessor shall have collected any monthly deficiencies as aforesaid, Lessor shall be entitled to recover from Lessee on demand, as and for liquidated damages, a sum equal to the amount by which the Fixed Rent and Additional Rent payable hereunder for the period which otherwise would have constituted the unexpired portion of the Term (conclusively presuming the Additional Rent to be the same as was payable for the year immediately preceding such termination or reentry) exceeds the then rental value of the Premises for the same period, both discounted a the rate of 4% per annum to present worth. If the Premises or any part thereof be relet by Lessor for the unexpired portion of the Term, or any part thereof, before presentation of proof of such liquidated damages to any court, commission or tribunal, the amount of rent reserved upon such reletting shall be deemed prima facie to be the fair and reasonable rental value for the part or the whole of the Premises so relet during the term of the reletting. Nothing herein contained shall limit or prejudice the right of Lessor to prove for and obtain as damages by reason of such termination an amount equal to the maximum allowed by any statute or rule of law in 21 effect at the time when, and governing the proceedings in which, such damages are to be proved, whether or not such amount be greater or less than the amount of liquidated damages referred to above. SECTION 14.02. In no event shall Lessee be entitled to receive any excess of the rental and other income collected by Lessor in respect of the Premises over the sums payable by Lessee to Lessor hereunder. In no event shall Lessee be entitled in any suit for the collection of damages pursuant to this Article to a credit in respect of any such rental and other income, except to the extent that such rental and other income is allocable to the portion of the Term in respect of which such suit is brought and is actually received by Lessor prior to the entry of judgment in such suit. SECTION 14.03. Separate actions may be maintained by Lessor against Lessee from time to time to recover any damages which, at the commencement of any such action, have then or theretofore become due and payable to Lessor under Article FOURTEENTH, without waiting until the end of the Term and without prejudice to Lessor's right to collect damages thereafter. ARTICLE FIFTEENTH LESSEE TO INDEMNIFY LESSOR SECTION 15.01. Notwithstanding that joint or concurrent liability may be imposed upon Lessor by statute, ordinance, rule, regulation, order or court decision, and notwithstanding any insurance furnished by Lessee to Lessor pursuant hereto or otherwise, Lessee shall and does hereby indemnify and hold harmless Lessor, and Lessor's agents, from and against any and all loss, liability, fines, suits, claims, obligations, damages, penalties, demands and actions, and costs and reasonable expenses of any kind or nature (including architects' and attorneys' fees) due to or arising out of any of the following: (a) any work or thing done in, on or about the Premises or any part thereof or any use, possession, occupation, condition, operation, maintenance or management of the Premises or the Facility or any part thereof, or any parking lot, sidewalk, curb, or space adjacent thereto or any railroad siding, sewers, or private roadway, by Lessee or anyone claiming through or under Lessee or the respective employees, agents, licensees, contractors, servants or subtenants of Lessee or any such person; (b) any act, omission or negligence on the part of Lessee or any person claiming through or under Lessee, or the respective employees, agents, licensees, invitees, contractors, servants or subtenants of Lessee or any such person; (c) any accident or injury to any person (including death) or damage to property (including loss of property) occurring in, on or about the Premises or the Facility or any part thereof, or any parking lot, sidewalk, curb, or space adjacent thereto, or any railroad siding or private roadway even if due to the negligence of Lessor or Lessor's agents; or (d) any failure on the part of Lessee to perform or comply with any of the covenants, agreements, terms, provisions, conditions or limitations contained in this Lease on its part to be performed or complied with. Notwithstanding the foregoing, Lessee shall not be obligated to indemnify Lessor or Lessor's agents for any accident, injury or damage described in the preceding clause (c) if caused by or due to: (i) Lessor's active negligence (as such term is hereafter defined); (ii) Lessor's willful or wanton misconduct; or (iii) Lessor's negligent or willful refusal to perform its obligations under this Lease, provided that Lessor shall have received a bona fide notice from Lessee referring to this Section 15.01 and stating that Lessor is in default in performing its obligations under this Lease 22 and that loss or damage is imminent or then occurring as a result of such default and Lessor shall have had a reasonable period of time (extended for such time as shall equal the aggregate period Lessor shall have been delayed by Unavoidable Delays) after receipt of such notice in which to perform its obligations. For the purposes of this Section 15.01 and Section 15.02, the term "Lessor's active negligence" shall mean a. negligent act or omission of Lessor's agents or employees while they are physically present on the Premises and are performing any of Lessor's obligations under this Lease and the claimed accident, injury or damage occurs while such agents or employees are physically present on the Premises and is solely caused by the negligent performance by such agents or employees of such obligations. The provisions of this Section shall survive the expiration or termination of this Lease. Any sums payable by Lessee or Lessor under this Section shall be due and payable on demand. SECTION 15.02. Lessor and Lessor's agents shall not be liable for any of the following, however caused even if due to the negligence of Lessor or Lessor's agents: (a) any failure of water supply, gas or electrical current or of any utility, (b) any injury or damage to person or property caused by or resulting from any cause whatsoever, including explosion, falling plaster, vermin, smoke, gasoline, oil, steam, gas, electricity, earthquake, subsidence of land, hurricane, tornado, flood, wind or similar storms or disturbances, or water, rain, ice or snow which may be upon, or leak or flow from any street, road, sewer, gas main or subsurface area, or from any part of the Building or Building Equipment, or leakage of gasoline, oil or other substances from pipes, pipelines, appliances, sewers or plumbing works in the Premises or at the Facility, or from any other place, or from the breaking of any electric wire or the breaking, bursting or leaking of water from any plumbing or sprinkler system, or any other pipe in or about the Premises or the Facility, (c) interference with light or other incorporeal hereditaments, any railroad siding, sewers, or private roadway, (d) loss by theft or otherwise of Lessee's Property or the property of any person claiming through or under Lessee. Notwithstanding the foregoing, Lessor and Lessor's agents shall be responsible under applicable law for any of the foregoing (other than such as pertain to Lessee's Property or to consequential damages arising from interruption or loss of Lessee's business, as to which Lessor shall have no liability in any case) if caused by or due to: (i) Lessor's active negligence; (ii) Lessor's willful or wanton misconduct; or (iii) Lessor's negligent or willful refusal to perform its obligations under this Lease provided that Lessor shall not be responsible for such negligent or willful refusal unless and until Lessor shall have received a bona fide notice from Lessee referring to this Section 15.02 and stating that Lessor is in default in performing its obligations under this Lease and that loss or damage is imminent or then occurring as a result of such default and, in any event, Lessor shall not be liable for any such loss or damage occurring prior to Lessor's receipt of such notice and expiration thereafter of a reasonable period of time (extended for such time as shall equal the aggregate period Lessor shall have been delayed by Unavoidable Delays) for Lessor to perform its obligations. No property, other than such as might normally be brought upon or kept in the Premises or the parking lot as incident to the reasonable use of the Premises or the parking lot for the purposes herein permitted, will be brought upon or be kept in the Premises or the parking lot . Lessor and Lessor's agents shall not be liable for any loss or damage to any of Lessee's Property nor for any interruption or loss of Lessee's business, even if due to the negligence of Lessor or Lessor's agents. Any employees of Lessor to whom any property shall be entrusted by or on behalf of Lessee shall be deemed to be acting as Lessee's 23 agents with respect to such property and neither Lessor nor Lessor's agents shall be liable for any loss of or damage to any such property by theft or otherwise. ARTICLE SIXTEENTH MECHANICS' AND OTHER LIENS SECTION 16.01. If any mechanic's, laborer's or materialman's lien shall at any time be filed against the Premises or the Facility or any part thereof with respect to any work done, or caused to be done, or labor or materials furnished, or caused to be furnished, by Lessee or anyone claiming through or under Lessee, Lessee, within ten (10) days after notice of the filing thereof, shall cause the same to be discharged of record by payment, deposit, bond, order of a court of competent jurisdiction or otherwise. If Lessee shall fail to cause such lien to be discharged within the period aforesaid, then, in addition to any other right or remedy, Lessor may, but shall not be obligated to, discharge the same by bonding proceedings, if permitted by law (and if not so permitted, by deposit in court). Any amount so paid by Lessor, including all costs and expenses paid by Lessor in connection therewith, together with interest thereon at all the maximum legal rate from the respective dates of Lessor's so paying and such amount, cost or expense, shall constitute Additional Rent payable by Lessee under this Lease and shall be paid by Lessee to Lessor on demand. SECTION 16.02. Nothing in this Lease contained shall be, deemed or construed in any way as constituting the consent or request of Lessor, express or implied, by inference or otherwise, to any contractor, subcontractor, laborer or materialman for the performance of any labor or the furnishing of any materials for any specific improvement, alteration to or repair of the Premises, or any part thereof or any appurtenance thereto, nor as giving Lessee any right, power or authority to contract for or permit the rendering of any services or the furnishing of any materials that would give rise to the filing of any mechanic's liens against the Facility, any part thereof, or Lessor's interest therein. Notice is hereby given that Lessor shall not be liable for any labor or materials furnished or to be furnished to Lessee upon credit, and that no mechanic's or other lien for any such labor or materials shall attach to or affect the reversion or estate or interest of Lessor in and to the Premises or the Facility. ARTICLE SEVENTEENTH CONDEMNATION SECTION 17.01. If the whole of the Premises, or such part thereof as will render the remainder Untenantable, shall be acquired or condemned for any public or quasipublic use or purpose, this Lease and the Term shall end as of the date of the vesting of title in the condemning authority with the same effect as if said date were the Expiration Date. If only a part of the Premises shall be so acquired or condemned then, except as otherwise provided in this Article, this Lease and the Term shall continue in force and effect but, from and after the date of the vesting of title, the Fixed Rent shall be an amount which bears the same ratio to the Fixed Rent payable immediately prior to such condemnation pursuant to this Lease as the value of the untaken portion of the Premises (appraised after the taking and repair of any damage to the 24 Premises pursuant to this Section) bears to the value of the entire Premises immediately before the taking. The value of the Premises before and after the taking shall be determined for the purposes of this Section by an independent appraiser chosen by Lessor. If only a part of the Premises shall be so acquired or condemned, then (a) Lessor, at Lessor's sole option, may give to Lessee within 60 days next following the date upon which Lessor shall have received notice of vesting of title, 30 days notice of termination of this Lease, and (b) if more than 50% of the total area of the Building included in the Premises immediately prior to such acquisition or condemnation is so acquired or condemned or if, by reason of such acquisition or condemnation. Lessee no longer has reasonable means of access to the Premises, Lessee, at Lessee's sole option, may give to Lessor, within 60 days next following the date upon which Lessee shall have received notice of vesting of title, 30 days notice of termination upon the expiration of said 30 days with the same effect as if that date were the Expiration Date. If a part of the Premises shall be so acquired or condemned, and the Term shall not be terminated pursuant to the provisions of this Section, Lessor, at Lessor's expense, shall restore that part of the Premises not so acquired or condemned to a self-contained unit. In the event of any termination of this Lease and the Term pursuant to the provisions of this Section, the Fixed Rent and Additional Rent shall be apportioned as of the date of sooner termination and any prepaid portion of Fixed Rent and Additional Rent for any period after such date shall be refunded by Lessor to Lessee, subject to claims, if any, of Lessor against Lessee hereunder or otherwise. SECTION 17.02. In the vent of any acquisition or condemnation of all or any part of the Premises, Lessor shall be entitled to receive the entire award for such acquisition or condemnation. Lessee shall have no claim against Lessor or the condemning authority for the value of any unexpired portion of the Term and Lessee hereby expressly assigns to Lessor all of its right, title and interest in and to any such award, and also agrees to execute any and all further documents that may be required in order to facilitate the collection thereof by Lessor. Nothing contained in this Section shall be deemed to prevent Lessee from making a separate claim in any condemnation proceeding for moving expenses and for the value of any Lessee's Property which would be removable at the end of the Term pursuant to the provisions hereof, provided that applicable statutes permit such awards and any award to Lessor is not diminished or adversely affected thereby. SECTION 17.03. The terms "condemnation" and "acquisition" as used in this Article shall include any agreement in lieu of or in anticipation of the exercise of the power of eminent domain between the lessor of any Underlying Lease and/or Lessor and any governmental authority authorized to exercise the power of eminent domain. SECTION 17.04. No condemnation or acquisition of any private roadway, sewers or parking lot shall affect this Lease or constitute an actual or constructive eviction of Lessee or entitle Lessee to terminate this Lease or to an abatement or diminution of rent, except that a condemnation or acquisition of a private roadway which would eliminate all reasonable means of access to the Premises shall be subject to the applicable provisions of this Article. 25 ARTICLE EIGHTEENTH COVENANT OF QUIET ENJOYMENT SECTION 18.01. If and so long as Lessee shall pay the Fixed Rent and Additional Rent reserved by this Lease and shall perform and observe all the covenants and conditions herein contained on the part of the Lessee to be performed and observed, Lessee shall quietly enjoy the Premises, subject, however, to the terms of this Lease (including those set forth in Sections 23.02) and to the matters to which this Lease is subject. ARTICLE NINETEENTH WAIVER OF COUNTERCLAIM AND JURY TRIAL SECTION 19.01. In the event that Lessor shall commence any summary or other proceedings or action for non-payment of rent hereunder, Lessee shall not interpose any counterclaim of any nature or description in such proceeding or action, unless such non-interposition would effect a waiver of Lessee's right to assert such claim against Lessor in a separate action or proceeding. The parties hereto waive a trail by jury on any and all issues arising in any action or proceeding between them or their successors under or in any way connected with this Lease or any of its provisions, any negotiations in connection therewith, the relationship of Lessor and Lessee, or Lessee's use or occupation of the Premises, including any claim of injury or any emergency or other statutory remedy with respect thereto. The provisions of this Article shall survive the expiration or termination of this Lease. ARTICLE TWENTIETH NOTICES SECTION 20.01. A. Except as otherwise expressly provided in this Lease, any bills, statements, notices, demands, requests, consents or other communications given or required to be given under this Lease shall be effective only if rendered or given in writing and (a) if to Lessee, then, at the option of Lessor, (i) by mail, postage prepaid, addressed to Lessee's address as set forth in this Lease if mailed prior to the Commencement Date or at the Building if subsequent to the Commencement Date, or to such other address as Lessee may designate as its new address for such purpose by notice given to Lessor in accordance with the provisions of this Section, or (ii) delivered personally to Lessee, (b) if to Lessor, sent by registered or certified mail, return receipt requested, postage prepaid, addressed to Lessor at 1185 Avenue of the Americas, Suite 310, New York, New York 10036, Attention: Mr. John Neu, or to such other address as Lessor may designate as its new address for such purpose by notice given to Lessee in accordance with the provisions of this Section. 