-----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, Pvze46lHG5FzPY1qd9n8No1qImc9FYBeyHqSU0e3QbJwlwAiENk1+yzDzUVFSH5d k020aGp7zNq7s8ptfB/IBQ== 0001047469-99-013033.txt : 19990402 0001047469-99-013033.hdr.sgml : 19990402 ACCESSION NUMBER: 0001047469-99-013033 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19990101 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BURKE INDUSTRIES INC /CA/ CENTRAL INDEX KEY: 0001046777 STANDARD INDUSTRIAL CLASSIFICATION: PLASTICS, MATERIALS, SYNTH RESINS & NONVULCAN ELASTOMERS [2821] IRS NUMBER: 943081144 STATE OF INCORPORATION: CA FISCAL YEAR END: 0102 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 333-36675 FILM NUMBER: 99583244 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 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: 10-K405 SEC ACT: SEC FILE NUMBER: 333-57211-02 FILM NUMBER: 99583245 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: 10-K405 SEC ACT: SEC FILE NUMBER: 333-57211-03 FILM NUMBER: 99583246 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: 10-K405 SEC ACT: SEC FILE NUMBER: 333-36675-01 FILM NUMBER: 99583247 BUSINESS ADDRESS: STREET 1: 2250 SOUTH TENTH STREET CITY: SAN JOSE STATE: CA ZIP: 95112 BUSINESS PHONE: 4082973500 MAIL ADDRESS: STREET 1: 2250 SOUTH TENTH STREET CITY: SAN JOSE STATE: CA ZIP: 95112 10-K405 1 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------- FORM 10-K (Mark One) /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended January 1, 1999 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF SECURITIES EXCHANGE ACT OF 1934 For the Transition Period From ______to_________ Commission File Number 333-36675 --------------- BURKE INDUSTRIES, INC. (Exact name of Registrant as specified in its charter) CALIFORNIA 94-3081144 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2250 SOUTH TENTH STREET, SAN JOSE, CALIFORNIA 95112 (Address of principal executive office) (Zip Code) (408) 297-3500 (Registrant's telephone number, including area code) --------------- Securities registered pursuant to Section 12 (b) of the Act: NONE --------------- Securities registered pursuant to Section 12(g) of the Act: 10% Senior Notes Due 2007 Guarantees of 10% Senior Notes Due 2007 Floating-Rate Notes Due 2007 Guarantees of Floating-Rate Notes Due 2007 (Title of each class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. /X/ As of March 15, 1999, the aggregate market value of the registrant's Common Stock held by non-affiliates of the registrant was approximately $2,297,979. The aggregate market value has been calculated on a basis which excluded shares of Common Stock which may be acquired through excercise of options or warrants. As of March 15, 1999, the number of outstanding shares of the registrant's Common Stock was 3,857,000. DOCUMENTS INCORPORATED BY REFERENCE None. TABLE OF OTHER REGISTRANTS
Address Including Zip Code and Area Code and Primary IRS Employer Telephone Number of Jurisdiction of Standard Industrial Identification Principal Executive Name of Corporation Incorporation Classification Number Number Offices - ------------------------------ --------------- --------------------- -------------- --------------------- Burke Flooring Products, Inc. California 3069 94-2147284 2250 Tenth Street San Jose, CA 95112 (408) 297-3500 Burke Rubber Company, Inc. California 3069 94-2157283 2250 Tenth Street San Jose, CA 95112 (408) 297-3500 Burke Custom Processing, Inc. California 3069 94-2157282 2250 Tenth Street San Jose, CA 95112 (408) 297-3500
BURKE INDUSTRIES, INC. INDEX TO ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED JANUARY 1, 1999
CAPTION PAGE - ------- ---- PART I ITEM 1. BUSINESS........................................................................................1 ITEM 2. PROPERTIES.....................................................................................11 ITEM 3. LEGAL PROCEEDINGS..............................................................................12 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............................................13 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS..........................13 ITEM 6. SELECTED FINANCIAL DATA........................................................................14 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..........16 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.....................................23 ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.......................................23 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE...........23 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.............................................24 ITEM 11. EXECUTIVE COMPENSATION.........................................................................28 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.................................30 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................................................31 PART IV ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K..................34
PART I ITEM 1. BUSINESS OVERVIEW Burke Industries, Inc. (the "Company" or "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 and Defense Products"), (ii) a leading nationwide producer of both rubber and vinyl cove base and floor covering accessories for commercial and industrial applications ("Flooring Products") and (iii) a value-added producer of high-performance silicone hose, roofing and membrane products for the heavy-duty truck, commercial building and fluid containment industries ("Commercial Products"). 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. 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, Inc. ("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 April 1998, the Company acquired from Sovereign Specialty Chemicals, Inc. ("Sovereign") all of the outstanding capital stock of Mercer Products Company, Inc. ("Mercer"). For many years, Mercer has been a leading manufacturer of plastic and vinyl flooring products such as vinyl cove base, transitional and finish mouldings, corners, stair treads and other accessories. Management believes that the highly successful vinyl cove base and moulding product lines and the strong presence in the eastern United States developed by Mercer complement the Company's position as the dominant producer of rubber cove base and floor covering accessories in the western United States. Mercer was merged with and into the Company, effective August 12, 1998. Burke has integrated Mercer's product lines into its own and now operates its Flooring Products business throughout the nation under the name BurkeMercer Flooring Products. Mercer represents the fifth acquisition completed by Burke's current management team over the last six years. Burke's integration of these acquisitions has led to a dominant position in the aerospace 1 seals market, opened new markets for its Flooring Products business, improved operating efficiencies, consolidated overhead and strengthened technical capabilities. In August 1997, the Company entered into a recapitalization (the "Recapitalization") pursuant to which the Company was recapitalized by means of a merger and J.F. Lehman Equity Investors I, L.P. ("JFLEI") and its affiliates became the owners of approximately 65% of the common equity of the Company, without giving effect to the exercise of certain options issued to management of the Company. INDUSTRY OVERVIEW The Company operates within one industry segment, elastomer products. Virtually every industry contains applications for elastomeric products. These products are used wherever there is a need for materials that are flexible, yet retain their original shape and other properties. Elastomeric products tend to be a small portion of the total cost of any product, yet can be critical to a successful design. The Company believes that the demand for elastomeric products will continue to grow as the performance requirements of various products are increased. The Company serves a number of industries with significant usage of highly-engineered elastomer-based products. 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. PRODUCTS AND MARKETS Within the elastomer products industry segment, the Company is organized into two business segments: silicone and organic products. The Company's products are further organized into three product groups: Aerospace and Defense 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 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. AEROSPACE AND DEFENSE PRODUCTS Operating out of Santa Fe Springs, California and Taunton, Massachusetts, Burke, through its Aerospace and Defense 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. Burke first entered the aerospace market in 1993 with its purchase of Purosil. Aerospace and Defense Products sales increased from $3.6 million in 1993 to $33.8 million in 1998. 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 2 electromagnetic interference survivable conditions. Burke's product line ranges from the most basic extruded seals, costing less than $100, 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 and Haskon 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 and Defense 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 1998, the top five customers of the Aerospace and Defense Products division accounted for $23.2 million in net sales, representing 21.7% and 68.9%, respectively, of the Company's total and the Aerospace and Defense Product division's net sales in that year. Boeing is the single largest customer of Aerospace and Defense Products, and management believes Burke is likewise the leading supplier of these products to Boeing. 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 (now Boeing), Lockheed Martin, Northrop Grumman, Airbus Industries, Pratt & Whitney, General Electric, Gulfstream, Bombardier and B.F. Goodrich Aerostructures. As a result, Burke's products have been designed into some of the most successful commercial and military aircraft in the world, including the Boeing 717, 737, 747, 757, 767 and 777, the McDonnell Douglas DC and MD series, the Northrop Grumman F-14 and the Lockheed Martin L1011. Burke's advanced Aerospace and Defense 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 and other composite materials utilized on the B-2 bomber, the F-22 fighter and naval surface ships. Ground-based and amphibious vehicle applications are also being developed. 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 and Defense Products business. 3 The Northrop Grumman B-2 radar-resistant materials program provides a solid base for expansion of Burke's Aerospace and Defense business. Burke's revenues from this program are generated both by new aircraft production and by replacement materials 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 two 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 and Defense Products business could be limited if either of these programs were to be curtailed or eliminated. The advanced Aerospace and Defense Products business is also in the final phase of redesign and qualification for the "over-wing-fairing" seal for the B-1 bomber. Flight qualification will be followed by production proposals in 1999. The Company has also bid on a contract to develop seals for the new Joint Strike Fighter (JSF) 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, which was purchased by Esterline Technologies in 1998, Chase-Walton Elastomers, Inc. and Elastomeric Silicone Products, which was purchased by Bestobell Aviation 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 and Defense Products are classified in nature, and in many cases project leaders return to previous classified product suppliers for a preliminary assessment of future development opportunities. FLOORING PRODUCTS Burke is a leading producer and distributor of specialty rubber and vinyl flooring accessory products for use in commercial markets. Flooring Products sales were $41.1 million in 1998, comprising 38% of the Company's total net sales. 4 Burke's trademark BurkeBase has enjoyed a dominant market share in the western United States since the early 1950s and is well known throughout the industry. Burke extended its Flooring Products lines beyond rubber products through the Mercer acquisition. Founded in 1958, and headquartered in Eustis, Florida, Mercer established itself as a leading manufacturer of plastic and vinyl products such as vinyl and rubber wall base, transitional and finish mouldings, stair treads and other accessories. Mercer also sold a range of related adhesive products. The product and distribution lines developed by Mercer strongly complement the Company's Flooring Products business. While the Company has been the dominant producer of rubber cove base and floor covering accessories in the western United States, Mercer has been a leading supplier to the vinyl wall base and moulding products markets and developed a particularly strong sales presence in the eastern United States. PRODUCTS The combined line of BurkeMercer Flooring Products consists of a full range 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. BurkeMercer 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, BurkeMercer cove base is utilized in most commercial applications using resilient tile flooring and virtually all commercial applications involving carpeting. Other BurkeMercer flooring products are employed in commercial and institutional settings where durability and resilience are of primary importance. 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. MARKETS AND CUSTOMERS BurkeMercer Flooring Products are sold primarily to dealers and distributors in the western United States and through a network of flooring products distributors in other regions. In addition to the San Jose, California and Eustis, Florida manufacturing facilities, the Company has distribution facilities in Santa Fe Springs, California, Rancho Cucamonga, California, Bensonville, Illinois, and South Kearny, New Jersey. In 1998, the top five customers of the Flooring Products division accounted for $9.7 million in net sales, representing 9.0% and 23.5%, respectively, of Burke's total and the Flooring Products division's net sales in that year. 5 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. Burke's primary competitors in flooring accessory products include Roppe Corporation, Johnsonite, Flexco and Vinyl Plastics Incorporated. COMMERCIAL PRODUCTS Burke's Commercial Products business serves end markets with both intermediate and finished silicone and organic rubber-based compounds and products. Commercial Products net sales increased from $14.8 million in 1993 to $32.2 million in 1998, and represented 30% of the Company's total net sales in 1998. 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 have strengthened the silicone hose product line and increased Burke's penetration of the OEM market. Burke leased an additional facility of approximately 56,000 square feet beginning in mid 1998. This facility is devoted to the manufacture and distribution of Purosil products and is expected to 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 6 roofing systems are installed by Burke-approved contractors and technical assistants and are fully warranted for up to 30 years. Membrane liners and covers are used primarily for protective purposes in potable water and wastewater projects. The liners and covers are most often used to protect against contamination of potable water during its storage and transfer. Hypalon is one of the few polymers which meets environmental standards regarding sanctioned potable water contact materials. Burke's in-house technical and engineering groups work directly with municipal engineers and with distributors and fabricators to assist in the design, testing and selection of the final product. Burke also manufactures and provides a full line of custom-made shrouds, gas vents, adhesives and other components necessary to produce a complete system package. CUSTOM PRODUCTS. The custom products group within Burke's Commercial Products division has capitalized on the Company's sophisticated formulation and production capabilities to become a value-added partner that collaborates closely with its customers in designing application-specific advanced products in both the silicone and organic rubber products markets. The group focuses on identifying high-margin products that complement its existing product lines and utilize excess production capacity. These custom products are typically complex blending and compounding formulations serving as intermediate or finished products for manufacturers of specialty rubber products and include oil drilling equipment components, road tape, rocket motor insulation and surface ship bow domes. MARKETS AND CUSTOMERS Management believes that the Company is the only approved supplier of silicone hoses to Mack Trucks. Burke's automotive hose products are also designed and specified into model builds of other major Class 8 truck OEMs including Peterbilt and Freightliner. Burke's membrane roofing products are sold both to distributors and directly to end-users who favor higher-quality roofing systems and who select Burke based on its reputation for quality. These roofing systems are typically employed in high value-added applications where quality, as measured by durability and ease of maintenance, is critical. Burke's liner membrane products are used in applications which are typically outsourced by municipalities on a bid basis and take several months to complete. Burke's covers and liners are sold to distributors and fabricators who heat weld the Hypalon-constructed sheets together to create a final product. It is not unusual for Burke to work with multiple distributors who are bidding for the same municipal project. Most of Burke's customers of the custom products unit are repeat users and range from large industrial companies to niche manufacturers producing specialized elastomeric products. Burke has developed long-standing relationships with a broad base of customers as a supplier of both intermediate and finished products whose technical complexities are suited to its unique capabilities. Burke markets these products using direct and independent sales representatives in both the United States and Europe. In 1998, the top five customers of the Commercial Products division accounted for $8.6 million in net sales, representing 8.1% and 26.9%, respectively, of the Company's total and the Commercial Products division's net sales in that year. 7 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. 