26 B. Any such bill, statement, notice, demand, request, consent or other communication shall be deemed to have been rendered or given: (a) on the date delivered, if delivered to Lessee personally, and (b) on the expiration of 5 days after mailing, if mailed to Lessor or Lessee as provided in this Section. Any notice by a party signed by counsel to such party shall be deemed a notice signed by such party. ARTICLE TWENTY-FIRST WAIVERS AND SURRENDERS TO BE IN WRITING SECTION 21.01. The receipt of full or partial rent by Lessor with knowledge of any breach of this Lease by Lessee or of any default on the part of Lessee in the observance or performance of any of the provisions or covenants of this Lease shall not be deemed to be a waiver of any such provision, covenant or breach of this Lease. No waiver or modification by Lessor, unless in writing, and signed by Lessor, shall discharge or invalidate any provision or covenant or affect the right of Lessor to enforce the same in the event of any subsequent breach or default. The failure on the part of Lessor to insist in any one or more instances upon the strict performance of any of the provisions or covenants of this Lease, or to enforce any covenant or provision herein contained or to exercise any right, remedy or election herein contained consequent upon a breach of any provision of this Lease, shall not affect or alter this Lease or be construed as a waiver or relinquishment for the future of such one or more provisions or covenants or of the right to insist upon strict performance or to exercise such right, remedy or election, but the same shall continue and remain in full force and effect with respect to any then existing or subsequent breach, act or omission, whether of a similar nature or otherwise. The receipt by Lessor of any rent or any other sum of money or any other consideration hereunder paid by Lessee after the termination, in any manner of the Term, or after the giving by Lessor of the Termination Notice, shall not reinstate, continue or extend the Term, or destroy, or in any manner impair the efficacy of any such Termination Notice as may have been given hereunder by Lessor to Lessee prior to the receipt of any such rent, or other sum of money or other consideration, unless so agreed to in writing and signed by Lessor. Neither acceptance of the keys nor any other act or thing done by Lessor or any agent or employee shall be deemed to be an acceptance of a surrender of the Premises, or any part thereof, excepting only an agreement in writing signed by Lessor. No payment by Lessee or receipt by Lessor of a lesser amount than the correct rent shall be deemed to be other than a payment on account, nor shall any endorsement or statement on any check, as distinguished from any letter accompanying any such check or payment, be deemed to effect or evidence an accord and satisfaction, and Lessor may accept such check or payment without prejudice to Lessor's right to recover the balance or pursue any other remedy in this Lease provided. ARTICLE TWENTY-SECOND RIGHTS CUMULATIVE SECTION 22.01. Each right and remedy of Lessor shall be cumulative and, to the extent permitted by law, the exercise or beginning of the exercise by Lessor of any one or more of the rights or remedies of such party shall not preclude the simultaneous or later exercise by Lessor of 27 any or all other rights or remedies. In the event of any breach or threatened breach by Lessee or any persons claiming through or under Lessee of any of the agreements, terms, covenants or conditions contained in this Lease, Lessor shall be entitled to enjoy such breach or threatened breach (if entitled to do so at law or in equity or by statute or otherwise) and shall have the right to invoke any right or remedy allowed by law or in equity or by statute or otherwise as if reentry, summary proceedings or other specific remedies were not provided for in this Lease. ARTICLE TWENTY-THIRD EFFECT OF CONVEYANCE: LIABILITY OF LESSOR AND LESSEE NAMED HEREIN SECTION 23.01. The term "Lessor" as used in this Lease shall mean and include only the owner or owners at the time in question of the Lessor's interest in this Lease so that in the event of any transfer or transfers (by operation law or otherwise) of Lessor's interest in this Lease, Lessor herein named (and in the case of any subsequent transfers or conveyances, the then transferor) shall be and hereby is automatically freed and relieved, from and after the date of such transfer or conveyance, of all liability in respect to the performance of any covenants or obligations on the part of Lessor contained in this Lease thereafter to be performed provided that the transferee shall be deemed to have assumed and agreed to perform, subject to the limitations of this Article (and without further agreement between or among the parties or their successors in interest, and/or the transferee) and only during and in respect of the transferee's period of ownership, all of the terms, covenants and conditions in this Lease contained on the part of Lessor to be performed, which terms, covenants and conditions shall be deemed to "run with the land", it being intended hereby that the terms, covenants and conditions contained in this Lease on the part of Lessor to be performed shall, subject as aforesaid, be binding on Lessor, its successors and assigns, only during and in respect to their respective successive periods of ownership. The transferee shall take title to Lessor's interest in this Lease subject to all Lessee's rights and remedies under this Lease, whether vested or contingent, matured or unmatured, or otherwise. SECTION 23.03. In the event of a breach by Lessor of any of the provisions, covenants or obligations of this Lease to be performed by Lessor, the monetary liability of Lessor in relation to any such breach shall be limited to the equity of Lessor in the Premises. Lessee shall look only to Lessor's equity in the Premises for the performance and observance of the terms, covenants, conditions and obligations of this Lease to be performed or observed by Lessor and for the satisfaction of Lessee's remedies for the collection of any award, judgment or other judicial process requiring the payment of money by Lessor in the event of a default in the full and prompt payment and performance of any of Lessor's obligations hereunder. SECTION 23.03. The term "Lessee" as used in this Lease shall mean and include Lessee named herein and, during and in respect of their respective successive periods of ownership, each subsequent owner or owners of the leasehold estate created by this Lease. For all purposes of this Lease and without affecting the rights of and obligations between Lessee herein named and any transferee, notwithstanding any transfer (by operation of law or otherwise) of title to the leasehold estate created by this Lease by Lessee herein named or by any subsequent owner of such estate and notwithstanding the assumption by any transferee of the obligations of Lessee hereunder, 28 Lessee herein named, as between Lessor and Lessee herein named, shall remain primarily liable as a primary obligor and not as a surety, for the full and prompt payment and performance of Lessee's obligations hereunder and, without limiting the generality of the foregoing or of Article TWENTY-SEVENTH, shall remain fully and directly responsible and liable to Lessor of all acts and omissions on the part of any transferee subsequent to it in violation of any of the obligations of this Lease. ARTICLE TWENTY-FOURTH CHANGES AND ALTERATIONS BY LESSEE SECTION 24.01. Lessee shall have no right to make any alterations, changes, additions or improvements, structural or otherwise, (herein sometimes collectively referred to as an "alteration" or "work"), to the Premises, the parking lot, private roadway, or any appurtenance thereto, without the prior written consent of Lessor in each instance. In the event Lessor shall consent to a request by Lessee to perform work or make alterations, or in any other event, all alterations and work shall be performed in accordance with the following: (a) The same shall be performed at the sole cost and expense of Lessee; (b) The same shall be performed in a good and workmanlike manner and shall be made in compliance with all applicable Legal Requirements and Insurance Requirements, and Lessee shall obtain, and furnish copies to Lessor of, any and all permits or governmental approvals required in connection with the work; (c) The same shall be consistent with the use of the Premises and the parking lot provided for herein; (d) No alteration shall be such as to render the Premises other than a complete, self-contained operating unit; (e) A copy of plans and a copy of any specifications with respect to any alteration shall be delivered to Lessor promptly after approval of the same by the appropriate governmental department and, in any event, prior to commencement of any alteration or work; (f) No alteration shall, in Lessor's sole reasonable judgment, lessen the fair market value of the Premises, or decrease the net usable floor area of the Premises; (g) If any alteration shall require a zoning change or the issuance of a variance, such alteration shall not be permitted; (h) Any alteration shall be conducted under the supervision of a licensed architect approved by Lessor; 29 (i) Before commencing any such work, Lessee shall furnish proof that insurance coverage acceptable to Lessor (including, without limitation, proper workmen's compensation insurance) will be in full force and effect during such work and will cover, by endorsement or otherwise, the risk during the course of such work; (j) The Premises and the parking lot shall at all times be free of all liens, encumbrances, chattel mortgages, conditional bills of sale, financing statements and other charges for labor and materials supplied or claimed to have been supplied to the Premises or the parking lot; (k) The outside appearance, character or use of the Building shall not be affected; (l) All contractors, mechanics, and laborers involved or to be involved in the work, and all materials to be employed shall be subject to Lessor's approval, which approval, if granted, may nevertheless be revoked at any time if the foregoing would, in Lessor's judgment, disturb any operations of Lessor or of any other tenant of Lessor; (m) During the course of such work, Lessor and Lessor's architect or engineer may, from time to time, inspect the Building and shall be furnished, upon request, with copies of all plans, shop drawings and specifications relating to such worked, and they may examine at all reasonable times all plans, shop drawings and specifications. Lessee shall keep the same at the Premises. If, during such work, Lessor or Lessor's architect or engineer shall determine that the work is not being done in accordance with the plans and specifications hereinabove referred to, notice may be given to Lessee specifying the particular deficiency, omission or other respect in which it is claimed that such work is not in accord with the plans and specifications and, upon receipt of any such notice, Lessee shall take steps necessary to cause corrections to be made as to any deficiencies, omissions or otherwise; (n) The provisions of such Article SIXTEENTH shall be applicable to the work. In addition, each contractor, mechanic or laborer to be involved in the work shall, prior to commencement of the work, deliver to Lessor his written, unconditional waiver of the right to file at any time any and all notices of intention, lien notices, liens or stop notices against the Premise and/or the Facility with respect to any alteration or work affecting the Premises. SECTION 24.02. If and when Lessee wishes to perform any alterations which would require, or in Lessor's judgment would be likely to require, and aggregate expenditure of $50,000 or more and Lessor's consent shall have been granted pursuant to Section 24.01, then Lessee shall furnish Lessor with not less than 2 bona fide, written competitive bids for such work and Lessor, at its option, may elect either to perform the same as the agent of Lessee or to allow Lessee to perform the same, but in either case such alteration shall be performed at the sole cost and expense of Lessee. If Lessor shall elect to perform any alterations as aforesaid, then Lessee shall pay Lessor's charges therefor, promptly on demand, as Additional Rent, provided that such 30 charges do not exceed the lowest bid submitted by Lessee to Lessor as provided in the preceding sentence or Lessee has approved such charges in advance. SECTION 24.03. A. Any and all alterations shall immediately become the property of Lessor. B. At the Expiration Date, or the date of any earlier termination of this Lease, Lessee shall, at Lessor's request, restore the Premises or the affected portion thereof to the state or condition thereof existing prior to the making of any alteration, whether or not Lessor shall have granted its prior consent thereto. The provisions of this Paragraph B shall survive the expiration or termination of this Lease. SECTION 24.04. In the event of any alterations as provide for in this Article, the rent payable hereunder shall not be reduced or abated in any manner whatsoever. ARTICLE TWENTY-FIFTH NET LEASE; NON-TERMINABILTIY SECTION 25.01. Except as may be otherwise provided in Article THIRD, this Lease shall be deemed and construed to be a "net" lease, and Lessor shall receive all rent from Lessee free from any and all charges, assessments, impositions, expenses or deductions of any and every kind or nature whatsoever, to that end that this Lease shall yield net to Lessor the Fixed Rent payable hereunder during each year of the Term; all costs, expenses and obligations of every kind and nature whatsoever relating to the Premises or appurtenances thereto which may become due hereunder during or in respect to the Term of this Lease shall be paid by Lessee. In any case, however, nothing herein contained shall be construed to require Lessee to pay the principal of, or interest on, or prepayment penalties or other charges with respect to, any indebtedness secured by any mortgage place upon the Premises by Lessor. SECTION 25.02. Except as otherwise specifically provided in Sections 11.01, 11.02 and 17.01, no condition, event or occurrence during the Term, whether foreseen, and however extraordinary, shall (a) permit Lessee to quit or surrender the Premises, or any part thereof, or this Lease, or (b) relieve Lessee from its liability to pay the rent and make other payments hereunder to be made by Lessee or relieve Lessee from any of its other obligations hereunder or entitle it to any abatement, diminution or reductions of, or set-off agent, rent or other charges hereunder or to suspension or deferment of rent or such other charges. Lessee, for itself and any person claiming under it (including creditors) hereby waives any rights now or hereafter conferred upon it by statute, proclamation, decree, order or otherwise, to quit or surrender the Premises or any part thereof or this Lease, or to any abatement, diminution or reduction of, or set-off against, rent or other charges hereunder or to suspension or determent of rent or such other charges on account of any such event or occurrence. 31 ARTICLE TWENTY-SIXTH CERTIFICATE OF LESSEE SECTION 26.01. Lessee agrees at any time and from time to time, within twenty (20) days after request by Lessor, to execute, acknowledge and deliver a statement certifying (a) the Commencement Date hereunder, (b) that this Lease is unmodified and in full force and effect (or if there have been modifications, that the Lease is in full force and effect as modified and stating the modifications), (c) the dates to which the Fixed Rent and Additional Rend have been paid, and (d) whether or not to the best knowledge of the signor of such statement (i) Lessor is in default in keeping, observing or performing any term, covenant, agreement, provision, condition or limitation contained in this Lease and, if in default, specifying each such default, (ii) either party is holding any funds under this Lease in which the other has an interest (and, if so, specifying the party holding such funds and the nature and amount thereof) and (iii) there is any amount then due and payable to Lessee by Lessor, it being intended that any such statement delivered pursuant to this Section may be relied upon by Lessor, any mortgage or prospective mortgage, any prospective purchase or assignee of Lessor's interest in this Lease or the mortgagee's interest in any mortgage. ARTICLE TWENTY-SEVENTH ASSIGNMENTS, SUBLEASES AND MORTGAGES SECTION 27.01. Neither this Lease, nor the Term and estate hereby granted, nor any part hereof or thereof, nor the interest of Lessee in any sublease or the rentals thereunder, shall be assigned, mortgaged, pledged, encumbered or otherwise transferred by Lessee, Lessee's legal representatives or successors in interest by operation of law or otherwise, and neither the Premises, nor any part thereof, nor any Lessee's Property, shall be encumbered in any manner by reason of any act or omission on the part of Lessee or anyone claiming under or through Lessee, or shall be sublet or be used or occupied or permitted to be used or occupied or utilized for storage space by anyone other than Lessees or for any purpose other than as permitted by this Lease, without the prior written consent of Lessor in each case, which consent may be withheld for any reason whatsoever. A transfer (including any issuance of stock) of an aggregate of 10% or more of stock, partnership interest or other equity interest in Lessee by any part or parties in interest shall be deemed as assignment of this Lease. SECTION 27.02. If this Lease be assigned, whether or not in violation of the provisions of this Lease, Lessor may collect rent from the assignee and Lessor shall be entitled to receive, as Additional Rent, any and all consideration paid to Lessee in connection with such assignment promptly after receipt thereof by Lessee and any and all consideration payable to Lessee in connection with such assignment as and when Lessee would be entitled to receive the same. The provisions of the preceding sentence shall be in full force and effect notwithstanding that Lessee has sought the protection of any provisions of the bankruptcy law (as hereinafter defined) or a petition has been filed against Lessee under such bankruptcy law. If the Premises or any part thereof be sublet or be used or occupied by anybody other than Lessee, whether or not in violation of this Lease, Lessor may, after default by Lessee and expiration of Lessee's time to cure 32 such default, collect rent from the subtenant or occupant. In either event, Lessor may apply the net amount collected to the rents herein reserved, but no such assignment, subletting, occupancy or collection shall be deemed a waiver of any of the provisions of Section 27.01, or the acceptance of the assignee, subtenant or occupant as tenant, or a release of Lessee from the further performance by Lessee of Lessee's obligations under this Lease. The consent by Lessor to an assignment, mortgaging or subletting pursuant to any provision of this Lease shall not in any way be considered to relieve Lessee from obtaining the express consent of Lessor to any other or further assignment, mortgaging or subletting. References in this Lease to use or occupancy by anyone other than Lessee shall not be construed as limited to subtenants and those claiming under or through subtenants but as including also licensees and other claiming under or through Lessee, immediately or remotely. This listing of any name other than that of Lessee on any door of the Premises or on any sign on the Premises, or otherwise, shall not operate to vest in the person so named any right or interest in this Lease or in the Premises, or be deemed to constitute, or serve as a substitute for, any prior consent of Lessor required under this Article, and it is understood that any such listing shall constitute a privilege extended by Lessor which shall be revocable at Lessor's will by notice to Lessee. Lessee agrees to pay Lessor any counsel fees incurred by Lessor in connection with any proposed assignment of Lessee's interest in this Lease or any proposed subletting of the Premises or any part thereof. Neither any assignment of Lessee's interest in this Lease nor any subletting, occupancy or use of the Premises or any part thereof by any person other than Lessee, nor any collection of rent by Lessor from any person other than Lessee as provided in this Article, nor any application of any such rent as provided in this Article shall, under any circumstances, relieve Lessee herein named of its obligation fully to observe and perform the terms, covenants and conditions of this Lease on Lessee's part to be observed and performed. ARTICLE TWENTY-EIGHTH SUBORDINATION SECTION 28.01. This Lease, and all rights of Lessee hereunder, are and shall be subject and subordinate in all respects to (a) all present and future ground leases, overriding leases and underlying leases and/or grants of term of the Facility, the Land, the Building, the Building Equipment and/or any appurtenance thereto (collectively, the "Underlying Lease"), (b) all mortgages and building loan agreements, including leasehold mortgages, deeds of trust, and building loan agreements, which may now or hereafter affect the Facility, the Land, the Building, the Building Equipment and/or any appurtenance thereto, and/or the Underlying Lease, (collectively, the "Superior Mortgage"), whether or not the Superior Mortgage shall also cover other land and/or buildings, and (c) each and every advance made or hereafter to be made under the Superior Mortgage and to all renewals, modifications, replacements, substitutions and extensions of the Underlying Lease and the Superior Mortgage and spreaders and consolidations of the Superior Mortgage. The provisions of this Section shall be self-operative and no further instrument of subordination shall be required. In confirmation of such subordination, Lessee shall promptly execute and deliver, at its own cost and expense, any instrument, in recordable form if required, that Lessor, the lessor of the Underlying Lease or the holder of the Superior Mortgage or any of their respective successors in interest may request to evidence such subordination, and Lessee hereby constitutes and appoints Lessor attorney-in-fact for Lessee to execute any such 33 instrument for and on behalf of Lessee. If, in connection with the obtaining, continuing or renewing of financing for which the Premises or the interest of the lessee under the Underlying Lease represents collateral in whole or in part, a bank, insurance company or other lender shall request reasonable modifications of this Lease as a condition of such financing, Lessee will not unreasonably withhold or delay its consent thereto, provided that such modifications do not materially increase the obligations of Lessee hereunder or materially and adversely affect the rights of Lessee under this Lease. SECTION 28.02. Lessee shall not do or suffer or permit anything to be done which would constitute a default under the Superior Mortgage or Underlying Lease or cause the Underlying Lease to be terminated or forfeited by virtue of any rights of termination or forfeiture reserved or vested in the lessor thereunder. SECTION 28.03. If, at any time prior to the expiration of the Term, the Underlying Lease shall terminate or be terminated for any reason, or if the holder of the Superior Mortgage shall become the lessee under the Underlying Lease or become the owner of the Premises as a result of foreclosure of its mortgage or by reason of any assignment of the lessee's interest under any lease or conveyance of the Premises, or if the holder of the Superior Mortgage shall obtain a new lease in lieu of the terminated Underlying Lease by foreclosure or otherwise, or become a mortgagee in possession of the Premises, Lessee agrees, at the election and upon demand of any owner of the Premises, or if the holder of any Superior Mortgage (including a leasehold mortgagee) in possession of the Premises, or of any lessee under any other Underlying Lease covering premises which include the Premises, to attorn, from time to time, to any such owner, holder, or lessee, upon the then executory terms and conditions of this Lease, provided that such owner, holder or lessee, as the case may be, shall then be entitled to possession of the Premises. No such owner, holder or lessee shall be liable for any previous act or omission of Lessor under this Lease, be subject to any offset which shall have theretofore accrued to Lessee against Lessor, or be bound by any previous modification of this Lease, not expressly provided for in this Lease, entered into after the date of the Underlying Lease or Superior Mortgage, or by any previous prepayment of more than one month's Fixed Rent. The foregoing provisions of this Section shall enure to the benefit of any such owner, holder or lessee, shall apply notwithstanding that, as a matter of law, this Lease may terminate upon the termination of the Underlying Lease or the foreclosure (including judgment of foreclosure and sale) of the Superior Mortgage, shall be self-operative upon any such demand, and no further instrument shall be required to give effect to said provisions. Lessee, however, upon demand of any such owner, holder or lessee, agrees to execute, from time to time, instruments in confirmation of the foregoing provisions of this Section, satisfactory to any such owner, holder or lessee, acknowledging such attornment and setting forth the terms and conditions of its tenancy. Nothing contained in this Section shall be construed to impair any right otherwise exercisable by any such owner, holder or lessee. ARTICLE TWENTY-NINTH SURRENDER -- REMOVAL OF LESSEE'S PROPERTY SECTION 29.01. On the last day of the Term or on the earlier termination of the Term, Lessee shall peaceably and quietly leave, surrender and deliver the Premises to Lessor, together 34 with (a) all alterations, changes, additions and improvements, which may have been made upon the Premises, and (b) except for Lessee's Property, all fixtures and articles of personal property of any kind or nature which Lessee may have installed or affixed on, in, or to the Premises for use in connection with the operation and maintenance of the Premises (whether or not said property be deemed to be fixtures), all of the foregoing to be surrendered in good, substantial and sufficient repair, order and condition, reasonable use, wear and tear, and damage by fire or other casualty, excepted, and free of occupants and subtenants. SECTION 29.02. On or prior to the Expiration Date or any earlier termination of this Lease, Lessee shall remove Lessee's Property, and any items referred to in clauses (a) or (b) of Section 29.01 which Lessor shall request Lessee to remove, and Lessee shall pay or cause to be paid the cost of repairing or remedying any damage caused thereby, provided that no item of Lessee's Property may be removed if its removal would impair the integrity (structural or otherwise) of the Building or Building Equipment. All property not so removed shall be deemed abandoned and may either be retained by Lessor as its property or disposed of, without accountability, at Lessee's sole cost, expense and risk, in such manner as Lessor may see fit. SECTION 29.03. If the Premises are not surrendered in accordance with the provisions of this Article upon the expiration or termination of this Lease, Lessor shall have all rights given at law or in equity, in the case of holdovers, to remove Lessee and anyone claiming through or under Lessee and, in any event, Lessee shall and does hereby indemnify Lessor against all loss or liability arising from delay by Lessee in so surrendering the Premises, including any claims made by any succeeding lessee founded on such delay. Lessee expressly waives, for itself and for any person claiming through or under Lessee (including creditors), any rights which Lessee or any such person may have under the provisions of any law in connection with any holdover summary proceedings which Lessor may institute to enforce the provisions of this Article. Lessee's obligations under this Article shall survive the expiration or termination of this Lease. ARTICLE THIRTIETH BROKERS SECTION 30.01. Lessee represents that in connection with this Lease it dealt with no broker other than Joseph Scibetta and that so far as Lessee is aware said broker is the only broker who negotiated this Lease. Lessee hereby indemnifies Lessor and holds it harmless from any and all loss, cost, liability, claim, damage or expense (including court costs and attorneys' fees) arising out of any inaccuracy or alleged inaccuracy of the above representation. ARTICLE THIRTY-FIRST DEFINITIONS SECTION 31.01. For the purposes of this Lease and all agreements supplemental to this Lease, unless the context otherwise requires: 35 (a) "Additional Rent" shall mean all sums of money, other than Fixed Rent, as shall become due from and payable by Lessee hereunder. (b) "Building" shall mean the building, structures and improvements, including paved areas (other than "Building Equipment," as such term is herein defined) now or hereafter erected, constructed or situated on the Land or any part thereof, together with all alterations, additions and improvements thereto and all restorations and replacements thereof, designated by Lessor as Building 10. (c) "Building Equipment" shall mean all machinery, systems, apparatus, facilities, equipment and fixtures of every kind and nature whatsoever now or hereafter belonging, attached to and used (whether or not the same constitute fixtures) or procured for use in connection with the operation or maintenance of the Building, including water, sewer and gas connections, all heating, electrical, lighting, and power equipment, engines, furnaces, boilers, pumps, tanks, dynamos, motors, generators, conduits, plumbing, cleaning, fire prevention, refrigeration, ventilating, air cooling and air conditioning equipment and apparatus, cranes, elevators, escalators, ducts and compressors and any and all replacements thereof and additions thereto; but excluding, however, (i) Lessee's Property, (ii) property of sublease and this Lease, (iii) property of contractors servicing the Building, and (iv) improvements for water, gas and electricity and other similar equipment or improvements owned by any public utility company or any governmental agency or body. (d) "Lessee's Property" shall mean all articles of personal property (including goods being warehoused or distributed by Lessee or any permitted subtenant of Lessee or other permitted occupant of the Premises) and fixtures and other property, which have been installed or affixed on, in or to, or brought into, the Premises, at the expense of Lessee or any permitted subtenant of Lessee or other permitted occupant of the Premises and without any credit or allowance by Lessor, which are not replacements of any property of Lessor (whether any such replacement is made at Lessee's expense or otherwise), and which do not constitute alterations, changes, additions or improvements to the Premises or any appurtenance thereto. (e) "Lessor's agents" shall be deemed to include agents, servants, employees, directors, shareholders and contractors of Lessor. (f) "Unavoidable Delays" shall mean any and all delays beyond Lessor's reasonable control, including delays caused by Lessee, governmental restrictions, governmental preemption, strikes, labor disputes, lockouts, shortage of labor or materials, acts of God, enemy action, civil commotion, riot or insurrection, fire or other casualty. (g) "Untenable" shall mean the extent to which Lessee is actually unable to use any or all of the Premises in its normal course of business. SECTION 31.02. For the purposes of this Lease and all agreements supplemental to this Lease, unless the context otherwise requires: 36 (a) The terms "include," "including," and "such as" shall be construed as if followed by the phrase "without being limited to." (b) Whenever this Lease provides that Lessee shall pay Lessor interest at the "maximum legal rate," then interest shall be payable at a rate equal to the lesser of (i) twenty-four (24%) per cent per annum or (ii) the highest rate of interest permitted at the relevant time by applicable law to be paid by Lessee without impairing the validity or enforceability of this Lease and without incurring any civil or criminal penalty. (c) The term "obligations of this Lease" and words of like import, shall mean the covenants to pay Fixed Rent and Additional Rent and all of the other covenants and conditions contained in this Lease. Any provision in this Lease that one party or the other or both shall do or not do or shall cause or permit or not cause or permit a particular act, condition or circumstance shall be deemed to mean that such party so covenants or both parties so covenant, as the case may be. (d) The term "repair" shall be deemed to include restoration and replacement as may be necessary to achieve and/or maintain good working order and condition. (e) Reference to "termination of this Lease" includes expiration or earlier termination of the Term or cancellation of this Lease pursuant to any of the provisions of this Lease or to law. Upon the termination of this Lease, the Term and estate granted by this Lease shall end at noon of the date of termination as if such date were the date of expiration of the Term and neither party shall have any further obligation or liability to the other after such termination (i) except as shall be expressly provided for in this Lease, and (ii) except for such obligations as by their nature or under the circumstances can only be, or by the provisions of this Lease, may be, performed after such termination, and, in any event, unless expressly otherwise provided in this Lease, any liability for a payment which shall have accrued to or with respect to any period ending at the time of termination shall survive the termination of this Lease. ARTICLE THIRTY-SECOND SECURITY DEPOSIT SECTION 32.01. Lessee has deposited (and will throughout the Term maintain on deposit) with Lessor the sum of $7,375 as security for the faithful performance and observance by Lessee of the terms, covenants and conditions of this Lease; it is agreed that in the event Lessee defaults in the performance and observance of any of the terms, covenants and conditions of this Lease, including the payment of Fixed Rent and Additional Rent, Lessor may use, apply or retain the whole or any part of the security so deposited to the extent required for the payment of any Fixed Rent and Additional Rent or any other sum as to which Lessee is in default in respect of any of the terms, covenants and conditions of this Lease, including any damages or deficiency in the re-letting of the Premises, whether such damages or deficiency accrued before or after summary proceedings or other re-entry by Lessor. In the event that Lessee shall fully and faithfully comply with all of the terms, covenants and conditions of this Lease, the security shall be returned to 37 Lessee after the Expiration Date and after delivery of exclusive possession of the Premises to Lessor. In the event of a sale or leasing of the Premises or any part thereof, Lessor shall have the right to transfer the security to the vendee or lessee and Lessor shall ipso facto be released by Lessee from all liability for the return of such security; and Lessee agrees to look solely to the new lessor for the return of said security; and it is agreed that the provisions hereof shall apply to every transfer or assignment made of the security to a new lessor. Lessee further covenants that it will not assign or encumber or attempt to assign or encumber the monies deposited herein as security and that Lessor shall not be bound by any such assignment, encumbrance, attempted assignment or attempted encumbrance. ARTICLE THIRTY-THIRD MISCELLANEOUS SECTION 33.01. This Lease shall be governed in all respects by the laws of the State of New Jersey applicable to agreements made and to be performed wholly therein. SECTION 33.02. All pronouns and any variations hereof shall be deemed to refer to the masculine, feminine, neuter, singular or plural, as the identity of the person or persons or entity or entities in question may require. The term "person" shall be deemed to include individuals, corporations, partnerships, joint ventures, firms, associations and other entities. SECTION 33.03. All provisions of this Lease shall be deemed and construed to be "conditions" as well as "covenants," as though the words specifically expressing or importing covenants and conditions were used in each separate provision hereof. SECTION 33.04. If any of the provisions of this Lease or the application thereof to any person or circumstance shall, to any extent, be invalid or unenforceable, the remainder of this Lease, or the application of such provision or provisions to persons or circumstances other than those as to whom or which it is held invalid or unenforceable, shall not be affected thereby, and every provision of this Lease shall be valid and enforceable to the fullest extent permitted by law. SECTION 33.05. The article headings in this Lease are inserted only as a matter of convenience and reference and are not to be given any effect whatsoever in construing this Lease. SECTION 33.06. This Lease contains the entire agreement between the parties and shall not be modified in any manner except by an instrument in writing executed by the parties or their respective successors in interest. No waiver or modification by either party of any provision or covenant of this Lease shall be deemed to have been made unless such waiver is expressed in writing and signed by the party against whom such waiver or modification is charged. SECTION 33.07. Lessee agrees with Lessor that Lessee will not record this Lease or any memorandum of this Lease without the prior written consent of Lessor. SECTION 33.08. The covenants, agreements, terms, provisions and conditions contained in this Lease shall apply to and inure to the benefit of and be binding upon Lessor and Lessee and their respective assigns, except as otherwise expressly provided herein. 