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 and Defense 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. Management believes the recently consolidated BurkeMercer 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 16 direct sales representatives who manage direct sales and orchestrate the Company's national marketing efforts through approximately 345 commercial flooring products distributor locations. Burke's Commercial Products businesses utilize several different sales and marketing approaches due to the scope of their product offerings. 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 8 Company has historically not experienced any significant supply restrictions and has generally been able to pass through increases in the price of these materials to customers. In 1995, however, the Company experienced a significant price increase in one of the raw materials used in the manufacture of one of its Flooring Products. Due to the competitive nature of the Flooring Products business and the Company's proprietary formula for this product, the Company was unable to fully pass this price increase along to its consumers and its gross margins for this product were adversely affected. Although the Company does not currently anticipate that it will experience any similar price increases for this or any other raw material used by the Company in the near future, there can be no assurance that such price increases will not occur and that the Company's results of operations will not be adversely affected thereby. VERTICAL INTEGRATION Burke's operations are vertically integrated for the production of both silicone and organic rubber-based products. The Company's production process commences with the receipt of raw materials, followed by a variety of production steps which generally include mixing, milling, calendering (or extrusion or stripping), forming and molding and, in the case of silicone, roto-curing. Management believes Burke's vertical integration provides a key competitive advantage within the markets it serves. OTHER INFORMATION BACKLOG AND WARRANTY The Company's backlog consists of cancelable orders and is dependent upon trends in consumer demand throughout the year. Customer order patterns vary from year to year, largely because of annual differences in consumer end-product demand, marketing strategies, overall economic and weather conditions. Orders for the Company's products are generally subject to cancellation until shipment. As a result, comparison of backlog as of any date in a given year with backlog at the same date in a prior year is not necessarily indicative of sales trends. Moreover, the Company does not believe that backlog is necessarily indicative of the Company's future results of operations or prospects. The Company's warranty policy is to accept returns of products with defects in materials or workmanship. The Company will also accept returns of incorrectly shipped goods where the Company has been notified on a timely basis and, in certain cases, to maintain customer goodwill. In accordance with normal industry practice, the Company ordinarily accepts returns only from its customers and does not ordinarily accept returns directly from consumers. Certain of the products returned to the Company by its customers, however, may have been returned to those customers by consumers. The Company generally warrants its roofing products for two years, for which the related costs are not significant. In addition, the Company sells extended warranties on roofing products for ten to thirty years. During the three-year period ended January 1, 1999, the Company incurred insignificant warranty costs with respect to its roofing products. EMPLOYEES At January 1, 1999, the Company employed 1,058 employees at its various locations, including 935 involved in manufacturing and manufacturing support and 74 involved in product sales. Employees at the Company's various 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 9 location was renegotiated in October 1997 for a three-year term. Burke's employees at the Eustis, Florida location are represented by the Glass, Molders, Pottery, Plastics and Allied Workers International Union. This collective bargaining agreement was renegotiated in December 1998 for a three-year term. The Company has not experienced a work stoppage due to a labor dispute since 1975 and management believes that the Company's relationships with its employees and unions are good. PATENTS, TRADEMARKS, TRADE NAMES AND TRADE SECRETS The success of the Company's various businesses depends in part on the Company's ability to exploit certain proprietary patents, trademarks, trade names and trade secrets on an exclusive basis in reliance upon the protections afforded by applicable copyright, patent and trademark laws and regulations. The loss of certain of the Company's rights to such patents, trademarks, trade names and trade secrets or the inability of the Company effectively to protect or enforce such rights could adversely affect the Company. The duration of the Company's intellectual property rights is as follows: PATENTS
PATENT NO. TITLE GATT EXPIRY ---------- -------------------------------------------- ----------- 4,608,792 Roof membrane holdown system 11/12/08 4,603,790 Tensioned reservoir cover, rainwater run-off 3/11/05 enhancement system
TRADEMARKS
MARK EXPIRATION ---------------------------------------------------------------------- ---------- VAC-Q-ROOF............................................................ 12/1/02 ROULEAU............................................................... 12/1/02 BURKEBASE............................................................. 6/4/05 SURETITE.............................................................. 7/4/01 BURKE INDUSTRIES...................................................... 4/19/07 ARGONAUT.............................................................. 4/1/09 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 is subject to various evolving federal, state and local environmental laws and regulations governing, among other things, emissions to air, discharge to waters and the generation, handling, storage, transportation, treatment and disposal of hazardous and non-hazardous substances and wastes. These laws and regulations provide for substantial fees and sanctions for violations and, in many cases, could require the Company to remediate a site to meet applicable legal requirements. In 10 connection with the Recapitalization, JFLEI conducted certain investigations (including, in some cases, reviewing environmental reports prepared by others) of the Company's operations and its compliance with applicable environmental laws. The investigations, which included Phase I assessments (consisting generally of a site visit, records review and non-intrusive investigation of conditions at the subject facility) by independent consultants, found that certain facilities have had or may have had releases of hazardous materials that may require remediation. Pursuant to the Merger Agreement (as defined below), the former shareholders of the Company have agreed, subject to certain limitations as to survival and amount, to indemnify the Company against certain environmental liabilities incurred prior to the consummation of the Recapitalization. Based in part on the investigations conducted and the indemnification provisions of the Agreement and Plan of Merger, dated as of August 13, 1997 (the "Merger Agreement") among JFLEI, JFL Merger Co. ("MergerCo") and certain former shareholders of the Company (pursuant to which the Company was recapitalized by means of a merger of MergerCo into the Company (the "Merger") with the Company surviving the Merger) with respect to environmental matters, the Company believes, although there can be no assurance, that its potential obligations 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, subject to certain limitations as to survival and amount, to indemnify the Company against certain environmental liabilities incurred prior to the purchase. 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 potential obligations 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. ITEM 2. PROPERTIES FACILITIES San Jose, California serves as the corporate headquarters for Burke as well as one of the manufacturing sites for the Flooring Products business and the organic rubber portion of the Commercial Products businesses. Santa Fe Springs, California is the manufacturing headquarters for Burke's silicone production activities and houses most of its Aerospace and Defense Products and all of its silicone Commercial Products businesses. Along with the industrial hose production, the Aerospace and Defense 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. 11 Burke's Flooring Products are produced in San Jose, California and Eustis, Florida. In addition, the Company leases and operates large distribution centers in Santa Fe Springs, California, Rancho Cucamonga, California, Bensonville, Illinois and South Kearny, New Jersey. The Company believes that its 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. As of March 15, 1999, 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......... 56,000 Leased Manufacturing, Engineering, Distribution, Offices Santa Fe Springs, CA......... 25,000 Leased Mixing Santa Fe Springs, CA......... 25,000 Leased Warehouse, Distribution Taunton, MA.................. 85,000 Leased Manufacturing, Engineering, Distribution, Offices Bensonville, IL.............. 15,000 Leased Warehouse, Distribution Eustis, FL................... 96,500 Owned Manufacturing, Engineering, Distribution, Offices Rancho Cucamonga, CA 22,000 Leased Warehouse, Distribution South Kearny, NJ............. 25,000 Leased Warehouse, Distribution
In addition to the facilities identified above, the Company leases a 113,000 square foot facility in Modesto, California, which is subleased to the purchaser of the Company's custom-molded products business in connection with the sale of that business in 1996. ITEM 3. LEGAL PROCEEDINGS The Company is routinely involved in legal proceedings related to the ordinary course of its business. Management does not believe any such matters will have a material adverse effect on the Company. The Company maintains property, general liability and product liability insurance in amounts which it believes are consistent with industry practices and adequate for its operations. On or about December 28, 1997, a former employee filed a complaint in the California Superior Court for the County of Santa Clara against the Company and certain of the Company's current and former officers and directors. On March 11, 1998, the plaintiff filed an amended complaint against the same defendants. The former employee alleges that he was induced to sell his stock in the Company to the Company and/or to the officer and director defendants in August 1996 through the use of allegedly false and/or misleading statements. The Company believes that such claims are without merit and intends to continue to vigorously defend such action. In this regard, on October 5, 1998, defendants answered the complaint and, in addition, filed a cross-complaint against the plaintiff for breach of contract. Defendants' cross-claim alleges that the plaintiff breached the terms of a general release he executed at the time he left the employ of the Company in 1996 and certain covenants set forth therein. On or about May 5, 1998, a former employee of Mercer filed a lawsuit in U.S. District Court Middle District of Florida against Mercer and Sovereign, the former owner of Mercer. The former employee made various claims for relief on the grounds that she was allegedly the victim of certain 12 harassment, discrimination, retaliation and negligence. Pursuant to certain indemnification provisions contained in the Stock Purchase Agreement between the Company, Mercer and Sovereign, dated March 5, 1998, as amended by Amendment No. 1 to the Stock Purchase Agreement, dated April 21, 1998, Mercer tendered its defense to Sovereign and Sovereign agreed, through its counsel, to defend Mercer against the allegations asserted against Mercer by the former employee. Following Mercer's merger into the Company, the Company became a defendant in the lawsuit. In order to avoid the expenses associated with further litigation, including a possible trial, on or about February 2, 1999, the parties entered into a confidential settlement agreement pursuant to which the plaintiff agreed voluntarily to dismiss her claims against the Company without any admission of liability on the part of the Company. Although the terms of the settlement agreement are confidential, the settlement agreement included no terms that have had, or will have in the future, any material impact on the Company's business, financial condition or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS COMMON EQUITY DIVIDENDS The Company's Common Stock is not listed or traded on any exchange. At January 1, 1999, there were approximately 13 holders of the Company's Common Stock. The Company has not paid any cash dividends on its Common Stock to date. The Company intends to retain all future earnings for use in the development of its business and does not anticipate paying cash dividends in the foreseeable future. The payment of all dividends will be at the discretion of the Company's Board of Directors and will depend upon, among other things, future earnings, operations, capital requirements, the general financial condition of the Company and general business conditions. The ability of the Company and its subsidiaries to pay dividends is restricted by the indentures governing the $110,000,000 principal amount of Senior Notes Due 2007 and the Floating-Rate Notes (defined below) and, with respect to the Common Stock, the Company's Articles of Incorporation. RECENT SALES OF UNREGISTERED SECURITIES In connection with the Mercer acquisition, on April 17, 1998, the Company issued $30,000,000 principal amount of Floating Interest Rate Senior Notes due 2007 of the Company (the "Floating-Rate Notes") to NationsBanc Montgomery Securities LLC (the "Initial Purchaser"). The aggregate price to the public of the Floating-Rate Notes was $30,000,000 and the aggregate initial purchaser's discounts and commissions were $900,000 resulting in aggregate proceeds to the Company of $29,100,000. The Company sold the Floating-Rate Notes in reliance on the exemption provided by Section 4(2) of the Securities Act of 1933, as amended. The Initial Purchaser subsequently resold the Floating-Rate Notes in reliance on Rule 144A under the Securities Act of 1933, as amended. The Floating-Rate Notes were registered by the Company pursuant to a Registration Statement on Form S-4, File No. 333-36675, as filed with the Securities and Exchange Commission on June 19, 1998. 13 In connection with the Mercer acquisition, the Company also sold 3,000 shares of Series C 6% Convertible Preferred Stock ("Series C Convertible Preferred Stock") for aggregate consideration of $3 million. The Series C Convertible Preferred Stock was sold to all of the shareholders and warrantholders who elected to participate in the subscription offering. Upon the occurrence of certain triggering events, the holders of the Series C Convertible Preferred Stock are entitled to convert such shares into the Company's Common Stock at a price of $10 per share. ITEM 6. SELECTED FINANCIAL DATA SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA The selected consolidated financial data below for the Company for the three years ended January 1, 1999 and as of January 1, 1999 and January 2, 1998 have been derived from the Consolidated Financial Statements of the Company which have been audited by Ernst & Young LLP, independent auditors, and are included elsewhere in this Report. The selected consolidated financial data below for the Company for the years ended December 30, 1994 and December 29, 1995 and as of December 30, 1994 and December 29, 1995, and January 3, 1997 have been derived from the Consolidated Financial Statements of the Company which have also been audited by Ernst & Young LLP, but which are not included elsewhere herein. The information presented below is qualified in its entirety by, and should be read in conjunction with, "Management's Discussion and Analysis of Financial Condition and Results of Operations," the Consolidated Financial Statements of the Company and the related notes included elsewhere in this Report. The data below reflect the acquisition by the Company of certain assets of Purosil in March 1993; of Silicone Fabrication Specialists, Inc. ("SFS") in February 1995; of Haskon Corporation ("Haskon") in June 1995; of Kentile Corporation ("Kentile") in April 1996; of Mercer Products Company, Inc. ("Mercer") in April 1998, and the effect of the Recapitalization in August 1997. 14