38 SECTION 33.09. Lessor may from time to time adopt rules and regulations pertaining to use and operation of the Facility, the private roadway, the parking lot and any other roadway on or appurtenant to the Facility or the Premises, and Lessee agrees to comply with the same. SECTION 33.10. If any excavation or other substructure shall be made or contemplated to be made for building or other purposes upon property or streets adjacent to the Premises, Lessee shall either (a) to the extent required by law, afford to the person or persons causing or authorized in cause such excavation the right to enter upon the Premises for the purpose of doing such work as shall be necessary to preserve any of the walls or structures of the Building or surrounding land from injury or damage and to support the same by proper foundations, pinning and/or underpinning or, at Lessee's option, (b) at Lessee's expense, do or cause to be done all such work as may be necessary to preserve any of the walls or structures of the Building from injury or damage and to underpinning. Lessee shall not, by reason of any such excavation nor work, have any claim against Lessor for damages or indemnity or for suspension, diminution, abatement or reduction of rent under this Lease, or otherwise. Lessee shall, at Lessee's expense, repair, or cause to be repaired, any damage caused to any part of the Premises because of any excavation, construction work or other work of a similar nature which may be done on any property or streets adjacent to the Premises. SECTION 33.11. During the Term, neither Lessee nor any person which has guaranteed Lessee's obligations under this Lease shall substantially change the nature of its business or its financial condition. Upon request of Lessor at any time and from time to time, Lessee and any such person shall submit to Lessor true, correct, current and complete financial statements of Lessee and its affiliates. SECTION 33.12. Solely for the purposes of a proceeding under the present or any future federal bankruptcy act or any other present or future applicable federal, state or other statute or law (a "bankruptcy law"), the following terms and conditions have been agreed upon by Lessor and Lessee: A. In the event of a default by Lessee under this Lease occurring prior to the filing of a voluntary or involuntary petition (a "pre-petition default") under any bankruptcy law, a period exceeding thirty (30) days for curing such default shall in no event be deemed reasonable. B. In order to be deemed adequate assurance by Lessee for the cure of any pre-petition default, Lessee must (a) deposit with Lessor securities, in negotiable form, issued by the United States of America, with a fair market value, at all relevant times, equal to twice the amount of the rent due or the cost, as estimated by Lessor, of curing the pre-petition default, as the case may be, or (b) grant to Lessor a security interest or lien, which shall be superior to any and all claims and liens, on any of Lessee's property that is valued at liquidation at twice the amount of such rent or cost. C. In order to be deemed adequate assurance by Lessee, with respect to the payment of rent due after the filing of a voluntary or involuntary petition under any bankruptcy law, Lessee must (a) deposit with Lessor securities, in negotiable form, issued 39 by the United States of America, with a fair market value, at all relevant times, of not less than six months' rent, or (b) grant a security interest or lien, which shall be superior to any and all claims and liens, in any of Lessee's property that is valued at liquidation at not less than six months' rent. SECTION 33.13. If any financial statement of Lessee shall reflect a net loss, or working capital or a net worth less than that reflected on Lessee's balance sheet as of the last day of its fiscal year ended within the 12 month period preceding the date hereof, or if Lessee's credit rating established by any reputable credit rating agency shall drop below that on the date hereof, then and in any such event Lessee shall promptly deliver to Lessor a sum equal to not less than two months' rent as and for a security deposit hereunder, such deposit to be in addition to any deposit referred to in Section 32.01 and to be held subject to and upon the provisions of such Section. ARTICLE THIRTY-FOURTH RENEWAL TERM SECTION 34.01. Subject to and upon the terms and conditions set forth in this Article, Lessee shall have the right, at its option, to extend this Lease for a term ("Renewal Term") of five (5) years (to commence on the Expiration Date originally provided for herein and to end at noon on the fifth (5th) anniversary of such Expiration Date originally provided for herein) by giving Lessor notice of such election at any time but not less than six months prior to the expiration Date originally provided for herein (time being of the essence with respect thereto), and upon the giving of such notice this Lease thereupon shall be automatically extended for the Renewal Term with the same force and effect as if the Renewal Term has been originally included in the Term, without the execution of any further instrument. SECTION 34.02. Any notice of election to exercise the option to extend as hereinbefore provided must be in writing and sent to Lessor as provided in Article TWENTIETH. In addition, if prior to the exercise of an option to extend Lessee herein named shall have assigned this Lease, no notice by the then Lessee of election to exercise an option to extend shall be valid unless joined in or consented to in writing by Lessee herein named (which consent, in order for the exercise of such option to be effective, shall be delivered to Lessor at or prior to the time of the exercise of the option as to which consent of Lessee herein named has been given). Neither the option granted to Lessee in this Article to extend the Term, nor the exercise of such option of Lessee, shall prevent Lessor from exercising any option or right granted or reserved to Lessor in this Lease to terminate this Lease, and the effective exercise of any such right of termination by Lessor shall terminate any such renewal or extension and any right of Lessee to any such renewal or extension, whether or not Lessee shall have exercised any such option to extend the Term. Any such option or right on the part of Lessor to terminate this Lease pursuant to the provisions hereof shall continue during the Renewal Term. SECTION 34.03. All of the terms, covenants and conditions of this Lease shall continue in full force and effect during the Renewal Term except that (a) the Fixed Rent for the Renewal Term shall be as provided in Section 34.04 (all other rent and charges payable by Lessee 40 remaining unaffected), and (b) there shall be no further privilege of extension of this Lease beyond the Renewal Term. SECTION 34.04. During the Renewal Term Lessee shall pay to Lessor annual Fixed Rent, at the same times and in the same manner as in the Term originally provided for, at an annual rate equal to the sum of the following: (a) Eighty Eight Thousand Five Hundred ($88,500) Dollars plus (b) Eighty Eight Thousand Five Hundred ($88,500) Dollars multiplied by a fraction, the numerator of which equal the amount by which the Index (as defined in Article THIRD) in effect on the first day of the month in which the Renewal Term commences exceeds the Base Level (as such term is defined in Article THIRD), and the denominator of which is the Base Level (it being understood that if the Index in effect on the first day of the month in which the Renewal Term commences is less than the Base Level, the amount described under clause (b) shall be deemed to be zero). SECTION 34.05. If Lessee shall effectively exercise its option to extend this Lease for the Renewal Term, Lessor and Lessee, upon demand of either, shall execute and deliver to each other duplicate originals of an instrument, duly acknowledged, setting forth (a) that the Term has been extended, (b) the period of such extension, (c) the annual Fixed Rent payable during the Renewal Term and (d) that such extension is upon and subject to all of the terms, covenants, conditions and limitations contained herein. SECTION 34.06. The right of Lessee to extend this Lease as provided in Section 34.01 is conditioned in all respects upon Lessee's not being in default in the observance or performance of any term, covenant, condition or agreement on Lessee's part to be observed or performed under this Lease both at the time the notice of exercise is given and at the Expiration Date originally provided for herein. Any termination, cancellation or surrender of this Lease shall terminate any right of extension hereunder for the Renewal Term. SECTION 34.07. Reference in this Lease to (a) the "Expiration Date originally provided for herein" shall be deemed to mean the Expiration Date provided for in Section 1.01, without regard to the Renewal Term, (b) the "Expiration Date" shall be deemed, after Lessee shall have effectively exercised an option to extend this Lease pursuant to this Article, to mean the date of expiration of the Renewal Term and (c) the "Term" shall be deemed, after Lessee shall have effectively exercised the option to extend this Lease pursuant to this Article, to include the Renewal Term. 41 ARTICLE THIRTY-FIFTH SUPPLEMENT TO ARTICLE TWENTY-SEVENTH (ASSIGNMENTS, SUBLEASES AND MORTGAGES) SECTION 35.01. The following provisions shall supplement the provisions of Article TWENTY-SEVENTH and shall be deemed inserted following Section 27.02: SECTION 27.03. Lessee may, upon Lessor's prior consent which shall not be unreasonably withheld, permit any corporations or other business entities which control, are controlled by, or are under common control with Lessee (hereinafter referred to as "related corporations") to sublet all or part of the Premises for any of the purposes permitted to Lessee, subject however to compliance with Lessee's obligations under this Lease. Such subletting shall not release, relieve, discharge or modify any of Lessee's obligations hereunder. For the purposes hereof, "control" shall be deemed to mean ownership of not less than 50% of all of the voting stock of such corporation or not less than 50% of all of the legal and equitable interest in any other business entities. SECTION 27.04. Lessee may, upon Lessor's prior consent which shall not be unreasonably withheld, assign or transfer its entire interest in the Lease and the leasehold estate hereby created or sublet the whole of the Premises on one or more occasions to a "successor corporation" of Lessee, as such term is hereinafter defined, provided that Lessee shall not be in default in observing and performing any of the terms, covenants, conditions and agreements of this Lease on its part to be observed and performed, including the payment of Fixed Rent and Additional Rent. A "successor corporation," as used in this Section, shall mean (a) a corporation into which or with which Lessee, its corporate successors or assigns, is merged or consolidated, in accordance with applicable statutory provisions for the merger or consolidation, the liabilities of the corporations participating in such merger or consolidation are assumed by the corporation surviving such merger or consolidation, or (b) a corporation acquiring this Lease and the Term hereby demised, the good-will and all or substantially all of the other property and assets (other than capital stock of such acquiring corporation) of Lessee, its corporate successors and assigns and assuming all or substantially all of the liabilities of Lessee, its corporation successors and assigns, or (c) any corporate successor to a successor corporation becoming such by either of the methods described above in subdivisions (a) and (b); provided that, immediately after giving effect to any such merger or consolidation, or such acquisition and assumption, as the case may be, the corporation surviving such merger or created by such consolidation or acquiring such assets and assuming such liabilities, as the case may be, shall have assets, capitalization, and a net worth (as determined in accordance with generally accepted principles of accounting consistently applied) at least equal to the assets, capitalization and net worth, similarly determined, of Lessee at the beginning of the Term or of Lessee, its corporate successors or assigns, immediately prior to such merger or consolidation or such acquisition and assumption, as the case may be, whichever is the greater. The acquisition by Lessee, its corporate successors or assigns, of all or substantially all of the assets, together with the assumption of all or substantially all of the obligations and liabilities of any corporation, shall be deemed to be a merger for the purposes of this Article. Upon the delivery to Lessor by any successor corporation to whom this Lease may be and is 42 assigned or transferred with the consent of Lessor pursuant to the provisions of this Section, of the agreement of such corporation to assume all the terms, covenants and conditions of this Lease to be performed by Lessee, and to be bound thereby, the corporation so assigning or transferring this Lease shall thereafter be released and discharged from any obligation thereafter arising under this Lease. SECTION 27.05. No assignment made pursuant to Section 27.04 and no assignment otherwise consented to by Lessor shall be valid unless, within 10 days after the execution thereof, Lessee shall deliver to Lessor (a) a duplicate original instrument of assignment in form and substance satisfactory to Lessor, duly executed by Lessee, and (b) in instrument in form and substance satisfactory to Lessor, duly executed by the assignee, in which such assignee shall assume observance and performance of, and agree to be personally bound by, all of the terms, covenants and conditions of this Lease an Lessee's part to be observed and performed. SECTION 27.06. A Notwithstanding anything contained in Sections 27.01 and 27.02, but subject to the rights of Lessee under Sections 27.03 and 27.04, in the event that, at any time or from time to time prior to of during the Term, Lessee desires to sublet all of any part of the Premises, Lessee (a) shall submit to Lessor in writing the name and address of the proposed subtenant, a reasonably detaled statetment of the proposed subtenant's business, reasonably detailed financial references for the proposed subtenant (including certified balance sheet and income statements for the proposed subtenint in the case of balance sheet dated not more thin 60 days prior to its date of submission; and in the case of the income statement for a full fiscal year ended not more than 60 days prior to the date of its submission), (b) shall submit to Lessor a copy of the proposed sublease, fully executed by both Lessee and the proposed subtenant, the term of which sublease shall commence no later than six months after, (c) shall submit to Lessor in assignment in favor of Lessor, executed by Lessee, of all of Lessee's right, title, and interest in and to the proposed sublease, (d) shall be deemed to have granted Lessor the option either to accept the assignment of the sublease referred to in subdivision (c) above or to sublet from Lessee such space so proposed to be sublet upon the terms and conditions herein set forth, and (e) shall not offer such space for subletting to anyone other than Lessor until 30 days have elapsed after receipt by Lessor of such proposed sublease and assignment. B. The option of Lessor referred to in subdivision (d) of Subsection A shall be exercisable by Lessor only during the 30 day period commencing on the day after Lessor receives the sublease and assignment referred to in subdivisions (b) and (c) above. C. In the event Lessor exercises Lessor's option to sublet such space, such sublease by Lessee to Lessor shall be at a fixed rent equal to the lesser of (i) the Fixed Rent as provided in this Lease for the entire Premises or an equitable apportionment of such Fixed Rent if such 43 sublease shall be in respect of less than the whole of the Premises or (ii) the fixed rent provided for in the proposed sublease referred to in subdivision (b) of Section 27.06A, and shall be for the same term as that of the proposed subletting, and it is hereby expressly greed that: (a) The sublease shall be expressly subject to all of the covenants, agreements, terms, provisions and condions of this Lease except such as are not relevant or applicable, and except as is otherwise expressly set forth to the contrary in this Section; (b) Such sublease to Lessor shall give Lessor the unqualified and unrestricted right, without Lessee's permission, to assign such sublease of any interest therein and/or to sublet the space covered by such sublease or any part or parts of such space and to make any and all changes, alterations, and improvements in the space covered by such sublease, Lessee covenants and agrees (i) that any such assignment or sub-letting by the subtenant may be for any purpose or purposes that Lessor, in Lessor's uncontrolled descretion, shall deem suitable or appropriate, (ii) that Lessee, at Lessee's expense, shall and will at all times provide and permit reasonably appropriate means of ingress and egress from such space so sublet by Lessee to Lessor, and (iii) that at the expiration of the term of such sublease, Lessee will accept the space covered by such sublease in its then existing condition, subject to the obligations of Lessor to make such repairs thereto is may be necessary to preserve the premises demised by such sublease in good order and condition; (c) Such sublease to Lessor shall provide that any assignee or subtenant of the Lessor may, at the election of the Lessor, be permitted to make alterations, decorations and installations in such space or any part thereof and shall also provide in substance that any such alterations, decorations and installations therein made by any assignee or subtanetant of the Lessor may be removed, in whole or in part, by such assignee or subtenant, at its option, prior to or upon the expiration or other termination of such sublease provided that such assignee or subtenant, at its expense, shall repair any damage and injury to such space so sublet caused by such removal; (d) Such sublease to Lessor shall also provide that the parties to such sublease expressly negate any intention that any estate created under such sublease be merged with any other estate held by either of said parties; and (e) if such sublease is for less than the entire Premises, it shall provide that Lessee, at its expense, will erect the partitions required to separate the portion of the Premises to be sublet from the remainer of the Premises and will provde any doors required to provide an independent means of access to the Premises to be sublet, and shall install all other equipment of facilities which may be required in order to use such sublet portion of the Premises as a unit separate from the remainder of the Premises. D. In