FISCAL YEAR ------------------------------------------------------------------ 1994 1995 1996 1997 1998 ---- ---- ---- ---- ---- (DOLLARS IN THOUSANDS) OPERATING DATA: Net sales..................................... $44,370 $68,411 $72,466 $90,228 $107,019 Cost of sales................................. 29,998 49,226 49,689 62,917 77,053 ------ ------ ------ ------ ------ Gross profit.................................. 14,372 19,185 22,777 27,311 29,966 Selling, general and administrative expenses.. 8,152 10,212 11,610 12,238 15,957 Transaction expenses(1)....................... -- -- -- 1,321 -- Stock option purchase(2)...................... -- -- -- 14,105 -- ------- ------- ------- ------ ------- Income (loss) from operations................. 6,220 8,973 11,167 (353) 14,009 Interest expense, net......................... 2,812 3,007 2,668 5,408 13,819 ------- ------- ------- ------ ------- Income (loss) before income tax provision (benefit), cumulative effect of accounting change, extraordinary loss and discontinued operation(3).............. 3,408 5,966 8,499 (5,761) 190 Income tax provision (benefit)................ 1,395 3,393 3,466 (1,818) 160 ------- ------- ------- ------ ------- Income (loss) from continuing operations before cumulative effect of accounting change, extraordinary loss and discontinued operation(3).................. $2,013 $2,573 $5,033 $(3,943) $ 30 ------- ------- ------- ------ ------- Net income (loss)(3).......................... $1,502 $1,094 $4,101 $(3,943) $ 30 ------- ------- ------- ------ ------- ------- ------- ------- ------ ------- OTHER DATA: EBITDA(4)..................................... $7,490 $10,461 $12,586 $16,851(5) $17,184 EBITDA margin(4).............................. 16.9% 15.3% 17.4% 18.7%(5) 16.1% Depreciation and amortization................. 1,270 1,488 1,419 1,499 3,175 Capital expenditures(6)....................... 335 3,647 1,684 1,454 3,220 Cash interest expense......................... 2,438 2,683 1,950 2,059 12,223 Ratio of earnings to fixed charges(7)......... 2.1x 2.8x 3.7x -- 1.0x
AS OF FISCAL YEAR END ------------------------------------------------------------------ 1994 1995 1996 1997 1998 ---- ---- ---- ---- ---- (DOLLARS IN THOUSANDS) BALANCE SHEET DATA: Working capital............................... $4,766 $5,402 $5,328 $21,678 $18,946 Total assets.................................. 28,551 39,729 40,673 62,837 93,945 Long-term obligations, less current portion... 16,937 21,803 18,126 110,000 140,000 Shareholders' equity (deficit)................ 849 340 4,283 (86,490) (85,472)
(1) Reflects $1,321 of expenses associated with the Recapitalization in August 1997. (2) Reflects the Company's cost to purchase options issued and outstanding under the Company's stock option plan in connection with the Recapitalization in August 1997. (3) Net income reflects (i) extraordinary loss on debt settlement, net of income tax benefit, of $815 in 1995 and (ii) losses, net of income tax benefit, of $511, $664 and $308 in 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. (4) EBITDA is the sum of income (loss) before cumulative effect of changes in accounting principles, extraordinary loss, discontinued operation, income tax provision (benefit) and interest, depreciation and amortization expense. EBITDA is presented because it is a widely accepted financial indicator of a company's ability to service indebtedness. However, EBITDA should not be considered as an alternative to income from operations or to cash flows from 15 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. (5) Reflects EBITDA excluding costs of stock option purchase, transaction expenses related to the Recapitalization and management fees paid to a former controlling shareholder. (6) Capital expenditures include the acquisition of assets of SFS for $1,578 and Haskon for $2,081 in 1995, of Kentile for $854 in 1996. Capital expenditures in 1998 include $1,408 for a replacement information technology system, which will be completed in 1999. (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 $5.8 million for fiscal year ended 1997. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Report contains certain forward-looking statements and information relating to the Company that are based on the beliefs of management as well as assumptions made by and information currently available to management. The words "anticipates," "believes," "estimates," "expects," "plans," "intends" and similar expressions, as they relate to the Company or its management, are intended to identify forward-looking statements. Such statements reflect the current views of the Company, with respect to future events and are subject to certain risks, uncertainties and assumptions, that could cause actual results to differ materially from those expressed in any forward-looking statement, including, without limitation: competition from other manufacturers in the Company's aerospace, flooring or commercial product lines, loss of key employees, general economic conditions and adverse factors impacting the aerospace industry such as changes in government procurement policies. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated or expected. The Company does not intend to update these forward-looking statements. INTRODUCTION The following discussion and analysis should be read in conjunction with "Selected Historical Consolidated Financial Data" and the audited Consolidated Financial Statements of the Company and the notes thereto included elsewhere in this Report. The Company operates within one industry segment, elastomer products, and is organized into two business segments: silicone and organic products. The Company's products are organized into three product groups: Aerospace and Defense 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 and Defense Products business through the acquisition of Purosil's assets in 1993. The Company subsequently expanded its Aerospace and Defense 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 and Defense Products line and to incorporate advanced military stealth capability into this product group. Subsequent to these acquisitions, in 16 December 1995, the Company integrated all of its aerospace operations in anticipation of increased demand as communicated by aircraft OEMs. In general, Aerospace and Defense Products seals 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. Revenues of low-observable seals and materials 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 1998 due to improvement in the commercial construction market in the western United States and the acquisition of Mercer. 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. 17 RESULTS OF OPERATIONS The following table sets forth certain income statement information for the Company for the fiscal years ended January 3, 1997, January 2, 1998, and January 1, 1999:
FISCAL YEAR ENDED PERCENTAGE PERCENTAGE PERCENTAGE 1996 OF NET SALES 1997 OF NET SALES 1998 OF NET SALES ---- ---------- ---- ------------ ---- ---------- (DOLLARS IN THOUSANDS) Net sales: Aerospace and Defense Products.. $24,622 34.0% $31,225 34.6% $33,766 31.6% Flooring Products............... 20,546 28.4 23,475 26.0 41,091 38.4 Commercial Products............. 27,298 37.6 35,528 39.4 32,162 30.0 ------ ---- ------ ---- ------ ---- Total net sales................. 72,466 100.0 90,228 100.0 107,019 100.0 Cost of sales................... 49,689 68.6 62,917 69.7 77,053 72.0 ------ ---- ------ ---- ------- ----- Gross profit.................... 22,777 31.4 27,311 30.3 29,966 28.0 Selling, general and administrative expenses...... 11,569 16.0 12,174 13.6 14,546 13.6 Transaction costs............... -- -- 1,321 1.5 -- -- Stock option purchase........... -- -- 14,105 15.6 -- -- Amortization of Goodwill........ 41 -- 64 -- 1,411 1.3 ------ ---- ------ ---- ----- ---- Income (loss) from operations... 11,167 15.4 (353) (0.4) 14,009 13.1 Interest expense, net........... 2,668 3.7 5,408 6.0 13,819 12.9 ------ ---- ------ ---- ------- ----- Income (loss) before income tax provision (benefit), extraordinary loss and discontinued operation....... 8,499 11.7 (5,761) (6.4) 190 0.2 Income tax provision (benefit).. 3,466 4.8 (1,818) (2.0) 160 0.2 ------ ---- ------- ------ ---- ----- Income (loss) from continuing operations before extraordinary loss and discontinued operation....... $5,033 6.9% $(3,943) (4.4)% $30 -- ------ ---- ------- ------ ---- ----- ------ ---- ------- ------ ---- ----- Net income (loss)............... $4,101 5.7% $(3,943) (4.4)% $30 -- ------ ---- ------- ------ ---- ----- ------ ---- ------- ------ ---- -----
YEAR ENDED JANUARY 1, 1999 VERSUS YEAR ENDED JANUARY 2, 1998 NET SALES. Total net sales increased 18.6%, from $90.2 million in 1997 to $107.0 million in 1998. Aerospace and Defense Products sales grew 8.1%, due primarily to increased demand for military products. Flooring Products sales increased 75.0%, due primarily to the acquisition of Mercer. Commercial Products sales decreased 9.5%, primarily because 1997 included a liner project order that favorably affected results for that period, partially offset by volume associated with new products introduced during 1998 by the silicone hose portion of this product group. COST OF SALES. Cost of sales increased 22.5%, from $62.9 million in 1997 to $77.1 million in 1998. As a percentage of net sales, gross profit decreased from 30.3% to 28.0%. The decrease in profit percentage was primarily due to temporary operating inefficiencies, both in connection with new product ramp-up, and also in connection with the silicone products' facility expansion which occurred in July, 1998. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased 18.9%, from $12.2 million in 1997 to $14.5 million in 1998. The increase in spending was 18 primarily due to the acquisition of Mercer. As a percentage of net sales, selling, general and administrative expenses remained constant. TRANSACTION EXPENSES AND STOCK OPTION PURCHASE. Transaction expenses and stock option purchase were one-time expenses associated with the leveraged recapitalization in August, 1997. AMORTIZATION OF GOODWILL. Amortization of goodwill increased to $1.4 million in 1998. The increase was due to the acquisition of Mercer. INCOME FROM OPERATIONS. As a result of the above factors, income from operations increased from a loss of $0.4 million in 1997 to income of $14.0 million in 1998. INTEREST EXPENSE. Interest expense increased 155.5%, from $5.4 million in 1997 to $13.8 million in 1998. The increase was due to the issuance of the Senior (fixed-rate) Notes on August 20, 1997 and the Floating-Rate Notes on April 21, 1998. INCOME FROM CONTINUING OPERATIONS. As a result of the above factors, income from continuing operations increased from a loss of $3.9 million in 1997 to income of less than $0.1 million 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 and Defense 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 AND STOCK OPTION PURCHASE. Transaction expenses were incurred in connection with the Recapitalization. The stock option purchase charge in 1997 represents the compensation component of payments made for the cancellation of stock options in connection with the Recapitalization. INCOME FROM OPERATIONS. As a result of the above factors, income from operations decreased 103.2%, from $11.2 million in 1996 to a loss of $(0.4) million in 1997. 19 INTEREST EXPENSE. Interest expense increased 102.7%, from $2.7 million in 1996 to $5.4 million in 1997. The increase was due to the issuance of the Senior Notes on August 20, 1997. INCOME FROM CONTINUING OPERATIONS. As a result of the above factors, income from continuing operations decreased 178.3%, from $5.0 million in 1996 to a loss of $(3.9) million in 1997. INCOME TAX PROVISION For 1998, the Company recorded an income tax provision of $160,000 which differed from the federal statutory rate primarily due to filing requirements in certain states as a result of the Mercer acquisition. For 1996 and 1997, the Company recorded an income tax provision (benefit) of 40.8% and (31.6%), respectively, which differs from the federal statutory rate primarily due to state income taxes (net of federal benefit) and in 1997 due to additional provision for federal and state audits. In 1996, the Company settled with the Internal Revenue Service ("IRS") certain issues relating to the Company's income tax returns for 1988 through 1990. As of January 3, 1997, the Company had fully provided for the taxes and interest which are payable as a result of the settlement. In addition to the above settlement, in 1997, the Company settled with the IRS certain issues related to the Company's income tax returns for 1992 and 1993. The Company fully provided for the taxes and interest which are payable as a result of the settlement. 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 provided by operating activities was $6.0 million in 1998. 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 expects to spend approximately $2.5 million during 1999 on capital expenditures not directly related to acquisitions. In 1998, $3.2 million was spent on capital expenditures not directly related to acquisitions, including $1.4 million for a replacement information technology system that will be completed in 1999. Cash flow from operations, to the extent available, may also be used to fund a portion of any acquisition expenditures. SOURCES OF CAPITAL. On April 21, 1998, the Company acquired all of the issued and outstanding capital stock of Mercer, from Sovereign, for an aggregate purchase price of $38,474,000 (including acquisition costs of $2,280,000). Financing for this acquisition and related expenses was provided, in large part, from the sale of (the "Offering") $30 million principal amount of Floating-Rate Notes Due 2007. 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 (the "Series C Convertible Preferred Stock") and cash on hand. The Floating-Rate 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 Floating-Rate Notes bear interest at a rate per annum equal to LIBOR plus 400 basis points, with the interest rate reset semiannually. The Floating-Rate Notes are unconditionally guaranteed on a joint and several basis by each of the Company's subsidiaries. Upon a change of control of the Company, the Company will be 20 required to make an offer to repurchase all outstanding Floating-Rate Notes at 101% of the aggregate principal amount thereof plus accrued and unpaid interest thereon at the date of repurchase. Contemporaneously with the Mercer acquisition, the Company amended its existing Loan and Security Agreement, as amended from time to time, with NationsBank, N.A., as administrative agent, and other lending institutions party thereto (the "Credit Agreement") to, among other things, (i) increase the Company's borrowing capacity 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 have resulted from the consummation of the Offering and the Mercer acquisition. Following the merger of Mercer with and into Burke, which occurred in August 1998, Mercer was no longer a borrowing subsidiary under the Credit Agreement. The Credit Facility matures in August 2002. Interest on loans under the Credit Facility bear interest at rates based upon either, at the Company's options, Eurodollar Rates plus a margin of 2.5% or upon the Prime Rate. Loans under the Credit Facility are secured by security interests in substantially all of the assets of the Company and are guaranteed by any and all current or future subsidiaries of the Company, which guarantees are secured by substantially all of the assets of such subsidiaries. The Credit Facility 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 Facility also contains a number of financial covenants that will require the Company to meet certain ratios and tests and provide that a change of control of the Company (as defined in the Credit Facility) will constitute an event of default. At fiscal year end 1998, the Company was not in compliance with certain of these covenants. The Company obtained a waiver from the bank and future covenants have been amended. The Company anticipates that its principal use of cash during 1999 will be working capital requirements, debt service requirements and capital expenditures. 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. YEAR 2000 ISSUE GENERAL DESCRIPTION OF THE YEAR 2000 ISSUE AND THE NATURE AND EFFECTS OF THE YEAR 2000 ON INFORMATION TECHNOLOGY (IT) AND NON-IT SYSTEMS The Year 2000 issue ("Year 2000 Issue") is the result of computer programs being written using two digit rather than four to define the applicable year. Any of the Company's computer programs or hardware that have date-sensitive software or embedded chips may recognize a date using "00" as the year 1900 rather than the Year 2000. This could result in a system failure or miscalculation causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. Based on recent assessments, the Company determined that it had to modify or replace significant portions of its software and certain hardware so that those systems will properly utilize dates beyond December 31, 1999. The Company presently believes that with modifications or replacements of existing 21 software and certain hardware, the Year 2000 Issue can be mitigated. However, if such modifications and replacements are not made, or are not timely completed, the Year 2000 Issue could have a material impact on the operations of the Company. The Company's plan to resolve the Year 2000 Issue involves the following three phases: assessment, remediation, and testing. To date, the Company has fully completed its assessment of all systems that could be significantly affected by the Year 2000 Issue. The completed assessment indicated that most of the Company's significant information technology systems could be affected, particularly the general ledger, billing, and inventory systems. That assessment also indicated that software and hardware (embedded chips) used in production and manufacturing systems do not represent significant risks. The Company does not believe that the Year 2000 presents a material exposure as it relates to the Company's products. STATUS OF PROGRESS IN BECOMING YEAR 2000 COMPLIANT With respect to its information technology, the Company is 50% complete on the remediation phase and expects to complete software and hardware replacement no later than June 30, 1999. Completion of the testing phase for all significant systems is expected by June 30, 1999. The Company is utilizing both internal and external resources to replace and test the software and hardware for resolution of the Year 2000 Issue. In conjunction with the Company's current $2.2 million information technology systems re-engineering effort, approximately 50% of the total cost is estimated to be related to the Year 2000 project. Most of the cost of the new system will be funded through a lease. NATURE AND LEVEL OF IMPORTANCE OF THIRD PARTIES AND THEIR EXPOSURE TO THE YEAR 2000 ISSUE The Company has no significant systems which would interface directly with third party vendors. To date, the Company is not aware of any external agent with a Year 2000 Issue that would materially impact the Company's results of operations, liquidity, or capital resources. The Company has sent out questionnaires to external agents during the first quarter of 1999 in an effort to verify the external agents' Year 2000 readiness. However, the Company has no means of ensuring that the external agents will be Year 2000 ready. The inability of external agents to complete their Year 2000 resolution process in a timely fashion could materially impact the Company. The effect of non-compliance by external agents is not determinable. RISKS Management believes it has an effective program in place to resolve the Year 2000 Issue in a timely manner. As noted above, the Company has not yet completed all necessary phases of its Year 2000 program. In the event that the Company does not complete any additional phases, the Company might be unable to take customer orders, manufacture and ship products, invoice customers or collect payments. In addition, disruptions in the economy generally resulting from the Year 2000 Issue could also materially adversely affect the Company. The amount of potential liability and lost revenue cannot be reasonably estimated at this time. CONTINGENCY PLANS The Company currently has no contingency plans in place in the event it does not complete all phases of the Year 2000 program. The Company plans to evaluate the status of completion in the second quarter of 1999 and determine whether such a plan is necessary. 22 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market risks related to fluctuations in interest rates on its Senior Notes and Floating-Rate Notes. The Company does not currently use interest rate swaps or other types of derivative financial instruments. For fixed rate debt such as the Senior Notes, changes in interest rates generally affect the fair value of the debt instrument. For variable rate debt such as the Floating-Rate Notes, changes in interest rates generally do not affect the fair value of the debt instrument, but do affect earnings and cash flows. The Company does not have an obligation to repay its Senior Notes prior to maturity in 2007 and, as a result, interest rate risk and changes in fair value should not have a significant impact on the Company. Management believes that the interest rate on the Senior Notes approximates the current rates available for similar types of financing and as a result the carrying amount of the Senior Notes approximates fair value. The carrying value of the Floating-Rate Notes approximates fair value as the interest rate is variable and resets frequently. The Floating-Rate Notes bear interest at a rate per annum equal to LIBOR plus 400 basis points and each one percentage point increase in interest rates would result in an increase in interest expense of $300,000 per year. Management does not believe that the future market rate risk related to the Senior Notes and Floating-Rate Notes will have a material impact on the Company's financial position, results of operations or liquidity. ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Consolidated Financial Statements required in response to this Item are listed under Item 14(a) of Part IV of this Report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 23 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth the name, age and position of each person who is a director or executive officer of the Company as of March 15, 1999. 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................... 62 Vice Chairman of the Board, President and Chief Executive Officer Reed C. Wolthausen.................. 51 Director, Senior Vice President David E. Worthington................ 45 Treasurer, Vice President--Finance Robert F. Pitman.................... 44 Vice President and Technical Director--San Jose Hisham Alameddine................... 40 Vice President--Operations--San Jose Thomas G. Keup...................... 51 Vice President--Operations--Eustis, Florida Craig A. Carnes..................... 39 Vice President--Sales and Marketing--Flooring Products Martin J. Suydam, Jr................ 55 President--Silicone Products Group Anthony E. Lawson................... 44 Vice President and General Manager--Silicone Products Group Robert P. Harrison.................. 63 Vice President--Aerospace and Defense--Haskon Operations Robert G. Engle..................... 57 Vice President--Operations--Santa Fe Springs Ronald A. Stieben................... 51 Vice President--Sales and Marketing--Purosil George Sawyer....................... 67 Chairman of the Board Oliver C. Boileau, Jr............... 72 Director Donald Glickman..................... 65 Director Bruce D. Gorchow.................... 45 Director John F. Lehman...................... 56 Director Keith Oster......................... 37 Director Thomas G. Pownall................... 77 Director Joseph A. Stroud.................... 43 Director
ROCCO C. GENOVESE, Vice Chairman, President and Chief Executive Officer, has been with the Company for 43 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 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, has been with the Company for ten years. Initially serving as the Company's Chief Financial Officer, Mr. Wolthausen now manages Burke's information technology systems re-engineering effort and other strategic issues. 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 eight 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. 24 HISHAM ALAMEDDINE, Vice President--Operations--San Jose, has been with the Company for seven 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. THOMAS G. KEUP, Vice President--Operations--Eustis, Florida, joined the Company in April 1998 when Burke purchased Mercer. Mr. Keup joined Mercer in 1991 as Operations Manager and became Director of Operations in 1993. Prior to joining Mercer, Mr. Keup was Director of Technology for Chelsea Building Products from 1989 to 1991. Mr. Keup is a member of the Society of Plastic Engineers and the SPS Vinyl Division Technical Program Committee. 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 sales and marketing positions with Levolor Corporation, an industry leader and manufacturer of hard window coverings. MARTIN J. SUYDAM, JR., President--Silicone Products Group, joined the Company in November 1998. For five years prior to joining the Company, Mr. Suydam was the President and a Senior Consultant of FOCUS Consulting Inc., an independent consulting firm in Virginia which specializes in Business Management and Business Development services. Prior to founding FOCUS, Mr. Suydam was Vice President of Business Development for the BMY Defense Group where his responsibilities included overall Washington operations for the Group's tracked and wheeled vehicle product lines. Prior to joining BMY, Mr. Suydam also served as Vice President and General Manager of West Coast Operations for John J. McMullen Associates, an engineering firm specializing in naval architecture and marine engineering. Mr. Suydam also held positions as Corporate Vice President of Business Development and Planning for ALCOA/TRE (now Alcoa Composites), a wholly owned subsidiary of the Aluminum Company of America (ALCOA) and Vice President of Marketing (domestic and international) for General Dynamics Land Systems Division. Mr. Suydam has held senior executive positions with the U.S. government, including Director of Resources & Policy Evaluation for the Assistant Secretary of the Navy (Shipbuilding and Logistics) and as a policy analyst in the Office of the Secretary of Defense. Mr. Suydam retired from the Army Reserves as a Colonel after 31 years of military service. ANTHONY E. LAWSON, Vice President and General Manager--Silicone Products Group, joined the Company in May 1998. Prior to joining the Company, Mr. Lawson worked for Northrop Grumman from 1985 to September 1997 where he most recently held the position of Vice President and B-2 Deputy Program Manager responsible for 6,000 employees and daily program activities including engineering, business management, business development and manufacturing. Mr. Lawson also held positions at Northrop Grumman as Vice President of Pico Rivera Operations and Composites in the Military Aircraft Systems Division, Vice President of the Pico Rivera Operations in the B-2 Division, Vice President of Production in the B-2 Division, Final Inspection Operations Manager, Product Inspections Manager and Quality Assurance Manager. From 1980 through 1983, Mr. Lawson held various positions at Rockwell International, including Supervisor, Quality Assurance in the NAOO Division, Supervisor, Quality and Reliability Assurance in the Space Division and Test Quality Engineer in the Space Division. ROBERT P. HARRISON, Vice President--Aerospace and Defense--Haskon Operations, joined the Company with the acquisition of Purosil in March 1993. Prior to Purosil, Mr. Harrison worked for Haskon Corporation ("Haskon") where 25 he was a Vice President of Sales and Engineering, responsible for all of Haskon's sales and product engineering efforts in the aerospace industry in North America and Europe. From January 1972 to September 1981, Mr. Harrison was Superintendent of the Injection and Mechanical Molding Departments and the Urethane Coating Department of Beebe Rubber Company, a manufacturer of automobile and industrial molding goods. From September 1962 through December 1971, Mr. Harrison held positions as a Manufacturing Manager of Chomerics, Inc., a manufacturer of shielding products and components for the electronics industry, a Production Manager for Bond Rubber Company and a General Foreman of the compounding, extrusion and molding departments of Haskon. 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. RONALD A. STIEBEN, Vice President--Sales and Marketing--Purosil, has worked for the Company for three 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. 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 six 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 United States 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 Dr. Lehman. Mr. Sawyer is Chairman of Special Devices, Inc. and a director of Elgar Holdings, Inc. and also serves on the Board of Trustees of Webb Institute and is on the Board of Managers of the American Bureau of Shipping. OLIVER C. BOILEAU, JR., became a director of the Company upon consummation of the Recapitalization. He joined The Boeing Company in 1953 as a research engineer and progressed through several technical and management positions and was named Vice President in 1968 and then President of Boeing Aerospace in 1973. In 1980, he joined General Dynamics Corporation as President and a member of the Board of Directors. In January 1988, Mr. Boileau was promoted to Vice Chairman. He retired in May 1988. Mr. Boileau joined Northrop Grumman Corporation ("Northrop Grumman") 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 the Massachusetts Institute of Technology-Lincoln Laboratory Advisory Board. Mr. Boileau is also a director of Elgar Holdings, Inc. and Special Devices, Inc. DONALD GLICKMAN, became a director of the Company upon consummation of the Recapitalization and is a Managing Principal of Lehman. Prior to joining Lehman, 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 Chairman of Elgar Holdings, Inc. and a director of the McNeal-Schwendler Corporation, General 26 Aluminum Corporation, Special Devices, Inc. and Monroe Muffler Brake, Inc. He is also a trustee of MassMutual Participation Investors and Wolf Trap Foundation for the Performing Arts. BRUCE D. GORCHOW, became a director of the Company upon consummation of the Recapitalization and is a member of the investment advisory board of Lehman. Since 1991, Mr. Gorchow has been Executive Vice President and head of the Private Finance Group of PPM America, Inc. Mr. Gorchow is also a director of Global Imaging Systems, Inc., Leiner Health Products, Inc., Tomah Products, Inc. and 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, became a director of the Company upon consummation of the Recapitalization and is a Managing Principal of Lehman. Prior to founding Lehman in 1990, Dr. Lehman was an investment banker with Paine Webber, Inc. from 1988 to 1990, and served as a Managing Director in Corporate Finance. Dr. Lehman served for six years as Secretary of the Navy, was a member of the National Security Council Staff, served as a delegate to the Mutual Balanced Force Reductions negotiations and was the Deputy Director of the Arms Control and Disarmament Agency. Dr. Lehman served as Chairman of the Board of Directors of Sperry Marine, Inc., and is a member of the Board of Directors of Elgar Holdings, Inc., Special Devices, Inc., Ball Corporation and ISO Inc. and is Chairman of the Princess Grace Foundation, a director of OpiSail Foundation and a trustee of LaSalle College High School. KEITH OSTER, became a director of the Company upon consummation of the Recapitalization and is a Principal of Lehman. 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. and Special Devices, Inc. THOMAS G. POWNALL, became a director of the Company upon consummation of the Recapitalization and is a member of the investment advisory board of Lehman. Mr. Pownall was Chairman of the Board of Directors from 1983 until 1992 and Chief Executive Officer of Martin Marietta Corporation ("Martin Marietta") from 1982 until 1988. Mr. Pownall joined Martin Marietta Corporation in 1963 as Vice President of its Aerospace Advanced Planning Unit, became President of Aerospace Operations and, in succession, Vice President and President and Chief Operating Officer of Martin Marietta. Mr. Pownall is also a director of the Titan Corporation, Elgar Holdings, Inc. and Special Devices, Inc., Director Emeritus of Sundstrand Corporation, serves on the advisory boards of Ferris, Baker Watts Incorporated and is President of the American-Turkish Council. He is also a director of the U.S. Naval Academy Foundation and the Naval Academy Endowment Trust and a trustee of Salem-Teikyo University. JOSEPH A. STROUD, became a director of the Company in February 1998 and is a Principal of Lehman. Mr. Stroud has been affiliated with Lehman since 1992 and formally joined the firm in 1996. He 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, 27 Mr. Stroud was Chief Financial Officer of the Accudyne and Kilgore Corporations. Mr. Stroud is also a director of Elgar Holdings, Inc. and Special Devices, 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 "Certain Relationships and Related Transactions--Shareholders Agreement." COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Board of Directors has established a Human Resources and Compensation Committee, consisting of Messrs. Lehman, Sawyer, Genovese, Glickman, and Stroud. The Compensation Committee assists the Board of Directors in its responsibilities for corporate governance relating to recruiting, appointing and compensating officers and directors and with respect to human resources policies and issues. During 1998, Mr. Genovese served as the Company's President and Chief Executive Officer. ITEM 11. EXECUTIVE COMPENSATION The information set forth in this section relates to the Chief Executive Officer of the Company and the four most highly compensated executive officers of the Company as of January 1, 1999. COMPENSATION SUMMARY The following summary compensation table sets forth for the fiscal years ended January 1, 1999, January 2, 1998 and January 3, 1997, 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 1, 1999:
LONG-TERM ANNUAL COMPENSATION(1) COMPENSATION ------------------------------------------- ------------ SECURITIES UNDERLYING NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY ($) BONUS ($)(2) OTHER ($)(3) OPTIONS ----------- ---------- ------------ -------------- ------------ Rocco C. Genovese. 1998 $233,651 $ -- $ -- -- President and Chief 1997 196,925 317,500 5,579,314 150,000 Executive Officer 1996 180,050 150,000 -- 336,000 Reed C. Wolthausen 1998 170,192 -- -- -- Senior Vice President 1997 148,800 237,000 3,201,004 100,000 1996 141,378 100,000 -- 224,000 David E. Worthington 1998 109,324 22,000 -- -- Vice President--Finance 1997 95,166 100,000 393,766 10,000 1996 90,794 25,000 -- -- Craig A. Carnes 1998 114,575 20,000 -- -- Vice President--Sales and 1997 94,231 25,000 161,710 7,500 Marketing--Flooring 1996 89,342 60,000 -- 40,000 Products
28 Ronald A. Stieben 1998 132,500 -- -- -- Vice President--Sales and 1997 130,000 -- 183,757 7,500 Marketing--Purosil 1996 130,000 -- -- --
(1) Perquisites and other personal benefits paid in 1998 for the Named Executive Officers aggregated less than the lesser of $50,000 and 10% of the total annual salary and bonus set forth in the columns entitled "Salary" and "Bonus" for each named executive officer and, accordingly, are omitted from the table. (2) Annual bonuses are indicated for the year in which they were earned and accrued. Annual bonuses for any year are generally paid in the following fiscal year. (3) Represents the compensation component of the consideration paid to the executives for their stock options in the Company in connection with the Recapitalization. OPTIONS GRANTED IN 1998 No options were granted in 1998 to the Named Executive Officers. AGGREGATE OPTION PURCHASES IN LAST FISCAL YEAR-END AND FISCAL YEAR END OPTION VALUES The following table summarizes information with respect to the year-end values of all options held by Named Executive Officers.