the event Lessor does not exercise its option to so sublet such space or to accept in assignment of the sublease referred to in subdivision (c) of Subsection A within the 30-day period referred to in Subsection B of this Section, the term of the proposed sublease may commence upon consent of Lessor which consent may not be unreasonably withheld. However, Lessor shall not, in any event, be obligated to consent to the proposed sublease or the commencement of the term unless: 44 (a) In the reasonable judgment of Lessor the proposed subtenant is of a character such as is in keeping with the standards of Lessor in those respects for the Facility, and (b) The purposes for which the proposed subtenant intends to use the portion of the Premises sublet to it are uses expressly permitted by and not expressly prohibited by this Lease, and (c) Lessee shall not have (i) advertised or publicized in any way the avilability of all or part of the Premises without prior notice to and approval by Lessor, or (ii) listed nor publicly advertised the Premises for subletting whether through a broker, agent, representative, or otherwise at a rental rate less than the Fixed Rent then payable hereunder for such space; the provisions of this clause, however, shall not be deemed to prohibit Lessee from negotiating a sublease at a lesser rate of rent and consummatting the same insofar as it may be permitted under the provisions of this Article, and (d) Such subletting will result in there being no more than one tenant in the Premises, and (e) The proposed sublease shall prohibit any assignment or subletting, and (f) The rent for such subletting is no less than the then going market rate for comparable space and for a comparable term in the area, and (g) Lessee shall not be in default in the performance of any of its obligations under this Lease, and (h) Lessee shall reimburse Lessor for any costs that may be incurred by Lessor in connection with the said sublease, including without limitation the costs of making investigations as to the acceptability of a proposed subtenant, and legal costs incurred in connection with the granting of any requested consent, and (i) The proposed subtenant shall not then be a tenant of Lessor or a person with whom Lessor is then negotiating a lease, and (j) The proposed sublease shall provide that in the event Lessee shall default in the performance of its obligations under this Lease, Lessor, at its option and without any obligations to do so, may require the proposed subtenant to attorn to Lessor, in which event Lessor shall undertake the obligations of Lessee under such proposed sublease from the time of the exercise of said option to the termination of such proposed sublease. E. With respect to each and every sublease or subletting authorized by the provisions of this Section, it is further agreed and understood between Lessor and Lessee as follows: (a) No subletting shall be for a term later than one day prior to the Expirition Date and that part, if any, of the proposed term of any sublease or any renewal or extension thereof which shall extend beyond a date one day prior to the Expiration Date or earlier termination of the Term is hereby deemed a nullity; and 45 (b) There shall be delivered to Lessor, within 10 days after the commencement of the term of the proposed sublease, notice of such commencement. F. If Lessee effects any subletting permitted hereinabove, then Lessee shall pay to Lessor a sum equal to (a) any rent or other consideration received by Lessee under the sublease which is in excess of the rent allocable to the subleased space which is .then being paid by Lessee to Lessor pursuant to the terms hereof; and (b) any profit or gain realized by Lessee from any such subletting. All sums payable hereunder by Lessee shall be payable to Lessor as Additional Rent upon receipt thereof by Lessee. SECTION 27.07. In the event that, at any time after Lessee herein named may have assigned Lessee's interest in this Lease, this Lease shall be disaffimed or rejected in any proceeding of the types described in subdivisions (d) and (e) of Section 13.01A or in any similar proceeding, or in the event of termination of this Lease by reason of any such proceeding or by reason of lapse of time following notice of termination given pursuant to Section 13.01 based upon any of the conditons of limitation set forth in said subdivision, Lessee herein named, upon request of Lessor given within 30 days next following such disaffirmance, rejecton or termination (and actual notice thereof to Lessor in the event of a disaffirmance or rejection or in the event of termination other than by act of Lessor), shall (a) pay to Lessor all Fixed Rent, Additional Rent and other charges due and owing by the assignee to Lessor under this Lease to and including the date of such disaffirmance, rejection or termination, and (b) as "tenant", enter into a new lease with Lessor of the Premises for a term commencing on the effective data of such disaffirmance, rejection of termination and ending on the Expiration Date, unless sooner terminated is in such lease provided, at the same Fixed Rent and then executory terms, covenants and conditions as are contained in this Lease, except that (i) Leasee's rights under the new lease shall be subject to the possessory rights of the assignee under this Lease and the possessory rights of any persons claiming through or under such assignee or by virtue of any statute or of any order of any court, and (ii) such new lease shall require all defaults under this Lease to be cured by Lessee herein named with due diligence, and (iii) such new lease shall require Lessee herein named to pay all Additional Rent which, had this Lease not been so disaffirmed, rejected or terminated, would have become due under the provisions of this Lease after the date of such dissaffirmance, rejection or termination with respect to any period prior thereto. In the event Lessee herein named shall default for a period of 10 days next following Lessor's request in its obligation to enter into said new lease then, in addition to all other rights and remedies by reason of such default, either at law or in equity, Lessor shall have the same rights and remedies against Lessee herein named as if Lessee had entered into such new lease and such new lease had thereafter been terminated as at the commencement data thereof by reason of Lessee's default thereunder. 46 IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement of Lease as of the date first above written. LESSOR RTC PROPERTIES, INC. By: -------------------------------------- LESSEE MERCER PRODUCTS CO., INC. By: -------------------------------------- (Seal) Attest: - ------------------------------------- (Acknowledgment for Corporate Lessee) STATE OF ) ) ss.: COUNTY OF ) On the day of , , before me personally came , to me known, who, being by me duly sworn, did depose and say that he resides at ; that he is the President of Mercer Products Co., Inc., the corporation described in and which executed the foregoing instrument as Lessee; that he knows the seal of said corporation; that the seal affixed to said instrument is such corporate seal; that it was so affixed by order of the Board of Directors of said corporation; and that he signed his name thereto by like order. -------------------------------------- Notary Public (Acknowledgment for Individual Lessee) STATE OF ) ) ss.: COUNTY OF ) On the day of , , before me personally came , to me known and known to me to be the individual described in and who executed the foregoing instrument as Lessee, and acknowledged to me that he executed the same. 47 ------------------------------------- Notary Public (Acknowledgment for Partnership Lessee) STATE OF ) ) ss.: COUNTY OF ) On the day of , , before me personally came , to me known, who, being by me duly sworn, did depose and say that he is a partner in the firm of , a partnership, and that he executed the foregoing instrument on behalf of said firm. --------------------------------- Notary Public 48 EXHIBIT A DESCRIPTION OF PREMISES The Premises consist of a portion of the Building at the Facility designated by Lessor as Building 10, as shown more particularly on Plan A annexed to this Exhibit A. Area measurements or descriptions of the Premises or the parking lot set forth in this Exhibit, Plan A annexed hereto, elsewhere in this Lease or in any agreement or document collateral thereto, are approximations and are intended merely to identify space; any errors in such area measurements shall have no effect whatsoever on this Lease or any such agreement. 49 EXTENSION AND FIRST AMENDMENT OF LEASE, dated as of January 13, 1994, by and between RTC PROPERTIES, INC., a New York corporation having an office at 1185 Avenue of the Americas, Suite 310, New York, New York 10036 ("Lessor") and MERCER PRODUCTS CO., INC., a New York corporation having an office at Hackensack Avenue, Building 10, Kearny, New Jersey 07032 ("Lessee"). WITNESSETH: WHEREAS, Lessor, as lessor, and Lessee, as lessee, entered into a lease agreement dated as of December 1, 1988 (hereinafter referred to as the "Lease Agreement"), covering premises including a portion of Building 10 at the River Terminal Facility, Kearny, New Jersey, as more particularly described therein (the "Premises"), and WHEREAS, the Lease Agreement will expire on April 30, 1994; and WHEREAS, Lessor and Lessee desire to extend the Lease Agreement for an additional term of one year and, coincident with such extension, to amend certain other provisions of the Lease Agreement; NOW, THEREFORE, Lessor and Lessee do hereby agree to the extension of the Lease Agreement and to the amendment of the Lease Agreement as follows: PARAGRAPH 1. Section 1.01 of the Lease Agreement is hereby amended by deleting the expiration date "April 30, 1994" and inserting in its place and stead the date "April 30, 1995". PARAGRAPH 2. During the one year extension, the Fixed Rent payable by Lessee pursuant to Section 2.01 shall remain unchanged. PARAGRAPH 3. Article THIRTY-FOURTH is hereby amended to provide that the term "Expiration Date originally provided for herein" shall refer to the Term as extended herein, i.e., April 30, 1995. PARAGRAPH 4. Unless otherwise provided expressly herein, initially capitalized terms used herein shall have the same meanings that they have in the Lease Agreement. PARAGRAPH 5. Except as modified herein, the provisions of the Lease Agreement shall continue in full force and effect. 50 IN WITNESS WHEREOF, Lessor and Lessee have duly executed this Extension and First Amendment of Lease as of the day and year first above written. RTC PROPERTIES, INC. By: ------------------------------- MERCER PRODUCTS CO., INC. By: ------------------------------- ATTEST: By: ----------------------------- 51 CONFIRMATION AND AFFIRMATION OF GUARANTY The undersigned, LAPORTE GROUP p.l.c., hereby confirms and agrees that the Guaranty dated as of August 20, 1990 (the "Guaranty") which the undersigned executed in connection with the Lease referred to in the foregoing Extension and First Amendment of Lease is applicable to the obligations of the Lessee under the Lease, as modified by the foregoing Extension and First Amendment of Lease; and that said Guaranty continues in full force and effect. Dated: As of January 13, 1994 LAPORTE GROUP p.l.c. By: ---------------------------- Attest: By: ----------------------------- 52 EXTENSION AND SECOND AMENDMENT OF LEASE, dated as of January 23, 1995, by and between RTC PROPERTIES, INC., a New York corporation having an office at 1185 Avenue of the Americas, Suite 310, New York, New York 10036 ("Lessor") and MERCER PRODUCTS CO., INC., a New York corporation having an office at Hackensack Avenue, Building 10, Kearny, New Jersey 07032 ("Lessee"). WITNESSETH: WHEREAS, Lessor, as lessor, and Lessee, as lessee, entered into a lease agreement dated as of December 1, 1988 as amended by an Extension and First Amendment of Lease dated as of January 13, 1994 (hereinafter referred to as the "Lease Agreement"), covering premises including a portion of Building 10 at the River Terminal Facility, Kearny, New Jersey, as more particularly described therein (the "Premises"); and WHEREAS, the Lease Agreement will expire on April 30, 1995; and WHEREAS, Lessor and Lessee desire to extend the Lease Agreement for an additional term of two years and, coincident with such extension, to amend certain other provisions of the Lease Agreement; NOW, THEREFORE, Lessor and Lessee do hereby agree to the extension of the Lease Agreement and to the amendment of the Lease Agreement as follows: PARAGRAPH 1. Section 1.01 of the Lease Agreement is hereby amended by deleting the expiration date "April 30, 1995" and inserting in its place and stead the date "April 30, 1997". PARAGRAPH 2. During the two year extension, the Fixed Rent payable by Lessee pursuant to Section 2.01 shall remain unchanged. PARAGRAPH 3. Article THIRTY-FOURTH is hereby amended to provide that the term "Expiration Date originally provided for herein" shall refer to the Term as extended herein, i.e., April 30, 1997. PARAGRAPH 4. Unless otherwise provided expressly herein, initially capitalized terms used herein shall have the same meanings that they have in the Lease Agreement. PARAGRAPH 5. Except as modified herein, the provisions of the Lease Agreement shall continue in full force and effect. 53 IN WITNESS WHEREOF, Lessor and Lessee have duly executed this Extension and Second Amendment of Lease as of the day and year first above written. RTC PROPERTIES, INC. By: -------------------------------- MERCER PRODUCTS CO., INC. By: -------------------------------- ATTEST: By: ---------------------------- 54 CONFIRMATION AND AFFIRMATION The undersigned, LAPORTE GROUP p.l.c., hereby confirms and agrees that the Guaranty dated as of August 20, 1990 (the "Guaranty") which the undersigned executed in connection with the Lease referred to in the foregoing Extension and Second Amendment of Lease is applicable to the obligations of the Lessee under the Lease, as modified by the foregoing Extension and Second Amendment of Lease; and that said Guaranty continues in full force and effect. Dated: As of January 23, 1995 LAPORTE GROUP p.l.c. By: ---------------------------- Attest: By: --------------------- 55 THIRD AMENDMENT AND EXTENSION OF AGREEMENT OF LEASE THIS THIRD AMENDMENT AND EXTENSION OF AGREEMENT OF LEASE, dated as of March 26, 1997, by and between RTC PROPERTIES, INC., A NEW YORK CORPORATION, with offices at 100 Central Avenue, South Kearny, New Jersey 07032, (herein called "Lessor") , and MERCER PRODUCTS CO., INC., A NEW YORK CORPORATION, with offices at Building 10, Hackensack Avenue, South Kearny, New Jersey 07032, (herein called "Lessee"). WITNESSETH: WHEREAS, Lessor and Lessee entered into an Agreement of Lease dated as of December 1, 1988, covering premises known as Building 10, Hackensack Avenue, South Kearny, New Jersey, also known as Lot 20 in Block 294 on the current Tax Map of the Town of Kearny. The land and building are a part of an industrial park (the "Facility"), known and designated as Lots 20, 12, 13 and 14 in Block 294 on the said current Tax Map; WHEREAS, Lessor and Lessee entered into an Extension and First Amendment of Lease dated as of January 13, 1994, extending the term "Expiration Date" from April 30, 1994 to April 30, 1995; WHEREAS, Lessor and Lessee entered into an Extension and Second Amendment of Agreement of Lease dated as of January 23, 1995, extending the "Expiration Date" from April 30, 1995 to April 30, 1997; WHEREAS, Lessor and Lessee desire to extend the term of the Lease for three (3) years, from April 30, 1997 to April 30, 2000; WHEREAS, Lessor and Lessee further desire to add 10,000 square feet of contiguous space to the Premises covered by the said Agreement of Lease and First and Second Amendments of Agreement of Lease; WHEREAS, Lessor and Lessee have agreed to other terms and conditions as set forth herein; WHEREAS, Lessor and Lessee desire to let said Agreement of Lease dated as of December 1, 1988, said Extension and First Amendment of Agreement of Lease dated as of January 13, 1994, and Extension and Second Amendment of Agreement of Lease dated as of January 23, 1995, remain in full force and effect as to all terms and conditions contained therein and to the original Premises known as Building 10B and the additional 10,000 square feet of contiguous space; NOW, THEREFORE, Lessor and Lessee do hereby extend and amend the Agreement of Lease as follows: 1. PREMISES. Lessor is the owner of the land and building which is part of an industrial park known and designated as Lots 12 and 20 in Block 294 on the Tax Map of the 56 Town of Kearny. Lessor hereby leases to Lessee and Lessee leases from Lessor for the term, at the rental and upon all of the conditions set forth in said Agreement of Lease dated as of December 1, 1988, Extension and First Amendment of Agreement Lease dated as of January 13, 1994, and Extension and Second Amendment of Agreement of Lease dated as of January 23, 1995, and as set forth in this said Third Amendment and Extension of Agreement of Lease, a portion of the land and the Building known as 10B (15,000 square feet) and an additional 10,000 square feet of contiguous space, for a total of 25,000 square feet, together with the building equipment attached or appurtenant thereto, located thereon and used solely in connection with the operation and maintenance thereof. 2. ARTICLE FIRST -- DEMISE AND TERM OF DEMISE. The term of this Third Amendment and Extension of Agreement of Lease for the premises (Building 10B - 15,000 square feet and 10,000 square feet of contiguous space, for a total of 25,000 square feet) shall commence on a date sixty (60) days from the date of the execution of this Third Amendment and Extension of Agreement of Lease, and expire on April 30, 2000, unless sooner terminated pursuant to the provisions of the above-mentioned said Agreements. 3. ARTICLE SECOND -- RENT. Lessee shall pay to Lessor rent for the promises (Building 10B -- 15,000 square feet and 10,000 square feet of contiguous space for a total of 25,000 square feet), during the term, over and above the other and additional payments to be made by Lessee, as hereinafter provided, or as provided in the Agreement of Lease dated as of December 1, 1988 or the Extensions and Amendments of Agreements of Lease mentioned above, and without any offset or deduction, of ONE HUNDRED FIFTY-FOUR THOUSAND DOLLARS ($154,000.00) per annum, NET (based upon a rate of $6.16 per square foot per annum NET), payable on the first day of each and every month during the term. Rent for any period during the term hereof which is for less than one (1) month shall be a pro rata portion of the monthly installment. Rent shall be payable in lawful money of the United States to Lessor at the address stated herein or to such other persons or at such other places as Lessor may designate in writing. 