NUMBER OF SECURITIES UNDERLYING UNEXERCISED OPTIONS VALUE OF UNEXERCISED SHARES AT FISCAL YEAR-END IN-THE-MONEY OPTIONS ACQUIRED ON (#) EXERCISABLE/ AT FISCAL YEAR-END NAME EXERCISE VALUE REALIZED $UNEXERCISABLE ($)(1) - -------------------- ----------- -------------- ------------------- -------------------- Rocco C. Genoves 0 0 37,500/112,500 $0 Reed C. Wolthausen 0 0 25,000/75,000 $0 David E. Worthington 0 0 2,500/7,500 $0 Craig A. Carnes 0 0 1,875/5,625 $0 Ronald A. Stieben 0 0 1,875/5,625 $0
(1) There is no public market for the Company's Common Stock. The Company estimates that the market value for its Common Stock is $6.50 per share. EMPLOYMENT AGREEMENTS In connection with the Recapitalization, the Company entered into employment agreements (each, an "Employment Agreement") with two key executives. Generally, each Employment Agreement 29 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 or the date that is 30 days after notice of termination is given by the Company, whichever occurs later. If the executive's employment is terminated by the Company for any reason other than for Cause or the executive dies or is unable to perform his duties due to disability for a period of 90 consecutive days, the executive will be entitled to receive all compensation that would be due through the end of the then-current term, to the extent unpaid on the date of termination. Each Employment Agreement contains provisions prohibiting the executive, during the period of his employment with the Company and, for two years thereafter, from owning, managing, operating, financing, joining or controlling, directly or indirectly, any business entity that is, at the time of the executive's initial involvement, in competition with the Company in any business then or thereafter conducted by the Company. Each Employment Agreement also contains provisions requiring the executive to maintain the confidentiality of certain information related to the Company during the period of his employment with the Company and, under certain circumstances, for two years thereafter. Each Employment Agreement further provides that any proposals or ideas developed by the executive or that are submitted by the executive to the Company during the term of the Employment Agreement, whether or not exploited or accepted by the Company, are the property of the Company and may not be exploited by the executive except in compliance with the Company's policy on conflicts of interest. EXECUTIVE DEFERRED COMPENSATION AGREEMENT The Company has established an Executive Deferred Compensation Agreement which is a deferred compensation plan for certain executive officers and other highly compensated officers of the Company. Commencing on December 1, 1995 and continuing through the date on which the participant's employment with the Company terminates as a result of death, retirement, disability or any other cause, the participant is entitled to defer to an account an amount set forth in an annual election form, which the participant would otherwise be entitled to receive as compensation. Each participant's account accrues investment income based upon the investment election of the participant. Such deferred amounts are fully vested and are payable upon termination of employment, death, retirement or disability. The accumulated amount deferred in this plan as of fiscal year end 1998 was $0.5 million. STOCK OPTION PLAN The Board of Directors of the Company has adopted the 1997 Stock Option Plan (the "Plan"), pursuant to which officers, directors and key employees of the Company and its parents and subsidiaries are eligible to receive options to purchase the Company's Common Stock. The Plan is administered by the Board of Directors. The aggregate number of shares which may be issued under options shall not exceed 500,000 shares, subject to adjustment under certain circumstances provided for in the Plan. Any stock option granted under the Plan may be an Incentive Stock Option (as defined in the Plan) or a non-qualified stock option. The price of Incentive Stock Options shall range from one hundred to one hundred and ten percent of the fair market value of the shares depending upon whether or not the optionee is a ten percent holder. The fair market value shall be determined by reference to market prices if the stock is publicly traded or shall be determined in good faith by the Board in the absence of a public market. Options granted under the Plan vest as determined by the Board. No option may be granted under the Plan more than ten years from the date of its adoption. 401(K) PLANS The Company maintains two defined contribution 401(k) plans. The first plan covers substantially all of the Company's non-hourly employees who are not employed in the Mercer business. The employees become eligible to participate after 1,000 hours of service and participants may elect to contribute up to 20% of their compensation to this plan, subject to Internal Revenue Service limits. The Company matches a portion of the employees' contribution. The Company also maintains a defined contribution plan for salaried and hourly employees who were formerly employed by Mercer. Participating employees contribute to this 401(k) plan based on a percentage of their compensation, which is matched by the Company based on a percentage of employee contributions. 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." ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information regarding the ownership of the Company's Common Stock as of March 15, 1999 by (i) each director, (ii) each of the Named 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.
PERCENTAGE OF SHARES NAME OF INDIVIDUAL OR ENTITY(1) NUMBER OF SHARES(2) OUTSTANDING(3) - --------------------------------------------------- ------------------- -------------------- JFLEI(4)........................................... 3,134,298 81.3% John F. Lehman(5).................................. 3,134,298 81.3 George Sawyer(5)................................... 3,134,298 81.3 Donald Glickman(5)................................. 3,134,298 81.3 Keith Oster(5)..................................... 3,134,298 81.3 Joseph A. Stroud(5)................................ 3,134,298 81.3 Rocco C. Genovese(6)............................... 278,500 7.2 Reed C. Wolthausen(7).............................. 218,602 5.6 David E. Worthington(8)............................ 17,000 * Craig A. Carnes(9)................................. 7,175 * Ronald A. Stieben(9)............................... 2,975 * Oliver C. Boileau, Jr.(10)......................... -- -- Thomas G. Pownall(11).............................. -- -- Bruce D. Gorchow(12)............................... -- --
30 Jackson National(13)............................... 428,444 10.0 MassMutual(13)..................................... 428,444 10.0 All directors and executive officers as a group (20 persons)........................................... 3,688,200 93.7%
* 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) Computed based upon the total number of shares of the Company's Common Stock outstanding and the number of shares of the Company's Common Stock underlying the options or warrants held by that person exercisable within 60 days of March 15, 1999. In accordance with Rule 13(d)-3 of the Exchange Act, any Common Stock that will not be outstanding as of March 15, 1999, which is subject to options or warrants exercisable within 60 days, is deemed to be outstanding for the purpose of computing the percentage of outstanding shares of the Company's Common Stock owned by the person holding such options or warrants, but is not deemed to be outstanding for the purpose of computing the percentage of outstanding shares of the Company's Common Stock owned by any other person. On a fully diluted basis, as of March 15, 1999, JFLEI and its affiliates would own approximately 65% of the Company's Common Stock, the executive officers and directors as a group would own approximately 76.5% of the Company's Common Stock and the warrantholders (including Jackson National, MassMutual and Paribas) would have the right to purchase approximately 20% of the Company's Common Stock. (4) JFLEI is a Delaware limited partnership managed by Lehman, which is an affiliate of the general partner of JFLEI. Each of Messrs. Lehman, Glickman, Sawyer, Oster and Stroud, either directly (whether through ownership interest or position) or through one or more intermediaries, may be deemed to control Lehman and such general partner. Lehman and such general partner may be deemed to control the voting and disposition of the shares of the Company Common Stock owned by JFLEI. Accordingly, for certain purposes, Messrs. Lehman, Glickman, Sawyer, Oster and Stroud may be deemed to be beneficial owners of the shares of the Company's Common Stock owned by JFLEI. (5) Includes the shares beneficially owned by JFLEI, of which Messrs. Lehman, Glickman, Sawyer, Oster and Stroud are affiliates. (6) Includes options to purchase 37,500 shares of Common Stock issued under the Company's 1997 Stock Option Plan, which are currently exercisable. (7) Includes options to purchase 25,000 shares of Common Stock issued under the Company's 1997 Stock Option Plan, which are currently exercisable. (8) Includes options to purchase 2,500 shares of Common Stock issued under the Company's 1997 Stock Option Plan, which are currently exercisable. (9) Includes options to purchase 1,875 shares of Common Stock issued under the Company's 1997 Stock Option Plan, which are currently exercisable. (10) Mr. Boileau is a limited partner of JFLEI. (11) Mr. Pownall is a limited partner of JFLEI and is on the investment advisory board of Lehman. (12) Mr. Gorchow is on the investment advisory board of Lehman. (13) All shares are obtainable upon the exercise of warrants, which are immediately exercisable. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS MANAGEMENT AGREEMENT Pursuant to the terms of the ten-year Management Agreement (the "Management Agreement") entered into between Lehman and the Company, (i) upon consummation of the Recapitalization, the Company paid Lehman certain transaction fees and (ii) the Company agreed to pay Lehman an annual 31 management fee equal to $500,000, as may be adjusted from time to time subject to necessary board approval, that commenced accruing on October 1, 1998 and which was to be payable on a quarterly basis in arrears commencing on January 1, 1999. During 1998, the Board of Directors approved an amendment to the Management Agreement and the Company concurrently entered into a Management Services Agreement with Lehman, the combined effect of which was to further delineate the management services to be provided by Lehman and to provide that Lehman's management fee would be paid in advance on a quarterly basis commencing October 1, 1998. SHAREHOLDERS AGREEMENT In connection with the Recapitalization, the Company, JFLEI, the Continuing Shareholders (as defined in the Shareholders Agreement) and, in their capacity as holders of the Warrants (as defined in the Shareholders Agreement), 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 Series A and Series B 11 1/2% Cumulative Redeemable Stock (collectively, the "Redeemable Preferred Stock"), which was issued on the closing date of the Recapitalization, 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. "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. 32 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-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. 33 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. PART IV ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(1) Consolidated Financial Statements: The following consolidated financial statements of the Company are included in response to Item 8 of this report.
PAGE REFERENCE FORM 10-K -------------- Report of Ernst & Young LLP, Independent Auditors........................................... F-2 Consolidated Statements of Operations for the three fiscal years ended January 1, 1999...... F-3 Consolidated Balance Sheets at January 2, 1998 and January 1, 1999.......................... F-4 Consolidated Statements of Shareholders' Equity (Deficit) for the three fiscal years ended
34 January 1, 1999........................................................................ F-5 Consolidated Statements of Cash Flows for the three years ended January 1, 1999............. F-6 Notes to Consolidated Financial Statements.................................................. F-7
(a)(2) Consolidated Financial Statement Schedules: Report of Ernst & Young LLP, Independent Auditors........................................... S-2 Schedule II--Valuation and Qualifying Accounts.............................................. S-3
Schedules other than those listed above have been omitted since they are either not required, not applicable or the information is otherwise included. (b) Reports on Form 8-K. None. (c) Exhibits 1.1 Purchase Agreement, dated April 17, 1998 between the Company and the Initial Purchaser.(1) 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.(3) 3.2 Bylaws of the Company.(3) 3.3 Articles of Incorporation of Burke Flooring Products, Inc.(3) 3.4 Bylaws of Burke Flooring Products, Inc.(3) 3.5 Articles of Incorporation of Burke Rubber Company, Inc.(3) 3.6 Bylaws of Burke Rubber Company, Inc.(3) 3.7 Articles of Incorporation of Burke Custom Processing, Inc.(3) 3.8 Bylaws of Burke Custom Processing, Inc.(3) 3.9 Articles of Incorporation of Mercer Products Company, Inc.(1) 3.10 Bylaws of Mercer Products Company, Inc.(1) 4.1 Indenture among the Company, the Subsidiary Guarantors and United States Trust Company of New York, relating to the Floating-Rate Notes, dated as of April 21, 1998.(1) 4.2 First Supplemental Indenture, dated April 21, 1998, between the Company, the Subsidiary Guarantors and United States Trust Company of New York.(1) 4.3 Form of Note (included in Exhibit 4.1).(1) 4.4 Registration Rights Agreement, dated April 21, 1998, between the Company and the Holders.(1) 10.1 Purchase Agreement, dated August 14, 1997, between the Company and the Initial Purchaser.(3) 10.2 Agreement and Plan of Merger, dated as of August 13, 1997, by and among the Company, the Company Shareholders, JFLEI and MergerCo.(3) 35 10.3 Indenture among the Company, the Subsidiary Guarantors and United States Trust Company of New York, relating to the Fixed Rate Notes, dated as of August 20, 1997.(3) 10.4 Registration Rights Agreement, dated August 20, 1997, between the Company and the Fixed Rate Note Holders.(3) 10.5 Loan and Security Agreement, dated as of August 20, 1997, between the Company, the Lenders and NationsBank, N.A.(3) 10.6 Amendment No. 1, Waiver Joinder Agreement to Loan Security Agreement, dated April 21, 1998, between the Company, Mercer and NationsBank, N.A. (1) 10.7 Form of Revolving Notes (included in Exhibit 10.6). (1) 10.8 Subsidiary Guaranty, dated August 20, 1997, between the Company and the Subsidiaries.(3) 10.9 Subsidiary Security Agreement, dated as of August 20, 1997, between the Company and the Subsidiaries.(3) 10.10 Assignment for Security, dated April 21, 1998, by Mercer.(1) 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.(1) 10.12 Florida Mortgage, Security Agreement and Assignment of Leases and Rents, dated April 21, 1998, between Mercer and NationsBank, N.A. (unrecorded)(1) 10.13 Stock Pledge Agreement, dated August 20, 1997.(3) 10.14 Pledge Agreement, dated April 21, 1998, between the Company and NationsBank, N.A.(1) 10.15 Consent Solicitation Statement dated March 30, 1998.(1) 10.16 Form of Consent to Amendments to Indenture.(1) 10.17 Investment Agreement, dated as of August 20, 1997, between the Company and preferred shareholders.(3) 10.18 Shareholders' Agreement, dated as of August 20, 1997, between the Company and the shareholders.(3) 10.19 Shareholders' Registration Rights Agreement, dated as of August 20, 1997, between the Company and the shareholders.(3) 10.20 Warrantholders' Registration Rights Agreement dated as of August 20, 1997, between the Company and the warrantholders.(3) 10.21 Form of Warrant Certificate.(3) 10.22 Form of Election Form for Series C Preferred Stock.(1) 10.23 Management Agreement, dated August 20, 1997, between the Company and J.F. Lehman & Company.(3) 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.(3) 10.25 Lease Agreement, dated May 1, 1996, between the Company and SSMRT Bensonville Industrial Park (3), Inc. for the premises at 870 Thomas Drive, Bensonville, Illinois.(3) 36 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.(3) 10.27 Lease Agreement, dated April 25, 1983, between the Company and Donald M. Hypes for the premises at 14910 Carmenita Boulevard, Norwalk, CA.(3) 10.28 Lease Agreement, dated March 29, 1996, between S & M Development Co., a general partnership, for the premises at 13615 Excelsior Drive, Santa Fe Springs, CA.(3) 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.(3) 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.(1) 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.(1) 10.32 Sublease Agreement, dated February 20, 1992, between Burke Rubber Company for the premises at 107 South Riverside Drive, Modesto, CA.(3) 10.33 Servicing Agreement, dated April 26, 1996, between the Company and Westland Technologies.(3) 10.34 Amendment No. 1 to the Stock Purchase Agreement, dated April 21, 1998, among Burke, Sovereign and Mercer. 10.35 Lease Agreement, dated April 15, 1998, between Robert Steele, et al and the Company, for the premises at 10039 Norwalk Boulevard, Santa Fe Springs, CA. 10.36 Management Services Agreement, dated as of June 18, 1998, between the Company and J.F. Lehman & Company. 10.37 Amendment No. 1 to Management Agreement between the Company and J.F. Lehman & Company, dated as of June 18, 1998. 10.38 Burke Industries, Inc. Deferred Compensation Agreement. 10.39 Burke Industries, Inc. 1997 Stock Option Plan. 12.1 Computation of Ratios of Earnings to Fixed Charges and Combined Fixed Charges and Preferred Stock Dividends. 21.1 Subsidiaries of the Company. 27. Financial Data Schedule. - ------------------------ (1) Incorporated by reference to the registrant's Registration Statement on Form S-4, File No. 333-36675, as filed with the Securities and Exchange Commission on June 19, 1998. (2) Incorporated by reference to the Company's 1997 annual report on Form 10-K, File No. 333-36675, as filed with the Securities and Exchange Commission on April 2, 1998. (3) Incorporated by reference to the registrant's Registration Statement on Form S-4, File No. 333-36675, as filed with the Securities and Exchange Commission on September 29, 1997, as amended. 37 SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(D) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT. No annual report or proxy material covering the Company's last fiscal year has been or will be sent to security holders of the Company. 38 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- BURKE INDUSTRIES, INC. AND SUBSIDIARIES Report of Ernst & Young LLP, Independent Auditors...............................................................F-2 Consolidated Statements of Operations for the three fiscal years ended January 1, 1999..........................F-3 Consolidated Balance Sheets at January 2, 1998 and January 1, 1999..............................................F-4 Consolidated Statements of Shareholders' Equity (Deficit) for the three fiscal years ended January 1, 1999......F-5 Consolidated Statements of Cash Flows for the three fiscal years ended January 1, 1999..........................F-6 Notes to Consolidated Financial Statements......................................................................F-9