4. ARTICLE THIRD -- TAXES AND ESCALATION RENT. In accordance with the provisions of Article Third of the Agreement of Lease dated as of December 1, 1988, Lessee shall, as additional rent, pay all charges set forth thereunder subject to a calculation as set forth in Article Third, but substituting the square footage of Building 10B -- 15,000 square feet and 10,000 additional continuous square feet, for a total of 25,000 square feet, for the square footage set forth in said original Agreement of Lease. In addition, the Proportional Land Impositions shall likewise be adjusted substituting as numerator the number of square feet of land under the Premises (Building 10B and the additional 10,000 contiguous square feet) and the number of square feet of land constituting the parking lot, and the denominator being the total number of square feet of land comprising the Land. All other terms and conditions of Article Third shall remain in full force and effect. 5.. ARTICLE FOURTH -- USE OF PREMISES. Lessee shall have the right to use the Premises (Building 10B and the additional 10,000 contiguous square feet) for warehousing, distribution and office use incidental thereto, and for no other purpose, as set forth in Article Fourth of the Agreement of Lease mentioned above. 57 6. ARTICLE THIRTY-SECOND -- SECURITY DEPOSIT. Lessee has deposited with Lessor a sum pursuant to said Agreement of Lease dated as of December 1, 1988. Said sum shall remain deposited with regard to this Third Amendment and Extension of Lease. All other terms and conditions of Article Thirty-Second of said Agreement of Lease shall remain in full force and effect. 7. ARTICLE THIRTY-FOURTH -- RENEWAL TERM. Lessor and Lessee agree that there shall be no further right to extend the term of this Lease beyond the date set forth herein, namely April 30, 2000. 8. WORK LETTER. Lessor agrees at Lessor's expense to do the following work at said Premises: (a) construct a new demising wall between Units 10C and 10B; (b) create an 8' x 10' opening in the said demising wall. 9. Except as set forth herein, and as amended and extended by this Third Amendment and Extension of Agreement of Lease, the terms and conditions of the Agreement of Lease dated as of December 1, 1988, the Extension and First Amendment of Agreement of Lease dated as of January 13, 1994, and the Extension and Second Amendment of Agreement of Lease dated as of January 23, 1995, shall continue in full force and effect. IN WITNESS WHEREOF, Lessor and Lessee have duly executed this Third Amendment and Extension of Lease as of the day and year first above written. RTC PROPERTIES, INC. By: -------------------------- WITNESS: BY: ------------------------- MERCER PRODUCTS CO., INC. By: --------------------------- WITNESS: BY: --------------------------- 58 EX-12.1 20 EXHIBIT 12.1 EXHIBIT 12.1 COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES AND COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS (DOLLARS IN THOUSANDS)
HISTORICAL PRO FORMA -------------------------------- --------------------------------------------------- FISCAL YEAR THREE MONTHS FISCAL YEAR THREE MONTHS THREE MONTHS ENDED ENDED ENDED ENDED ENDED 1997 4/3/98 1997 4/3/98 4/4/97 ------------- ----------------- ------------- ----------------- ----------------- Interest expense............................ $ 5,900 $ 2,937 $ 14,666 $ 3,728 $ 3,670 Estimated interest portion of rent expense.................................... 468 100 539 150 121 ------------- ------ ------------- ------ ------ Fixed charges............................... $ 6,368 $ 3,037 $ 15,205 $ 3,878 $ 3,791 ------------- ------ ------------- ------ ------ ------------- ------ ------------- ------ ------ Income (loss) before income taxes........... $ (5,761) 720 4,301 660 646 Fixed charges............................... 6,368 3,037 15,205 3,878 3,791 Less; interest charges capitalized.......... (29) (9) (29) (9) (4) ------------- ------ ------------- ------ ------ Earnings.................................... $ 578 $ 3,748 $ 19,477 $ 4,529 $ 4,433 ------------- ------ ------------- ------ ------ ------------- ------ ------------- ------ ------ Ratio of earnings to fixed charges(A)....... -- 1.2x 1.3x 1.2x 1.2x ------------- ------ ------------- ------ ------ ------------- ------ ------------- ------ ------ Fixed Charges............................... 6,368 3,037 15,205 3,878 3,791 Preferred stock dividend requirements....... 1,039 738 3,814 953 953 Accretion of carrying value of preferred stock...................................... 139 102 403 101 101 ------------- ------ ------------- ------ ------ Combined fixed charges and preferred stock dividends.................................. 7,546 3,877 19,422 4,932 4,845 ------------- ------ ------------- ------ ------ Ratio of earnings to combined fixed charges and preferred stock dividends(B)........... -- -- 1.0x -- -- ------------- ------ ------------- ------ ------ ------------- ------ ------------- ------ ------
(A) Earnings were insufficient to cover fixed charges by $5,790 in fiscal year 1997. (B) Earnings were insufficient to cover combined fixed charges and preferred stock dividends by $6,968 for fiscal year 1997, $129 in the three months ended April 3, 1998 and $403 for the pro forma three months ended April 3, 1998 and $412 for the pro forma three months ended April 4, 1997. EX-21.1 21 EXHIBIT 21.1 EXHIBIT 21.1 SUBSIDIARIES OF THE COMPANY
Jurisidiction of Name Incorporation - ---- ----------------- Burke Flooring Products, Inc. California Burke Rubber Company, Inc. California Burke Custom Processing, Inc. California Burkeline Construction Company, Inc. California Mercer Products Company, Inc. New Jersey
EX-23.2 22 EXHIBIT 23.2 EXHIBIT 23.2 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the reference to our firm under the captions "Experts," "Summary Historical Consolidated Financial Data," and "Selected Historical Consolidated Financial Data" and to the use of our reports dated February 26, 1998, with respect to the consolidated financial statements and schedule of Burke Industries, Inc., and to the use of our reports dated November 21, 1997 and February 20, 1998 with respect to the financial statements of Mercer Products Company, Inc. included in the Registration Statement (Form S-4) and related Prospectus of Burke Industries, Inc. for the registration of $30,000,000 aggregate principal amount of its Floating Interest Rate Senior Notes due 2007. /s/ ERNST & YOUNG LLP San Jose, California June 17, 1998 EX-23.3 23 EXHIBIT 23.3 EXHIBIT 23.3 The Board of Directors Mercer Products Company, Inc.: We consent to the use of our report included herein and to the reference to our firm under the heading "Experts" in the prospectus. /s/ KPMG Peat Marwick LLP Orlando, Florida June 17, 1998 EX-25.1 24 EXHIBIT 25.1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 -------------------------- FORM T-1 STATEMENT OF ELIGIBILITY UNDER THE TRUST INDENTURE ACT OF 1939 OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE --------------------- --------------------- CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF A TRUSTEE PURSUANT TO SECTION 305(b)(2) _______ --------------------- --------------------- UNITED STATES TRUST COMPANY OF NEW YORK (Exact name of trustee as specified in its charter) NEW YORK 13-3818954 (Jurisdiction of incorporation (I. R. S. Employer if not a U. S. national bank) Identification No.) 114 WEST 47TH STREET NEW YORK, NEW YORK 10036-1532 (Address of principal (Zip Code) executive offices) NONE (Name, address and telephone number of agent for service) ------------------------ ------------------------ BURKE INDUSTRIES, INC. (Exact name of obligor as specified in its charter) CALIFORNIA 94-3081144 (State or other jurisdiction of (I. R. S. Employer incorporation or organization) Identification No.) 2250 SOUTH TENTH STREET SAN JOSE, CALIFORNIA 95112 (Address of principal executive offices) (Zip Code) FLOATING INTEREST RATE SENIOR NOTES DUE 2007 (Title of the indenture securities) - 2 - GENERAL 1. GENERAL INFORMATION Furnish the following information as to the trustee: (a) Name and address of each examining or supervising authority to which it is subject. Federal Reserve Bank of New York (2nd District), New York, New York (Board of Governors of the Federal Reserve System) Federal Deposit Insurance Corporation, Washington, D.C. New York State Banking Department, Albany, New York (b) Whether it is authorized to exercise corporate trust powers. The trustee is authorized to exercise corporate trust powers. 2. AFFILIATIONS WITH THE OBLIGOR If the obligor is an affiliate of the trustee, describe each such affiliation. None 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14 and 15: The obligor is currently not in default under any of its outstanding securities for which United States Trust Company of New York is Trustee. Accordingly, responses to Items 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14 and 15 of Form T-1 are not required under General Instruction B. 16. LIST OF EXHIBITS T-1.1 -- Organization Certificate, as amended, issued by the State of New York Banking Department to transact business as a Trust Company, is incorporated by reference to Exhibit T-1.1 to Form T-1 filed on September 15, 1995 with the Commission pursuant to the Trust Indenture Act of 1939, as amended by the Trust Indenture Reform Act of 1990 (Registration No. 33-97056). T-1.2 -- Included in Exhibit T-1.1. T-1.3 -- Included in Exhibit T-1.1. - 3 - 16. LIST OF EXHIBITS (CONT'D) T-1.4 -- The By-Laws of United States Trust Company of New York, as amended, is incorporated by reference to Exhibit T-1.4 to Form T-1 filed on September 15, 1995 with the Commission pursuant to the Trust Indenture Act of 1939, as amended by the Trust Indenture Reform Act of 1990 (Registration No. 33-97056). T-1.6 -- The consent of the trustee required by Section 321(b) of the Trust Indenture Act of 1939, as amended by the Trust Indenture Reform Act of 1990. T-1.7 -- A copy of the latest report of condition of the trustee pursuant to law or the requirements of its supervising or examining authority. NOTE As of June 11, 1998, the trustee had 2,999,020 shares of Common Stock outstanding, all of which are owned by its parent company, U.S. Trust Corporation. The term "trustee" in Item 2, refers to each of United States Trust Company of New York and its parent company, U. S. Trust Corporation. In answering Item 2 in this statement of eligibility as to matters peculiarly within the knowledge of the obligor or its directors, the trustee has relied upon information furnished to it by the obligor and will rely on information to be furnished by the obligor and the trustee disclaims responsibility for the accuracy or completeness of such information. ------------------ Pursuant to the requirements of the Trust Indenture Act of 1939, the trustee, United States Trust Company of New York, a corporation organized and existing under the laws of the State of New York, has duly caused this statement of eligibility to be signed on its behalf by the undersigned, thereunto duly authorized, all in the City of New York, and State of New York, on the 11th of June 1998. UNITED STATES TRUST COMPANY OF NEW YORK, Trustee By: /s/ Louis P. Young ------------------------- Louis P. Young Vice President EXHIBIT T-1.6 The consent of the trustee required by Section 321(b) of the Act. United States Trust Company of New York 114 West 47th Street New York, NY 10036 June 11, 1998 Securities and Exchange Commission 450 5th Street, N.W. Washington, DC 20549 Gentlemen: Pursuant to the provisions of Section 321(b) of the Trust Indenture Act of 1939, as amended by the Trust Indenture Reform Act of 1990, and subject to the limitations set forth therein, United States Trust Company of New York ("U.S. Trust") hereby consents that reports of examinations of U.S. Trust by Federal, State, Territorial or District authorities may be furnished by such authorities to the Securities and Exchange Commission upon request therefor. Very truly yours, UNITED STATES TRUST COMPANY OF NEW YORK ----------------------- By: /S/Louis P. Young Vice President EXHIBIT T-1.7 UNITED STATES TRUST COMPANY OF NEW YORK CONSOLIDATED STATEMENT OF CONDITION MARCH 31, 1998 ($ IN THOUSANDS)
ASSETS Cash and Due from Banks $ 303,692 Short-Term Investments 325,044 Securities, Available for Sale 650,954 Loans 1,717,101 Less: Allowance for Credit Losses 16,546 ---------- Net Loans 1,700,555 Premises and Equipment 58,868 Other Assets 120,865 ---------- Total Assets $3,159,978 ---------- ---------- LIABILITIES Deposits: Non-Interest Bearing $ 602,769 Interest Bearing 1,955,571 ---------- Total Deposits 2,558,340 Short-Term Credit Facilities 293,185 Accounts Payable and Accrued Liabilities 136,396 ---------- Total Liabilities $2,987,921 ---------- ---------- STOCKHOLDER'S EQUITY Common Stock 14,995 Capital Surplus 49,541 Retained Earnings 105,214 Unrealized Gains on Securities Available for Sale (Net of Taxes) 2,307 ---------- Total Stockholder's Equity 172,057 ---------- Total Liabilities and Stockholder's Equity $3,159,978 ---------- ----------
I, Richard E. Brinkmann, Senior Vice President & Comptroller of the named bank do hereby declare that this Statement of Condition has been prepared in conformance with the instructions issued by the appropriate regulatory authority and is true to the best of my knowledge and belief. Richard E. Brinkmann, SVP & Controller May 6, 1998 EX-27 25 EXHIBIT 27 WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
5 1,000 12-MOS 3-MOS JAN-02-1998 JAN-01-1999 JAN-04-1997 JAN-03-1998 JAN-02-1998 APR-03-1998 11,563 3,884 0 0 11,520 13,037 (334) 476 11,187 12,747 40,546 33,598 25,556 25,975 (10,536) 10,893 62,837 55,915 18,868 11,514 110,000 110,000 16,148 16,652 0 0 25,464 25,464 (111,954) (112,026) 62,837 55,915 90,228 22,943 90,228 0 62,917 16,180 62,917 16,180 (27,424) 0 (240) 0 5,408 2,787 (5,761) 720 (1,818) 288 (3,943) 3,507 0 0 0 0 0 0 (3,943) 432 0 0 0 0
EX-99.1 26 EXHIBIT 99.1 LETTER OF TRANSMITTAL BURKE INDUSTRIES, INC. OFFER TO EXCHANGE FLOATING INTEREST RATE SENIOR NOTES DUE 2007 FOR ANY AND ALL OUTSTANDING FLOATING INTEREST RATE SENIOR NOTES DUE 2007 PURSUANT TO THE PROSPECTUS, DATED , 1998. - -------------------------------------------------------------------------------- THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M. NEW YORK CITY TIME, ON , 1998 UNLESS EXTENDED (THE "EXPIRATION DATE"). - -------------------------------------------------------------------------------- MAIL DELIVERY TO: United States Trust Company of New York, EXCHANGE AGENT BY MAIL: United States Trust Company of New York P.O. Box 844, Cooper Station New York, NY 10276-0844 Attention: Corporate Trust Services BY HAND: BY OVERNIGHT DELIVERY: United States Trust Company of New York United States Trust Company of New York 111 Broadway, Lower Level 770 Broadway, 13th Floor New York, NY 10006 New York, NY 10003 Attention: Corporate Trust Services Attention: Corporate Trust Services
By Facsimile Transmission (For Eligible Institutions Only) (212) 420-6152 Confirm By Telephone 1-800-548-6565 - -------------------------------------------------------------------------------- DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY. - -------------------------------------------------------------------------------- NOTE: SIGNATURES MUST BE PROVIDED BELOW. PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY The undersigned acknowledges that he or she has received and reviewed the Prospectus, dated , 1998 (the "Prospectus"), of Burke Industries, Inc., a Delaware corporation (the "Company"), and this Letter of Transmittal (the "Letter"), which together constitute the Company's offer (the "Exchange Offer") to exchange an aggregate principal amount of up to $50 million of its Floating Interest Rate Senior Notes due 2007 (the "New Notes") of the Company for a like principal amount of the issued and outstanding Floating Interest Rate Senior Notes due 2007 (the "Old Notes") of the Company from the holders (the "Holders") thereof. Capitalized terms used but not defined herein have the meanings given to them in the Exchange Offer. For each Old Note accepted for exchange, the Holder of such Old Note will receive a New Note having a principal amount equal to that of the surrendered Old Note. No interest will be payable on the Old Notes on the date of the exchange for the New Notes and Old Notes accepted for exchange will cease to accrue interest from and after the consummation of the Exchange Offer; therefore no interest will be paid thereon to the Holders at such time. Each New Note will bear interest at LIBOR plus 400 basis points per annum and will be payable in cash semiannually in arrears on each February 15 and August 15, commencing on August 15, 1998. Holders of Old Notes accepted for exchange will be deemed to have waived the right to receive any other payment of interest on the Old Notes. The Company reserves the right, at any time or from time to time, to extend the Exchange Offer at its discretion, in which event the term "Expiration Date" shall mean the latest time and date to which the Exchange Offer is extended. The Company shall notify the Holders of the Old Notes of any extension by means of a press release or other public announcement prior to 9:00 A.M., New York City time, on the next business day after the previously scheduled Expiration Date. This Letter is to be completed by a Holder of Old Notes either if certificates are to be forwarded herewith or if a tender of certificates for Old Notes, if available, is to be made by book-entry transfer to the account maintained by the Exchange Agent at The Depository Trust Company (the "Book-Entry Transfer Facility") pursuant to the procedures set forth in "The Exchange Offer--Procedures for Tendering Old Notes" section of the Prospectus. Holders of Old Notes whose certificates are not immediately available, or who are unable to deliver their certificates or confirmation of the book-entry tender of their Old Notes into the Exchange Agent's account at the Book-Entry Transfer Facility (a "Book-Entry Confirmation") and all other documents required by this Letter to the Exchange Agent on or prior to the Expiration Date, may tender their Old Notes according to the guaranteed delivery procedures set forth in "The Exchange Offer--Guaranteed Delivery Procedures" section of the Prospectus. See Instruction 1. Delivery of documents to the Book-Entry Transfer Facility does not constitute delivery to the Exchange Agent. The undersigned has completed the appropriate boxes below and signed this Letter to indicate the action the undersigned desires to take with respect to the Exchange Offer. List below the Old Notes to which this Letter relates. If the space provided below is inadequate, the certificate numbers and principal amount of Old Notes should be listed on a separate signed schedule affixed hereto.
- ---------------------------------------------------------------------------------------------------- DESCRIPTION OF OLD NOTES - ---------------------------------------------------------------------------------------------------- NAME AND ADDRESS OF REGISTERED HOLDER AS IT APPEARS CERTIFICATE NUMBER(S) OF PRINCIPAL AMOUNT OF OLD ON THE 10% SENIOR NOTES DUE 2007 OLD NOTES TRANSMITTED* NOTES TRANSMITTED** - ---------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------
* Need not be completed if Old Notes are being tendered by book-entry transfer. ** Unless otherwise indicated in this column, a Holder will be deemed to have tendered ALL of the Old Notes represented by the Old Notes indicated in column 2. See Instruction 2. Old Notes tendered hereby must be in denominations of principal amount of $1,000 and any integral multiple thereof. See Instruction 1. - -------------------------------------------------------------------------------- / / CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH THE BOOK-ENTRY TRANSFER FACILITY AND COMPLETE THE FOLLOWING: Name of Tendering Institution ______________________________________________ Account Number ______________ Transaction Code Number ______________ / / CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE OF GUARANTEED DELIVERY PREVIOUSLY SENT TO THE EXCHANGE AGENT AND COMPLETE THE FOLLOWING: Name(s) of Registered Holder(s) ___________________________________________ Window Ticket Number (if any) _____________________________________________ Date of Execution of Notice of Guaranteed Delivery ________________________ Name of Institution which guaranteed delivery _____________________________ - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- IF DELIVERED BY BOOK-ENTRY TRANSFER, COMPLETE THE FOLLOWING: Account Number ______________ Transaction Code Number ______________ - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- / / CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS THERETO. NAME: _____________________________________________________________________ ADDRESS: __________________________________________________________________ __________________________________________________________________ - -------------------------------------------------------------------------------- PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY Ladies and Gentlemen: Upon the terms and subject to the conditions of the Exchange Offer, the undersigned hereby tenders to the Company the aggregate principal amount of Old Notes indicated above. Subject to, and effective upon, the acceptance for exchange of the Old Notes tendered hereby, the undersigned hereby sells, assigns and transfers to, or upon the order of, the Company all right, title and interest in and to such Old Notes as are being tendered hereby. The undersigned hereby represents and warrants that the undersigned has full power and authority to tender, sell, assign and transfer the Old Notes tendered hereby and that the Company will acquire good and unencumbered title thereto, free and clear of all liens, restrictions, charges and encumbrances and not subject to any adverse claim when the same are accepted by the Company. The undersigned hereby irrevocably constitutes and appoints the Exchange Agent as its agent and attorney-in-fact with full power of substitution, for purposes of delivering this Letter and the Old Notes to the Company. The Power of Attorney granted in this paragraph shall be deemed irrevocable from and after the Expiration Date and coupled with an interest. The undersigned hereby further represents that any New Notes acquired in exchange for Old Notes tendered hereby will have been acquired in the ordinary course of business of the person receiving such New Notes, whether or not such person is the undersigned, that neither the Holder of such Old Notes nor any such other person is participating, intends to participate or has an arrangement or understanding with any person to participate in the distribution of such New Notes and that neither the Holder of such Old Notes nor any such other person is an "affiliate," of the Company, as defined in Rule 405 under the Securities Act of 1933, as amended (the "Securities Act"). The undersigned also acknowledges that this Exchange Offer is being made in reliance on an interpretation by the staff of the Securities and Exchange Commission (the "SEC") set forth in no-action letters to third parties, based on which the Company believes that the New Notes issued in exchange for the Old Notes pursuant to the Exchange Offer may be offered for resale, resold and otherwise transferred by any Holder thereof (other than any such Holder that is an "affiliate" of the Company within the meaning of Rule 405 under the Securities Act), without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that such New Notes are acquired in the ordinary course of such Holder's business and such Holder has no arrangement with any person to participate in the distribution of such New Notes. If the undersigned is not a broker-dealer, the undersigned represents that it is not engaged in, and does not intend to engage in, a distribution of New Notes. If the undersigned is a broker-dealer that will receive New Notes for in exchange for Old Notes, it represents that the Old Notes to be exchanged for New 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 New 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. The undersigned acknowledges that in reliance on an interpretation by the staff of the SEC, a broker-dealer may fulfill his prospectus delivery requirements with respect to the New Notes (other than a resale of an unsold allotment from the original sale of the Old Notes) with the Prospectus which constitutes part of this Exchange Offer. The undersigned will, upon request, execute and deliver any additional documents deemed by the Company to be necessary or desirable to complete the sale, assignment and transfer of the Old Notes tendered hereby. All authority conferred or agreed to be conferred in this Letter and every obligation of the undersigned hereunder shall be binding upon the successors, assigns, heirs, executors, administrators, trustees in bankruptcy and legal representatives of the undersigned and shall not be affected by, and shall survive, the death or incapacity of the undersigned. This tender may be withdrawn only in accordance with the procedures set forth in "The Exchange Offer--Withdrawal Rights" section of the Prospectus. Unless otherwise indicated herein in the box entitled "Special Issuance Instructions" below, please deliver the New Notes (and, if applicable, substitute certificates representing Old Notes for any Old Notes not exchanged) in the name of the undersigned or, in the case of a book-entry delivery of Old Notes, please credit the account indicated above maintained at the Book-Entry Transfer Facility. Similarly, unless otherwise indicated under the box entitled "Special Delivery Instructions" below, please send the New Notes (and, if applicable, substitute certificates representing Old Notes for any Old Notes not exchanged) to the undersigned at the address shown above in the box entitled "Description of Old Notes." - -------------------------------------------------------------------------------- THE UNDERSIGNED, BY COMPLETING THE BOX ENTITLED "DESCRIPTION OF OLD NOTES" ABOVE AND SIGNING THIS LETTER, WILL BE DEEMED TO HAVE TENDERED THE OLD NOTES AS SET FORTH IN SUCH BOX ABOVE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SPECIAL ISSUANCE INSTRUCTIONS (SEE INSTRUCTIONS 3 AND 4) To be completed ONLY if certificates for Old Notes not exchanged and/or New Notes are to be issued in the name of and sent to someone other than the person or persons whose signature(s) appear(s) on this Letter above, or if Old Notes delivered by book-entry transfer which are not accepted for exchange are to be returned by credit to an account maintained at the Book-Entry Transfer Facility other than the account indicated above. Issue: New Notes and/or Old Notes to: Name(s): ___________________________________________________________________ (PLEASE TYPE OR PRINT) __________________________________________________________________________ (PLEASE TYPE OR PRINT) Address: ___________________________________________________________________ ____________________________________________________________________________ Employer Identification # or Social Security Number: _______________________ / / Credit unexchanged Old Notes delivered by book-entry transfer to the Book-Entry Transfer Facility account set forth below. ____________________________________________________________________________ (BOOK-ENTRY TRANSFER FACILITY ACCOUNT NUMBER, IF APPLICABLE) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SPECIAL DELIVERY INSTRUCTIONS (SEE INSTRUCTIONS 3 AND 4) To be completed ONLY if certificates for Old Notes not exchanged and/or New Notes are to be sent to someone other than the person or persons whose signature(s) appear(s) on this Letter above or to such person or persons at an address other than shown in the box entitled "Description of Old Notes" on this Letter above. Mail: New Notes and/or Old Notes to: Name(s): ___________________________________________________________________ (PLEASE TYPE OR PRINT) __________________________________________________________________________ (PLEASE TYPE OR PRINT) Address: ___________________________________________________________________ ____________________________________________________________________________ - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- IMPORTANT: THIS LETTER OR A FACSIMILE HEREOF (TOGETHER WITH THE CERTIFICATES FOR OLD NOTES OR A BOOK-ENTRY CONFIRMATION AND ALL OTHER REQUIRED DOCUMENTS OR THE NOTICE OF GUARANTEED DELIVERY) MUST BE RECEIVED BY THE EXCHANGE AGENT PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE. - -------------------------------------------------------------------------------- PLEASE READ THIS ENTIRE LETTER OF TRANSMITTAL CAREFULLY BEFORE COMPLETING ANY BOX ABOVE. - -------------------------------------------------------------------------------- PLEASE SIGN HERE (TO BE COMPLETED BY ALL TENDERING HOLDERS) Dated: ___________________________________________ _______________________________ _______________________________ SIGNATURE(S) OF OWNER DATE Area code and Telephone Number _____________________________________________ If a Holder is tendering any Old Notes, this Letter must be signed by the registered Holder(s) as the name(s) appear(s) on the certificate(s) for the Old Notes or by any person(s) authorized to become registered Holder(s) by endorsements and documents transmitted herewith. If signature is by a trustee, executor, administrator, guardian, officer or other person acting in a fiduciary or representative capacity, please set forth full title. See Instruction 3. Name(s) ____________________________________________________________________ ____________________________________________________________________________ (PLEASE TYPE OR PRINT) Capacity: __________________________________________________________________ Address: ___________________________________________________________________ ____________________________________________________________________________ (INCLUDING ZIP CODE) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SIGNATURE GUARANTEE (IF REQUIRED BY INSTRUCTION 3) SIGNATURE(S) GUARANTEED BY AN ELIGIBLE INSTITUTION: (AUTHORIZED SIGNATURE) ______________________________________________________ (TITLE) ______________________________________________________ (NAME AND FIRM) Dated: ___________________________________________ - -------------------------------------------------------------------------------- INSTRUCTIONS FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER OF FLOATING INTEREST RATE NOTES DUE 2007 FOR ANY AND ALL OUTSTANDING FLOATING INTEREST RATE NOTES DUE 2007 OF BURKE INDUSTRIES, INC. 1. DELIVERY OF THIS LETTER AND NOTES; GUARANTEED DELIVERY PROCEDURES: This letter is to be completed by noteholders either if certificates are to be forwarded herewith or if tenders are to be made pursuant to the procedures for delivery by book-entry transfer set forth in "The Exchange Offer--Procedures for Tendering Old Notes" section of the Prospectus. Certificates for all physically tendered Old Notes, or Book-Entry Confirmation, as the case may be, as well as a properly completed and duly executed letter (or manually signed facsimile hereof) and any other documents required by this Letter, must be received by the Exchange Agent at the address set forth herein on or prior to the Expiration Date, or the tendering Holder must comply with the guaranteed delivery procedures set forth below. Old Notes tendered hereby must be in denominations of principal amount of $1,000 and any integral multiple thereof. Noteholders whose certificates for Old Notes are not immediately available or who cannot deliver their certificates and all other required documents to the Exchange Agent on or prior to the Expiration Date, or who cannot complete the procedure for book-entry transfer on a timely basis, may tender their Old Notes pursuant to the guaranteed delivery procedures set forth in "The Exchange Offer--Guaranteed Delivery Procedures" section of the Prospectus. Pursuant to such procedures, (i) such tender must be made by or through an Eligible Institution and a Notice of Guaranteed Delivery must be signed by such Holder, (ii) on or prior to the Expiration Date, the Exchange Agent must receive from the Holder and the Eligible Institution a properly completed and duly executed Notice of Guaranteed Delivery (by facsimile transmission, mail or hand delivery), substantially in the form provided by the Company, setting forth the name and address of the Holder of Old Notes, the certificate number or numbers of the tendered Old Notes, and the principal amount of Old Notes tendered, stating that the tender is being made thereby and guaranteeing that within four (4) business days after the date of delivery of the Notice of Guaranteed Delivery, the tendered Old Notes, a duly executed Letter of Transmittal and any other required documents will be deposited by the Eligible Institution with the Exchange Agent and (iii) the certificates for all physically tendered Old Notes, in proper form for transfer, or Book-Entry Confirmation, as the case may be, and all other documents required by this Letter, must be received by the Exchange Agent within four (4) business days after the Expiration Date. The method of delivery of this Letter, the Old Notes and all other required documents is at the election and risk of the tendering Holders, but the delivery will be deemed made only when actually received or confirmed by the Exchange Agent. If such delivery is by mail, it is recommended that registered mail, properly insured, with return receipt requested, be used. Instead of delivery by mail, it is recommended that that the Holder use an overnight or hand delivery service. In all cases, it is suggested that the mailing be made sufficiently in advance of the Expiration Date to permit delivery to the Exchange Agent prior to 5:00 p.m., New York City time, on the Expiration Date. See "The Exchange Offer" section of the Prospectus. 2. PARTIAL TENDERS (NOT APPLICABLE TO NOTEHOLDERS WHO TENDER BY BOOK-ENTRY TRANSFER): If less than all of the Old Notes evidenced by a submitted certificate are to be tendered, the tendering Holder(s) should fill in the aggregate principal amount of Old Notes to be tendered in the box above entitled "Description of Old Notes--Principal Amount of Old Notes Transmitted." Holders whose Old Notes are not tendered or are tendered but not accepted in the Exchange Offer will continue to hold such Old Notes and will be entitled to all the rights and preferences and subject to the limitations applicable thereto under the Indenture. Following consummation of the Exchange Offer, the Holders will continue to be subject to the existing restrictions upon transfer thereof and the Company will have no further obligation to such Holders to provide for the registration under the Securities Act of the Old Notes held by them. ALL OF THE OLD NOTES DELIVERED TO THE EXCHANGE AGENT WILL BE DEEMED TO HAVE BEEN TENDERED UNLESS OTHERWISE INDICATED. 