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 1, 1999 and January 2, 1998, 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 1, 1999. 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 1, 1999 and January 2, 1998, and the consolidated results of their operations and their cash flows for each of the three fiscal years in the period ended January 1, 1999, in conformity with generally accepted accounting principles. /s/ ERNST & YOUNG LLP San Jose, California February 26, 1999, except paragraph 12 of Note 5, as to which the date is March 16, 1999 BURKE INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
FISCAL YEARS ENDED ------------------------------------------- 1998 1997 1996 -------- -------- ------- (IN THOUSANDS) Net sales.............................................. $107,019 $90,228 $72,466 Costs and expenses: Cost of sales....................................... 77,053 62,917 49,689 Selling, general and administrative................. 14,546 12,174 11,569 Amortization of goodwill............................ 1,411 64 41 Transaction expenses................................ -- 1,321 -- Stock option purchase............................... -- 14,105 -- ------- ------- ------- Income (loss) from operations.......................... 14,009 (353) 11,167 Interest expense, net.................................. 13,819 5,408 2,668 ------- ------- ------- Income (loss) before income tax provision (benefit) and discontinued operation.......................... 190 (5,761) 8,499 Income tax provision (benefit)......................... 160 (1,818) 3,466 ------- ------- ------- Income (loss) from continuing operations before discontinued operation.............................. 30 (3,943) 5,033 Loss from discontinued operation, net of income tax benefit of $205..................................... -- -- (308) Loss on disposal of discontinued operation, net of income tax benefit of $356............................. -- -- (624) ------- ------- ------- Net income (loss)...................................... $30 $(3,943) $4,101 ------- ------- ------- ------- ------- -------
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 YEARS ENDED ---------------------- 1998 1997 ---- ---- (IN THOUSANDS) ASSETS Current assets: Cash and cash equivalents............................................. $ 2,981 $ 11,563 Restricted cash....................................................... -- 1,070 Trade accounts receivable, less allowance of $812 in 1998 and $334 in 1997................................................................ 13,109 11,186 Inventories........................................................... 14,574 11,187 Prepaid expenses and other current assets............................. 1,731 1,056 Deferred income tax assets............................................ 3,108 2,845 Refundable income taxes............................................... 174 1,639 --------- --------- Total current assets.............................................. 35,677 40,546 Property, plant, and equipment: Land and improvements................................................. 2,107 1,884 Buildings and improvements............................................ 11,210 9,151 Equipment............................................................. 17,277 13,007 Leasehold improvements................................................ 721 606 --------- --------- 31,315 24,648 Less: accumulated depreciation and amortization....................... 12,300 10,536 --------- --------- 19,015 14,112 Construction-in-process............................................... 2,364 908 --------- --------- 21,379 15,020 Other assets: Prepaid pension cost.................................................. 498 501 Goodwill, net......................................................... 29,735 1,465 Deferred financing costs, net......................................... 6,542 5,210 Other assets.......................................................... 114 95 --------- --------- 36,889 7,271 --------- --------- Total assets...................................................... $93,945 $62,837 --------- --------- --------- --------- LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Current liabilities: Trade accounts payable and accrued expenses........................... $6,934 $5,489 Accrued compensation and related liabilities.......................... 2,715 2,086 Accrued interest...................................................... 5,434 4,347 Payable to shareholders............................................... 953 5,882 Income taxes payable.................................................. 695 1,064 --------- --------- Total current liabilities......................................... 16,731 18,868 Senior notes............................................................. 110,000 110,000 Floating rate notes...................................................... 30,000 -- Other noncurrent liabilities............................................. 444 420 Deferred income tax liabilities.......................................... 4,082 3,891 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 (aggregate liquidation and redemption preference $18,000)........................................ 18,160 16,148 Shareholders' equity (deficit): Convertible preferred stock, no par value: 3,000 Series C shares designated, issued and outstanding (liquidation preference $3,000).... 3,000 -- Class A common stock, no par value: Authorized shares--20,000,000 Issued and outstanding shares--3,857,000 in 1998 and 1997........... 25,464 25,464 Accumulated deficit................................................... (113,936) (111,954) --------- --------- Total shareholders' equity (deficit).............................. (85,472) (86,490) --------- --------- Total liabilities and shareholders' equity (deficit)..................... $93,945 $62,837 --------- --------- --------- ---------
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)
CONVERTIBLE PREFERRED STOCK CLASS A COMMON STOCK --------------------- -------------------- TOTAL ACCUMULATED SHAREHOLDERS' SHARES AMOUNT SHARES AMOUNT DEFICIT EQUITY (DEFICIT) ---------- -------- --------- -------- ----------- ---------------- (IN THOUSANDS) 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) Net income......................... -- -- -- -- 30 30 Proceeds from sale of preferred stock.......................... 3,000 3,000 -- -- -- 3,000 Accretion of preferred stock discount....................... -- -- -- -- (242) (242) Preferred stock dividend in kind... -- -- -- -- (1,770) (1,770) ---------- -------- ------ ------- -------- -------- Balance at fiscal year end 1998....... 3,000 $3,000 3,857 $25,464 $(113,936) $(85,472) ---------- -------- ------ ------- -------- -------- ---------- -------- ------ ------- -------- --------
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. BURKE INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEARS ENDED ------------------------------------------ 1998 1997 1996 ------- -------- ------ (IN THOUSANDS) OPERATING ACTIVITIES Net income (loss)........................................... $30 $(3,943) $4,101 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization: Property, plant, and equipment......................... 1,764 1,435 1,378 Goodwill............................................... 1,411 64 41 Debt discounts arising from warrants................... -- 93 37 Interest on shareholder note........................... -- (240) -- Deferred financing costs............................... 752 229 -- Loss on disposal of discontinued operation............... -- -- 624 Changes in net assets of discontinued operation.......... -- -- 1,401 Changes in operating assets and liabilities: Trade accounts receivable.............................. 408 (2,031) 701 Inventories............................................ (506) (2,571) (1,398) Prepaid expenses and other current assets.............. (619) (436) (78) Refundable income taxes................................ 1,465 -- -- Prepaid pension cost................................... 3 41 83 Other assets........................................... (52) 25 12 Trade accounts payable and accrued expenses............ 1,559 3,382 1,940 Accrued compensation and related liabilities........... 223 149 124 Deferred income taxes.................................. (72) (1,397) 241 Income taxes payable................................... (369) (3,043) (103) Other noncurrent liabilities........................... 24 (300) 36 ------- -------- ------- Net cash provided by (used in) operating activities......... 6,021 (8,543) 9,140 INVESTING ACTIVITIES Acquisition of Mercer Products Company; net of cash acquired.................................................. (38,440) -- -- Purchases of property, plant, and equipment................. (3,220) (1,454) (1,684) 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 -- ------- -------- ------- Net cash (used in) provided by investing activities......... (41,660) 2,852 (3,932) FINANCING ACTIVITIES Restricted cash............................................. 1,070 (1,070) -- Checks outstanding in excess of funds deposited............. -- (828) (888) Borrowings of long-term debt................................ -- -- 79,516 Repayments and settlement of long-term debt and capital lease obligations.............................................. -- (18,869) (83,678) Payable to shareholders..................................... (4,929) 5,882 -- Repurchase of common stock and warrants..................... -- -- (235) Proceeds from sales of shares through employee stock plans.. -- 10 77 Deferred financing costs.................................... (2,084) (5,430) -- Repayment of subordinated debt.............................. -- (1,750) -- Net recapitalization consideration.......................... -- (107,310) -- Issuance of notes payable................................... 30,000 110,000 -- Issuance of preferred stock, net of issuance costs.......... 3,000 17,895 -- Issuance of common stock, net of issuance costs............. -- 18,724 -- ------- -------- ------- Net cash provided by (used in) financing activities......... 27,057 17,254 (5,208) ------- -------- ------- Change in cash.............................................. (8,582) 11,563 -- Cash at beginning of year................................... 11,563 -- -- ------- -------- ------- Cash at end of year......................................... $2,981 $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 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 10% of net sales in fiscal year 1998, 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 1998. 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 Taunton, Massachusetts through June 5, 2000. Burke's employees at the Eustis, Florida location are represented by the Glass, Molders, Pottery, Plastics and Allied Workers International Union. This collective bargaining agreement was renegotiated in December 1998 for a three year term. 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 5); (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 and $30 million floating-rate notes, F-7 BURKE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 of which $953,000 remains at fiscal year end 1998. A lawsuit was filed by a former shareholder against the Company and certain of its current and former officers and directors. The former shareholder is asserting various claims in connection with the Company's repurchase of the former shareholders' shares prior to the Recapitalization. The Company believes that such claims are without merit and intends to vigorously defend such claims. Management believes the resolution of this matter will not have a material adverse effect on the financial position of the Company. The Company is subject to various federal, state and local environmental laws and regulations. The former shareholders of the Company have agreed, subject to certain limitations, to indemnify the Company against certain environmental liabilities incurred prior to the Recapitalization. In addition, the former shareholders of Mercer Products Company, Inc. (Note 2) have agreed, subject to certain limitations, to indemnify the Company against environmental liabilities incurred prior to the acquisition of Mercer Products Company, Inc. Based upon environmental reviews and the indemnification provisions discussed above, management believes the potential obligations relating to environmental matters 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-three week year in fiscal 1996, a fifty-two week year in fiscal 1997 and a fifty-two week year in fiscal 1998. For convenience, the accompanying financial statements have been referred to as fiscal years ended 1996, 1997, and 1998 for the periods ended January 3, 1997, January 2, 1998 and January 1, 1999, 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. F-8 BURKE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CASH AND CASH EQUIVALENTS Cash and cash equivalents consist of bank demand deposit accounts. At fiscal year end 1997, restricted cash consisted 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 thirty 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. 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. 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. The adoption of FAS 130 had no impact on the Company's results of operations or financial position. F-9 BURKE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEGMENT INFORMATION Effective January 1, 1998, the Company adopted the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION (Statement 131). Statement 131 superseded FASB Statement No. 14, FINANCIAL REPORTING FOR SEGMENTS OF A BUSINESS ENTERPRISE. Statement 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. Statement 131 also establishes standards for related disclosures about products and services, geographic areas, and major customers. The adoption of Statement 131 did not affect results of operations or financial position, but did affect the disclosure of segment information. 2. ACQUISITION OF MERCER PRODUCTS COMPANY, INC. 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 $38,474,000 (including acquisition costs of $2,280,000). The acquisition was accounted for under the purchase method of accounting. The Company's consolidated results of operations include Mercer's results from the date of acquisition. The total purchase price was allocated to the assets acquired and liabilities assumed based on their estimated fair values as follows:
(IN THOUSANDS) Current assets............................................... $ 5,269 Plant and equipment.......................................... 4,903 Excess of purchase price over net assets acquired............ 29,681 Amounts payable and accrued expenses......................... (1,379) ------- Total purchase price......................................... $38,474 ------- -------
The above purchase price allocation is tentative and subject to change, although such changes are not anticipated to be significant. Financing for the Mercer 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 (the "Floating-Rate 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 Convertible Preferred Stock and cash on hand. The following pro forma data was prepared to illustrate the estimated effect of the Mercer acquisition and the financing related thereto, as if the Mercer acquisition had occurred as of the beginning of each period presented:
Fiscal Year Ended 1998 1997 ---- ---- (IN THOUSANDS) Net Sales....................................... $113,223 $115,127 Net loss........................................ (12) (3,973)
F-10 BURKE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The pro forma results of operations have been prepared for comparison purposes only, and do not purport to be indicative of what the results would have been had the Mercer acquisition occurred at the beginning of each period presented. The pro forma results for fiscal year ended 1997 include certain charges related to the Recapitalization (Note 1). 3. INVENTORIES Inventories consist of the following at the fiscal year ended:
1998 1997 (IN THOUSANDS) Raw materials................................... $ 5,123 $ 4,626 Work-in-process................................. 2,085 1,593 Finished goods.................................. 7,366 4,968 ------- ------- $14,574 $11,187 ------- ------- ------- -------