3. SIGNATURES ON THIS LETTER; BOND POWERS AND ENDORSEMENTS; GUARANTEE OF SIGNATURES: If this Letter is signed by the registered Holder of the Old Notes tendered hereby, the signature must correspond exactly with the name as written on the face of the certificates without any change whatsoever. If any tendered Old Notes are owned of record by two or more joint owners, all such owners must sign this Letter. If any tendered Old Notes are registered in different names on several certificates, it will be necessary to complete, sign and submit as many separate copies of this Letter as there are different registrations of certificates. When this Letter is signed by the registered Holder or Holders of the Old Notes specified herein and tendered hereby, no endorsements of certificates or separate bond powers are required. If, however, the New Notes are to be issued, or any untendered Old Notes are to be reissued, to a person other than the registered Holder, then endorsements of any certificates transmitted hereby or separate bond powers are required. Signatures on such certificate(s) must be guaranteed by an Eligible Institution. If this Letter is signed by a person other than the registered Holder or Holders of any certificate(s) specified herein, such certificate(s) must be endorsed or accompanied by appropriate bond powers, in either case signed exactly as the name or names of the registered Holder or Holders appear(s) on the certificate(s) and signatures on such certificate(s) must be guaranteed by an Eligible Institution. If this Letter or any certificates or bond powers are signed by trustees, executors, administrators, guardians, attorneys-in-fact, officers of corporations or others acting in a fiduciary or representative capacity, such persons should so indicate when signing, and, unless waived by the Company, proper evidence satisfactory to the Company of their authority to so act must be submitted. ENDORSEMENTS ON CERTIFICATES FOR OLD NOTES OR SIGNATURES ON BOND POWERS REQUIRED BY THIS INSTRUCTION 3 MUST BE GUARANTEED BY A FIRM WHICH IS A MEMBER OF A REGISTERED NATIONAL SECURITIES EXCHANGE OR A MEMBER OF THE NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC. OR BY A COMMERCIAL BANK OR TRUST COMPANY HAVING AN OFFICE OR CORRESPONDENT IN THE UNITED STATES (AN "ELIGIBLE INSTITUTION"). SIGNATURES ON THIS LETTER NEED NOT BE GUARANTEED BY AN ELIGIBLE INSTITUTION, PROVIDED THE OLD NOTES ARE TENDERED: (I) BY A REGISTERED HOLDER OF OLD NOTES (WHICH TERM, FOR PURPOSES OF THE EXCHANGE OFFER, INCLUDES ANY PARTICIPANT IN THE BOOK-ENTRY TRANSFER FACILITY SYSTEM WHOSE NAME APPEARS ON A SECURITY POSITION LISTING AS THE HOLDER OF SUCH OLD NOTES) TENDERED WHO HAS NOT COMPLETED THE BOX ENTITLED "SPECIAL ISSUANCE INSTRUCTIONS" OR "SPECIAL DELIVERY INSTRUCTIONS," ON THIS LETTER, OR (II) FOR THE ACCOUNT OF AN ELIGIBLE INSTITUTION. 4. SPECIAL ISSUANCE AND DELIVERY INSTRUCTIONS: Tendering Holders of Old Notes should indicate in the applicable box the name and address to which New Notes issued pursuant to the Exchange Offer and/or Old Notes not exchanged are to be sent, if different from the name or address of the person signing this Letter. In the case of issuance in a different name, the employer identification or social security number of the person named must also be indicated. Noteholders tendering Old Notes by book-entry transfer may request that Old Notes not exchanged be credited to such account maintained at the Book-Entry Transfer Facility as such noteholder may designate hereon. If no such instructions are given, such Old Notes not exchanged will be returned to the name or address of the person signing this Letter. 5. TRANSFER TAXES: The Company will pay all transfer taxes, if any, applicable to the transfer of Old Notes to it or its order pursuant to the Exchange Offer. If however, certificates representing New Notes and/or Old Notes for principal amounts not tendered or accepted for exchange are to be delivered to, or are to be registered or issued in the name of, any person other than the registered Holder of the Old Notes tendered hereby, or if tendered Old Notes are registered in the name of any person other than the person signing this Letter, or if a transfer tax is imposed for any reason other than the transfer of Old Notes to the Company or its order pursuant to the Exchange Offer, the amount of any such transfer taxes (whether imposed on the registered Holder or any other persons) will be payable by the tendering Holder. If satisfactory evidence of payment of such taxes or exemption therefrom is not submitted herewith, the amount of such transfer taxes will be billed directly to such tendering Holder. EXCEPT AS PROVIDED IN THIS INSTRUCTION 5, IT WILL NOT BE NECESSARY FOR TRANSFER TAX STAMPS TO BE AFFIXED TO THE OLD NOTES SPECIFIED IN THIS LETTER. 6. WAIVER OF CONDITIONS: The Company reserves the absolute right to waive satisfaction of any or all conditions enumerated in the Prospectus. 7. NO CONDITIONAL TENDERS: No alternative, conditional, irregular or contingent tenders will be accepted. All tendering Holders of Old Notes, by execution of this Letter, shall waive any right to receive notice of the acceptance of their Old Notes for exchange. Neither the Company, the Exchange Agent nor any other person is obligated to give notice of any defect or irregularity with respect to any tender of Old Notes nor shall any of them incur any liability for failure to give any such notice. 8. MUTILATED, LOST, STOLEN OR DESTROYED OLD NOTES: Any Holder whose Old Notes have been mutilated, lost, stolen or destroyed should contact the Exchange Agent at the address indicated above for further instructions. 9. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES: Questions relating to the procedure for tendering, as well as requests for additional copies of the Prospectus and this Letter, may be directed to the Exchange Agent, at the address indicated above. IMPORTANT TAX INFORMATION Under current Federal income tax law, any Holder whose tendered Old Notes are accepted for payment generally is required to provide the Exchange Agent (as agent for the payer) with his or her correct taxpayer identification number ("TIN") on Substitute Form W-9 below. If such Holder of Old Notes is an individual, the TIN is his or her social security number. If the Exchange Agent is not provided with the correct TIN, the Holder of Old Notes may be subject to a $50 penalty imposed by the Internal Revenue Service. In addition, payments that are made to such Holders of Old Notes with respect to New Notes may be subject to backup withholding. Certain Holders of Old Notes (including, among others, all corporations and certain foreign individuals) may not be subject to these backup withholding and reporting requirements. Exempt Holders of Old Notes should indicate their exempt status on Substitute Form W-9. In order for a foreign individual to qualify as an exempt recipient, that Holder of Old Notes must submit a properly completed Internal Revenue Service Form W-8, signed under penalties of perjury, attesting to his or her exempt status. Such statements can be obtained from the Exchange Agent. See the enclosed Guidelines for Certification of Taxpayer Identification Number on Substitute W-9 for additional instructions. If backup withholding applies, the Exchange Agent is required to withhold 31 percent of any such payments made to the Holder of Old Notes. Backup withholding is not an additional tax. Rather, the federal income tax liability of persons subject to backup withholding will be reduced by the amount of tax withheld. If withholding results in an overpayment of taxes, a refund may be obtained. PURPOSE OF SUBSTITUTE FORM W-9 To prevent backup withholding on payments that are made to a Holder of Old Notes with respect to Old Notes exchanged pursuant to the Exchange Offer, each Holder of Old Notes is required to notify the Exchange Agent of his, her or its correct TIN by completing the Substitute Form W-9 below certifying the TIN provided on such form is correct (or that such Holder of Old Notes is awaiting a TIN) and that (1) such Holder of Old Notes has not been notified by the Internal Revenue Service that he, she or it is subject to backup withholding as a result of failure to report all interest or dividends or (2) the Internal Revenue Service has notified such Holder of Old Notes that he, she or it is no longer subject to backup withholding. WHAT NUMBER TO GIVE THE EXCHANGE AGENT The Holder of Old Notes is required to give the Exchange Agent the social security number or employer identification number of the record owner of the Old Notes. If the Old Notes are in more than one name or are not in the name of the actual owner, consult the enclosed Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9 for additional guidelines on which number to report. PAYER'S NAME: UNITED STATES TRUST COMPANY OF NEW YORK, N.A. AS EXCHANGE AGENT - --------------------------------------------------------------------------------------------------- SUBSTITUTE Part 1: PLEASE PROVIDE YOUR TIN Social Security Number FORM W-9 IN THE BOX AT RIGHT AND CERTIFY OR ------------------ Department of the Treasury BY SIGNING AND DATING BELOW Employer Identification Number Internal Revenue Service ----------------------------------------------------------------- Part 2: Certification--Under penalties of perjury, I certify that: (1) The number shown on this form is my current taxpayer identification number (or I am waiting for a number to be issued to me) and (2) I am not subject to backup withholding because: (a) I am exempt from backup withholding, (b) I have not been notified by Payer's Request for Taxpayer the Internal Revenue Service (the "IRS") that I am subject to Identification Number (TIN) backup withholding as a result of a failure to report all interest or dividends or (c) the IRS has notified me that I am no longer subject to backup withholding. ----------------------------------------------------------------- Part 3: Awaiting TIN / / - --------------------------------------------------------------------------------------------------- CERTIFICATE INSTRUCTIONS--You must cross out Item (2) above if you have been notified by the IRS that you are currently subject to backup withholding because of under-reporting interest or dividends on your tax return. However, if after being notified by the IRS that you were subject to backup withholding you received another notification from the IRS that you are no longer subject to backup withholding, do not cross out such Item (2)
SIGNATURE: ____________________________________ DATE: ______________ - -------------------------------------------------------------------------------- NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP WITHHOLDING OF 31 PERCENT OF ANY PAYMENTS MADE TO YOU PURSUANT TO THE EXCHANGE OFFER, PLEASE REVIEW THE ENCLOSED "GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE W-9" FOR ADDITIONAL DETAILS NOTE: YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE BOX IN PART 3 OF SUBSTITUTE FORM W-9 - -------------------------------------------------------------------------------- CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER I certify under penalties of perjury that a taxpayer identification number has not been issued to me, and either (a) I have mailed or delivered an application to receive a taxpayer identification number to the appropriate Internal Revenue Service Center or Social Security Administration Officer or (b) I intend to mail or deliver such an application in the near future. I understand that if I do not provide a taxpayer identification number within sixty (60) days, 31 percent of all reportable payments made to me thereafter will be withheld until I provide a number. SIGNATURE: ____________________________________ DATE: ______________ - -------------------------------------------------------------------------------- EX-99.2 27 EXHIBIT 99.2 NOTICE OF GUARANTEED DELIVERY OFFER FOR OUTSTANDING FLOATING INTEREST RATE SENIOR NOTES DUE 2007 IN EXCHANGE FOR FLOATING INTEREST RATE SENIOR NOTES DUE 2007 OF BURKE INDUSTRIES, INC. This form or one substantially equivalent to it must be used to exchange the Burke Industries, Inc. Floating Interest Rate Senior Notes Due 2007 (the "Old Notes") if certificates for the Old Notes are not immediately available or if time will not permit the Letter of Transmittal or other required documents to reach the United States Trust Company of New York (the "Exchange Agent") prior to 5:00 p.m. New York City time on , 1998, at which time the right to exchange the Old Notes terminates. This form must be delivered by hand, mail, telegram or facsimile transmission to the Exchange Agent as follows: MAIL DELIVERY TO: United States Trust Company of New York, EXCHANGE AGENT By Mail: United States Trust Company of New York P.O. Box 844, Cooper Station New York, NY 10276-0844 Attention: Corporate Trust Services
By Hand: By Overnight Delivery: United States Trust Company of New York United States Trust Company of New York 111 Broadway, Lower Level 770 Broadway, 13th Floor New York, NY 10006 New York, NY 10003 Attention: Corporate Trust Services Attention: Corporate Trust Services
By Facsimile Transmission (For Eligible Institutions Only): (212) 420-6152 Confirm By Telephone 1-800-548-6565 - -------------------------------------------------------------------------------- DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN THOSE SHOWN ABOVE DOES NOT CONSTITUTE VALID DELIVERY. UNDER THE TERMS OF THIS DOCUMENT, THE OLD NOTES, A PROPERLY COMPLETED AND DULY EXECUTED LETTER OF TRANSMITTAL AND OTHER DOCUMENTS REQUIRED BY THE LETTER OF TRANSMITTAL MUST BE DELIVERED TO THE EXCHANGE AGENT WITHIN FOUR BUSINESS DAYS AFTER THE DATE OF DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY. - -------------------------------------------------------------------------------- Ladies and Gentlemen: The undersigned hereby tenders the principal amount of Old Notes indicated below, upon the terms and subject to the conditions contained in the Registration Statement on Form S-4 filed by Burke Industries, Inc., a California corporation, with the Securities and Exchange Commission (the "Registration Statement") and the accompanying Prospectus dated , 1998 included therein (the "Prospectus"), receipt of which is hereby acknowledged: DESCRIPTION OF SECURITIES TENDERED
- -------------------------------------------------------------------------------------------- PLEASE FILL IN YOUR NAME(S) EXACTLY AS IT APPEARS ON YOUR NOTE(S) PLEASE FILL IN AND YOUR PRESENT ADDRESS NUMBERS AND AMOUNTS - -------------------------------------------------------------------------------------------- NOTE PRINCIPAL NAME(S): NUMBER(S) AMOUNT -------------------------------------- -------------------------------------- -------------------------------------- -------------------------------------- ADDRESS(ES): -------------------------------------- -------------------------------------- -------------------------------------- -------------------------------------- TOTALS - --------------------------------------------------------------------------------------------
Signatures (all registered holders must sign): Address: - ---------------------------------------- ---------------------------------------- - ---------------------------------------- ---------------------------------------- (Please Type or Print) Area Code and Daytime Telephone Number: ( ) - -----------------------------------------
2 THE FOLLOWING GUARANTEE MUST BE COMPLETED GUARANTEE The undersigned, a member firm of a registered national securities exchange or a member of the National Association of Securities Dealers, Inc., or a commercial bank or trust company having an office, branch or agency in the United States, hereby guarantees to deliver to the Exchange Agent at the address set forth above, Old Note certificates surrendered for exchange hereby in proper form for transfer, together with a properly completed and duly executed Letter of Transmittal and any other documents required by the Letter of Transmittal, within four (4) business days after the date of delivery of this Notice of Guaranteed Delivery.
Dated: , 199 Name of Firm: ----------------------------- Sign Here: -------------------------------- (Authorized Signature) Name: ------------------------------------ (Please type or print) ------------------------------------------ (Area code and Telephone Number) Address: ---------------------------------- ------------------------------------------ ------------------------------------------ (Zip Code)
NOTE: DO NOT SEND OLD NOTES WITH THIS NOTICE OF GUARANTEED DELIVERY. OLD NOTES SHOULD BE SENT WITH YOUR LETTER OF TRANSMITTAL. 3 -----END PRIVACY-ENHANCED MESSAGE-----