4. GOODWILL AND LONG-LIVED ASSETS Goodwill represents the excess of the purchase price of acquired companies over the estimated fair value of the tangible and specifically identified intangible net assets acquired. In accordance with Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for the Long-Lived Assets to Be Disposed Of" (FAS 121), the carrying value of long-lived assets and related goodwill is reviewed if the facts and circumstances suggest that they may be impaired. If this review indicates that the carrying value of these assets will not be recoverable, as determined based on the undiscounted net cash flows of the entity acquired over the remaining amortization period, the Company's carrying value is reduced to its estimated fair value (based on an estimate of discounted future net cash flows). Goodwill related to the Mercer acquisition is being amortized on a straight-line basis over fifteen years. Goodwill related to prior transactions is being amortized on a straight-line basis over forty years. Accumulated amortization totaled $1,779,000 and $367,000 at fiscal years ended 1998 and 1997, respectively. 5. LONG-TERM DEBT AND LEASE OBLIGATIONS 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. F-11 BURKE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 ranks senior to the Senior Notes. 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. The Company believes the fair value of the Senior Notes at fiscal year end 1998 approximates the carrying value of such indebtedness issued based upon the incremental borrowing rate for similar types of instruments. FLOATING-RATE NOTES The Floating-Rate Notes issued in connection with the Mercer acquisition mature on August 15, 2007, with interest on the notes payable semiannually on February 15 and August 15, commencing on August 15, 1998. The Floating-Rate Notes bear interest at a rate per annum equal to LIBOR plus 400 basis points, with the interest rate set semiannually (9.7% at fiscal year end 1998). The Floating-Rate Notes are unconditionally guaranteed on a joint and several basis by each of the Company's subsidiaries. Upon a change of control of the Company, the Company will be required to make an offer to repurchase all outstanding Floating-Rate Notes at 101% of the aggregate principal amount thereof plus accrued and unpaid interest thereon at the date of repurchase. The Company believes the fair value of the Floating-Rate Notes at fiscal year end 1998 approximates the carrying value of such indebtedness as the interest rate is variable and resets frequently. BANK CREDIT FACILITY In fiscal year 1998, the Company revised its Loan and Security Agreement with a bank to provide the Company with a $25.0 million revolving credit facility expiring August 20, 2002. No amounts are outstanding at fiscal year end 1998 or 1997. Indebtedness of the Company under the agreement is secured by a first priority security interest in substantially all of the Company's assets. Indebtedness under the agreement bears interest at a floating rate of interest equal to, at the Company's option, the eurodollar rate for one, two, three or six months, plus 2.50% or the bank's prime rate. Advances under the agreement are limited to the lesser of (a) $25.0 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 $3.0 million may be issued under the bank credit facility. F-12 BURKE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. At fiscal year end 1998, the Company was not in compliance with certain of these covenants. On March 16, 1999, the Company obtained a waiver from the bank and amended future covenants. INTEREST EXPENSE Interest expense consists of the following:
FISCAL YEAR ENDED --------------------------------------- 1998 1997 1996 ---- ---- ---- (IN THOUSANDS) Interest incurred............................. $14,062 $5,900 $2,771 Capitalized................................... (13) (29) (19) Interest income............................... (230) (463) (84) ------- ------ ------ Interest expense, net......................... $13,819 $5,408 $2,668 ------- ------ ------ ------- ------ ------
Included in interest expense is $142,000 and $212,000 of interest incurred on subordinated shareholder notes in fiscal years 1997 and 1996, respectively. There was no interest payable to these shareholders at fiscal year ended 1997, and such subordinated notes were repaid in connection with the Recapitalization of the Company. DEFERRED FINANCING COSTS In connection with the issuance of the Floating-Rate Notes, Senior Notes and bank credit facility agreement, the Company incurred debt issuance costs of $7,513,000 that are being amortized to interest expense over the terms of the related debt. Accumulated amortization at fiscal year end 1998 and 1997 was $971,000 and $219,000, respectively. LEASE OBLIGATIONS The Company leases certain manufacturing, warehousing, and administrative space under noncancelable operating leases. At fiscal year ended 1998, future minimum payments under noncancelable operating leases are as follows (in thousands): 1999................................................ $1,985 2000................................................ 1,705 2001................................................ 1,117 2002................................................ 829 2003................................................ 560 Beyond 2003......................................... 1,686 ------ $7,882 ------ ------
Rental expense was $2,082,000, $1,404,000, and $1,143,000 in fiscal years 1998, 1997, and 1996, respectively. Rental expense is before sublease income of $325,000 in 1998, $316,000 in 1997 and F-13 BURKE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS $206,000 in 1996. Future sublease rental income commitments aggregated $975,000 at fiscal year ended 1998. 6. 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 1998. 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 F-14 BURKE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS preferred stock, the Company may not change the powers or preferences of the redeemable preferred stock, create, authorize or issue any shares of capital stock ranking senior or on a parity with the redeemable preferred stock or create, authorize or issue any shares of capital stock constituting junior securities, unless such junior securities are subordinate in right of payment to the redeemable preferred stock. If at any time after October 15, 2000, any amount of cash dividends payable on the Series A Redeemable Preferred Stock shall have been in arrears and unpaid for four or more successive dividend payment dates, then the holders of the Series A Redeemable Preferred Stock, shall have the right to elect the smallest number of directors constituting one-third of the authorized number of directors, and the holders of the common stock shall have the right to elect the remaining directors. If the Company fails to redeem shares of Series A Redeemable Preferred Stock in accordance with the mandatory redemption provisions described above, then the holders of the Series A Redeemable Preferred Stock shall have the right to elect the smallest number of directors constituting a majority of the authorized number of directors, and the holders of the common stock shall have the right to elect the remaining directors. 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. 7. SHAREHOLDERS' EQUITY CONVERTIBLE PREFERRED STOCK In connection with the Mercer acquisition, the Company issued $3 million in Series C Convertible Preferred Stock. The Series C Convertible Preferred Stock ranks junior to the Redeemable Preferred Stock and when declared, dividends accrue at an annual rate per share of 6% times the sum of $1,000 and accrued but unpaid dividends. The holders of Series C Convertible Preferred Stock are entitled to receive a stated liquidation value of $1,000 per share plus accrued but unpaid dividends in the event of any liquidation, dissolution or winding up of the Company. After payment of the liquidation preference, the holders of the Series C Convertible Preferred Stock are not entitled to further participation in any distribution of assets of the Company. The holders of Series C Convertible Preferred Stock are not entitled to any voting rights; however, without the consent of 51% of the holders of Series C Convertible Preferred Stock, the Company may not adversely alter the rights and preferences of the Series C Convertible Preferred Stock. Upon the occurrence of a triggering event, the holders of Series C Convertible Preferred Stock have the option to convert such shares into common stock at a conversion price of $10 per share, subject to anti-dilution provisions. A triggering event includes a change of control, an initial public offering, notice by the Company of an intent to redeem the Convertible Preferred Stock or the fifth anniversary of the issuance of the Convertible Preferred Stock. COMMON STOCK F-15 BURKE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS At fiscal year ended 1998 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. 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 ($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 year 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. 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. A summary of all stock option activity is as follows:
WEIGHTED OPTIONS AVERAGE PRICE OUTSTANDING PER SHARE ----------- ------------- (IN THOUSANDS, EXCEPT PER SHARE PRICE) Balance at fiscal year ended 1995............................ 1,259 $0.425 Granted.................................................. 618 $1.500 Exercised................................................ (181) $0.425 Canceled................................................. (96) $0.425 ------ Balance at fiscal year ended 1996............................ 1,600 $0.840 Granted.................................................. 370 $6.50 Exercised................................................ (22) $0.425 Canceled................................................. (1,578) $0.846 ------ Balance at fiscal year ended 1997............................ 370 $6.50 Granted.................................................. 68 $10.00 Exercised................................................ -- -- Canceled................................................. -- -- ------ Balance at fiscal year ended 1998 438 $7.04 ------ ----- ------ -----
F-16 BURKE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS At fiscal year end 1998, options to purchase 92,500 shares of common stock are exercisable (1997 - none) and the weighted average remaining contractual life is 9 years (1997 - 10 years). The Company has elected to follow Accounting Principal Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB Opinion No. 25) and related Interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under the Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation" (FAS 123), requires use of options valuation models that were not developed for use in valuing employee stock options. Under APB Opinion No. 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. Pro forma information regarding net loss has been determined as if the Company had accounted for its employee stock options under the fair value method of FAS 123. The fair value for all options granted was estimated at the date of grant using the minimum value options pricing model with the following weighted average assumptions: a risk-free interest rate of 5.50%; no dividend yield; and a weighted average expected life of the option of five years. The weighted average fair value of these options granted was $2.40 per share for 1998. The Minimum Value option valuation method may be used by companies without publicly traded equity to value an award. Option valuation models require the input of highly subjective assumptions, including expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. Had compensation costs for the Company's stock option plan been determined on the fair value at the grant dates for awards under the plan consistent with the method of FAS 123, the Company's pro forma net loss would have been $64,000 for the fiscal year end 1998. The effect of applying the FAS 123 minimum value method to the stock options granted in fiscal years ended 1997 and 1996 would not result in pro forma (loss) 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 for fiscal year end 1996 and 1997. Future pro forma net income results may be materially different from actual amounts reported. WARRANTS Warrants to purchase 964,000 shares of common stock of the Company at the initial exercise price of $4.67 per share were issued to the holders of the preferred stock. The warrants are immediately exercisable until February 20, 2008. The exercise price and number of Warrant Shares are both subject to adjustment in certain events. F-17 BURKE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8. 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 in 1996. 9. 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 tables set forth the plan's funded status and amounts recognized in the Company's consolidated balance sheets at fiscal year end:
1998 1997 ------- ------- (IN THOUSANDS) CHANGE IN BENEFIT OBLIGATION Benefit obligation at beginning of year....... $3,018 $2,894 Service cost.................................. 67 60 Interest cost................................. 252 220 Actuarial loss................................ 204 108 Benefits paid................................. (141) (264) ------ ------ Benefit obligation at end of year............. $3,400 $3,018 ------ ------ ------ ------ CHANGE IN PLAN ASSETS Fair value of plan assets at beginning of year $3,066 $2,920 Actual return on plan assets.................. 463 254 Employer contribution......................... 103 156 Benefits paid................................. (141) (264) ------ ------ Fair value of plan assets at end of year...... $3,491 $3,066 ------ ------ ------ ------ Funded status................................. $91 $48 Unrecognized net actuarial loss............... 132 116 Unrecognized prior service cost............... 275 337 ------ ------ Prepaid benefit cost ......................... $498 $501 ------ ------ ------ ------ WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER 31 Discount Rate................................. 8.00% 8.25% Expected return on plan assets................ 9.00% 9.00%
F-18 BURKE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Net periodic pension expense for the fiscal years ended 1998, 1997, and 1996 included the following components:
1998 1997 1996 ----- ---- ---- (IN THOUSANDS) COMPONENTS OF NET PERIODIC BENEFIT COST: Service cost--benefits earned during the year. $67 $58 $65 Interest cost on projected benefit obligation . 252 220 193 Expected return on plan assets............. (275) (254) (233) Amortization of prior service cost......... 62 44 58 ----- ----- ---- Net periodic pension cost.................. $106 $68 $83 ----- ----- ---- ----- ----- ----
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 $164,000, $156,000, and $113,000, to this plan in 1998, 1997, and 1996, respectively. The Company also sponsors a defined contribution 401(k) plan for the employees in the Mercer business. Participation in this plan is available to all salaried and hourly employees of the Company who work in the Mercer business. Participating employees contribute to the 401(k) plan based on a percentage of their compensation which is matched, based on a percentage of employee contributions, by the Company. The Company contributed approximately $93,000 to the plan subsequent to the Mercer acquisition in 1998. The Company also has a deferred compensation program for certain officers and employees. Such deferred amounts are fully vested and are payable upon termination of employment, death or retirement. Each participant's account accrues investment income based upon the investment election of the participant. The accumulated amount deferred as of fiscal year end 1998 is $532,000 (1997 - $296,000). 10. INCOME TAXES The income tax provision (benefit) recognized in the consolidated statements of operations consists of the following:
1998 1997 1996 ---- ---- ---- (IN THOUSANDS) Current: Federal.................................... $38 $(383) $2,171 State...................................... 194 (38) 493 ---- ------- ------- 232 (421) 2,664 Deferred: Federal.................................... 26 (1,211) 150 State...................................... (98) (186) 91 ---- ------- ------- (72) (1,397) 241 ---- ------- ------- $160 $(1,818) $2,905 ---- ------- ------- ---- ------- -------
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: F-19 BURKE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1998 1997 1996 ---- ---- ---- (IN THOUSANDS) Income taxes computed at the U.S. federal statutory rate............................. $65 $(1,958) $2,382 State taxes (net of federal effect).......... 110 (148) 385 Tax credits................................. (47) -- -- Federal and state audit provision............ -- 200 -- Other individually immaterial items.......... 32 88 138 ---- ------- ------ Income tax (benefit) provision............... $160 $(1,818) $2,905 ---- ------- ------ ---- ------- ------
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities at fiscal years ended 1998 and 1997 are as follows:
1998 1997 ------- ------ (IN THOUSANDS) Deferred tax liabilities: Basis differences between financial reporting and tax basis... $(3,108) $(2,964) Depreciation.................................................. (958) (900) Other......................................................... (122) (117) ------- ------- Total deferred tax liabilities................................ (4,188) (3,981) Deferred tax assets: Net operating loss and tax credit carryforwards............... 888 1,853 Receivable allowances and inventory reserves.................. 1,064 433 State taxes................................................... 188 1 Warranty reserve and other accruals........................... 585 166 Accrued vacation and employee benefits........................ 373 291 Other......................................................... 116 191 ------- ------- Total deferred tax assets..................................... 3,214 2,935 ------- ------- Net deferred tax liability........................................ $(974) $(1,046) ------- ------- ------- -------
As of fiscal year end 1998, the Company has federal and state net operating loss carryforwards of approximately $2.1 million and $0.6 million, respectively. The net operating loss carryforwards will expire in the years 2002 through 2012, if not utilized. 11. SEGMENT INFORMATION The Company has two reportable segments: organic products and silicone products. The organic products group produces and distributes rubber and vinyl wall base, other floor covering accessory products, flexible membranes and other organic rubber products. The silicone products group produces and distributes precision silicone seals and other products used on commercial and military aircraft as well as high performance silicone truck and bus engine hoses and other silicone rubber products. The Company evaluates performance and allocates resources based on the operating income or loss before taxes, interest, corporate general and administrative expenses and amortization expense related to goodwill from the Mercer Acquisition. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies. There are no intersegment sales or transfers. F-20 BURKE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company's reportable segments are business units that offer different products. The reportable segments are each managed separately because they manufacture and distribute distinct products with different production processes.
FISCAL YEAR ENDED 1998 ORGANIC PRODUCTS SILICONE PRODUCTS TOTAL - ---------------------- ---------------- ----------------- ----- (IN THOUSANDS) Revenues from external customers.................. $56,856 $50,163 $107,019 Depreciation expense.............................. 1,097 667 1,764 Segment profit.................................... 9,865 7,239 17,104 Segment assets.................................... 31,174 18,210 49,384 Expenditures for long-lived assets................ 1,555 257 1,812 PROFIT Total profit for reportable segments.............. $17,104 Unallocated items: Corporate general and administrative expenses... 1,721 Amortization of goodwill related to the Mercer acquisition.............................. 1,374 Interest expense, net........................... 13,819 ------- Income before income taxes........................ $190 ------- ------- ASSETS Total assets for reportable segments.............. $49,384 Other assets, primarily goodwill and other intangibles..................................... 44,561 ------- Total consolidated assets......................... $93,945 ------- -------
OTHER SIGNIFICANT ITEMS
SEGMENT TOTALS ADJUSTMENTS CONSOLIDATED TOTALS -------------- ----------- ------------------- (IN THOUSANDS) Expenditures for long-lived assets $1,812 $1,408 (1) $3,220
(1) Consists of expenditures for long lived assets not directly related to either segment. MAJOR CUSTOMER Revenue from one customer of the silicone products segment represents approximately $10 million of the Company's consolidated revenue. 12. SUPPLEMENTAL CASH FLOW INFORMATION
1998 1997 1996 ------- ------ ------ (IN THOUSANDS) Cash paid for interest..................................... $12,223 $2,059 $1,950 Cash paid for income taxes................................. 484 3,047 2,771
F-21 INDEX TO FINANCIAL STATEMENT SCHEDULES PAGE Report of Ernst & Young, LLP, Independent Auditors. S-2 Schedule II--Valuation and Qualifying Accounts. S-3 S-1 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We have audited the consolidated financial statements of Burke Industries, Inc. as of January 1, 1999 and January 2, 1998, and for each of the three years in the period ended January 1, 1999, and have issued our report thereon dated February 26, 1999, except paragraph 12 of Note 5, as to which the date is March 16, 1999. Our audits also included the financial statement schedule listed in the index at Item 14(a)(2). This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ ERNST & YOUNG LLP San Jose, California February 26, 1999, except paragraph 12 of Note 5, as to which the date is March 16, 1999 S-2 SCHEDULE II VALUATION & QUALIFYING ACCOUNTS BURKE INDUSTRIES INC. (IN THOUSANDS)
ADDITIONS -------------------------- BALANCE AT CHARGED TO ACQUISITION BEGINNING OF COSTS AND OF MERCER (a) BALANCE AT DESCRIPTION PERIOD EXPENSES PRODUCTS DEDUCTIONS END OF PERIOD - ----------- ------------ ---------- ----------- ---------- ------------- Allowance for doubtful accounts (deducted from accounts receivable) Year ended January 1, 1999......... $334 $196 $300 $18 $812 Year ended January 2, 1998......... 189 240 -- 95 334 Year ended January 3, 1997......... 336 225 -- 372 189
- ------------------------ (a) Includes write-offs and reversals. S-3 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized in the City of San Jose, State of California on the 23rd day of March, 1999. BURKE INDUSTRIES, INC., a California corporation By: /s/ ROCCO C. GENOVESE --------------------- Rocco C. Genovese VICE CHAIRMAN, CHIEF EXECUTIVE OFFICER AND PRESIDENT
SIGNATURE TITLE DATE --------- ----- ---- /s/ ROCCO G. GENOVESE Vice Chairman, Chief Executive - ----------------------------- Officer and President (Principal March 23, 1999 Rocco G. Genovese Executive Officer) /s/ DAVID E. WORTHINGTON Treasurer, Vice President--Finance - ----------------------------- (Principal Financial and March 23, 1999 David E. Worthington Accounting Officer) /s/ REED C. WOLTHAUSEN Director - ----------------------------- March 23, 1999 Reed C. Wolthausen /s/ JOHN F. LEHMAN Director - ----------------------------- March 23, 1999 John F. Lehman /s/ DONALD GLICKMAN Director - ----------------------------- March 23, 1999 Donald Glickman /s/ GEORGE SAWYER Director - ----------------------------- March 23, 1999 George Sawyer /s/ KEITH OSTER Director - ----------------------------- March 23, 1999 Keith Oster /s/ OLIVER C. BOILEAU Director - ----------------------------- March 23, 1999 Oliver C. Boileau /s/ THOMAS G. POWNALL Director - ----------------------------- March 23, 1999 Thomas G. Pownall
II-1
SIGNATURE TITLE DATE --------- ----- ---- /s/ BRUCE D. GORCHOW Director - ----------------------------- March 23, 1999 Bruce D. Gorchow /s/ JOSEPH A. STROUD Director - ----------------------------- March 23, 1999 Joseph A. Stroud
II-2 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized in the City of San Jose, State of California on the 23rd day of March, 1999. BURKE FLOORING PRODUCTS, INC., a California corporation By: /s/ ROCCO C. GENOVESE --------------------- Rocco C. Genovese PRESIDENT Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ ROCCO G. GENOVESE President (Principal Executive Officer) - ----------------------------- March 23, 1999 Rocco G. Genovese /s/ DAVID E. WORTHINGTON Vice President--Finance (Principal - ----------------------------- Financial and Accounting Officer) March 23, 1999 David E. Worthington /s/ KEITH OSTER Director - ----------------------------- March 23, 1999 Keith Oster
II-3 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized in the City of San Jose, State of California on the 23rd day of March, 1999. BURKE RUBBER COMPANY, INC., a California corporation By: /s/ ROCCO C. GENOVESE --------------------- Rocco C. Genovese PRESIDENT Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ ROCCO G. GENOVESE President (Principal Executive Officer) - ----------------------------- March 23, 1999 Rocco G. Genovese /s/ DAVID E. WORTHINGTON Vice President--Finance (Principal - ----------------------------- Financial and Accounting Officer) March 23, 1999 David E. Worthington /s/ KEITH OSTER Director - ----------------------------- March 23, 1999 Keith Oster
II-4 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized in the City of San Jose, State of California on the 23rd day of March, 1999. BURKE CUSTOM PROCESSING, INC., a California corporation By: /s/ ROCCO C. GENOVESE --------------------- Rocco C. Genovese PRESIDENT Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ ROCCO G. GENOVESE President (Principal Executive Officer) - ----------------------------- March 23, 1999 Rocco G. Genovese /s/ DAVID E. WORTHINGTON Vice President--Finance (Principal - ----------------------------- Financial and Accounting Officer) March 23, 1999 David E. Worthington /s/ KEITH OSTER Director - ----------------------------- March 23, 1999 Keith Oster
II-5 EXHIBIT INDEX 1.1 Purchase Agreement, dated April 17, 1998 between the Company and the Initial Purchaser.(1) 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.(3) 3.2 Bylaws of the Company.(3) 3.3 Articles of Incorporation of Burke Flooring Products, Inc.(3) 3.4 Bylaws of Burke Flooring Products, Inc.(3) 3.5 Articles of Incorporation of Burke Rubber Company, Inc.(3) 3.6 Bylaws of Burke Rubber Company, Inc.(3) 3.7 Articles of Incorporation of Burke Custom Processing, Inc.(3) 3.8 Bylaws of Burke Custom Processing, Inc.(3) 3.9 Articles of Incorporation of Mercer Products Company, Inc.(1) 3.10 Bylaws of Mercer Products Company, Inc.(1) 4.1 Indenture among the Company, the Subsidiary Guarantors and United States Trust Company of New York, relating to the Floating-Rate Notes, dated as of April 21, 1998.(1) 4.2 First Supplemental Indenture, dated April 21, 1998, between the Company, the Subsidiary Guarantors and United States Trust Company of New York.(1) 4.3 Form of Note (included in Exhibit 4.1).(1) 4.4 Registration Rights Agreement, dated April 21, 1998, between the Company and the Holders.(1) 10.1 Purchase Agreement, dated August 14, 1997, between the Company and the Initial Purchaser.(3) 10.2 Agreement and Plan of Merger, dated as of August 13, 1997, by and among the Company, the Company Shareholders, JFLEI and Merger Co.(3) 10.3 Indenture among the Company, the Subsidiary Guarantors and United States Trust Company of New York, relating to the Fixed Rate Notes, dated as of August 20, 1997.(3) 10.4 Registration Rights Agreement, dated August 20, 1997, between the Company and the Fixed Rate Note Holders.(3) 10.5 Loan and Security Agreement, dated as of August 20, 1997, between the Company, the Lenders and NationsBank, N.A.(3) 10.6 Amendment No. 1, Waiver Joinder Agreement to Loan Security Agreement, dated April 21, 1998, between the Company, Mercer and NationsBank, N.A. (1) 10.7 Form of Revolving Notes (included in Exhibit 10.6). (1) 10.8 Subsidiary Guaranty, dated August 20, 1997, between the Company and the Subsidiaries.(3) 10.9 Subsidiary Security Agreement, dated as of August 20, 1997, between the Company and the Subsidiaries.(3) 10.10 Assignment for Security, dated April 21, 1998, by Mercer.(1) 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.(1) 10.12 Florida Mortgage, Security Agreement and Assignment of Leases and Rents, dated April 21, 1998, between Mercer and NationsBank, N.A. (unrecorded)(1) 10.13 Stock Pledge Agreement, dated August 20, 1997.(3) 10.14 Pledge Agreement, dated April 21, 1998, between the Company and NationsBank, N.A.(1) 10.15 Consent Solicitation Statement dated March 30, 1998.(1) 10.16 Form of Consent to Amendments to Indenture.(1) 10.17 Investment Agreement, dated as of August 20, 1997, between the Company and preferred shareholders.(3) 10.18 Shareholders' Agreement, dated as of August 20, 1997, between the Company and the shareholders.(3) 10.19 Shareholders' Registration Rights Agreement, dated as of August 20, 1997, between the Company and the shareholders.(3) 10.20 Warrantholders' Registration Rights Agreement dated as of August 20, 1997, between the Company and the warrantholders.(3) 10.21 Form of Warrant Certificate.(3) 10.22 Form of Election Form for Series C Preferred Stock.(1) 10.23 Management Agreement, dated August 20, 1997, between the Company and J.F. Lehman & Company.(3) 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.(3) 10.25 Lease Agreement, dated May 1, 1996, between the Company and SSMRT Bensonville Industrial Park (3), Inc. for the premises at 870 Thomas Drive, Bensonville, Illinois.(3) 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.(3) 10.27 Lease Agreement, dated April 25, 1983, between the Company and Donald M. Hypes for the premises at 14910 Carmenita Boulevard, Norwalk, CA.(3) 10.28 Lease Agreement, dated March 29, 1996, between S & M Development Co., a general partnership, for the premises at 13615 Excelsior Drive, Santa Fe Springs, CA.(3) 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.(3) 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.(1) 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.(1) 10.32 Sublease Agreement, dated February 20, 1992, between Burke Rubber Company for the premises at 107 South Riverside Drive, Modesto, CA.(3) 10.33 Servicing Agreement, dated April 26, 1996, between the Company and Westland Technologies.(3) 10.34 Amendment No. 1 to the Stock Purchase Agreement, dated April 21, 1998, among Burke, Sovereign and Mercer. 10.35 Lease Agreement, dated April 15, 1998, between Robert Steele, et al and the Company, for the premises at 10039 Norwalk Boulevard, Santa Fe Springs, CA. 10.36 Management Services Agreement, dated as of June 18, 1998, between the Company and J.F. Lehman & Company. 10.37 Amendment No. 1 to Management Agreement between the Company and J.F. Lehman & Company, dated as of June 18, 1998. 10.38 Burke Industries, Inc. Deferred Compensation Plan. 10.39 Burke Industries, Inc. 1997 Stock Option Plan. 12.1 Computation of Ratios of Earnings to Fixed Charges and Combined Fixed Charges and Preferred Stock Dividends. 21.1 Subsidiaries of the Company. 27. Financial Data Schedule. - ------------------------ (1) Incorporated by reference to the registrant's Registration Statement on Form S-4, File No. 333-36675, as filed with the Securities and Exchange Commission on June 19, 1998. (2) Incorporated by reference to the Company's 1997 annual report on Form 10-K, File No. 333-36675, as filed with the Securities and Exchange Commission on April 2, 1998. (3) Incorporated by reference to the registrant's Registration Statement on Form S-4, File No. 333-36675, as filed with the Securities and Exchange Commission on September 29, 1997, as amended. EX-10.34 2 EXHIBIT 10.34 AMENDMENT NO. 1 TO STOCK PURCHASE AGREEMENT This Amendment No. 1 to the Stock Purchase Agreement (this "Amendment") is made and entered into as of April 21, 1998 by and among Burke Industries, Inc. ("Buyer"), Sovereign Specialty Chemicals, Inc. ("Seller") and Mercer Products Company, Inc. ("Mercer"). Except as otherwise provided herein, capitalized terms used herein will have the meanings ascribed to them in the Stock Purchase Agreement (as defined below). WITNESSETH WHEREAS, Buyer, Seller and Mercer entered into that certain Stock Purchase Agreement dated as of March 5, 1998 (the "Agreement"), pursuant to which Buyer agreed, among other things, to acquire all of the capital stock of Mercer from Seller; WHEREAS, pursuant to the Agreement, the parties agreed upon a Working Capital Target in the amount of $3,500,000, which represented the average of Mercer's Net Working Capital of $3,776,000 at September 30, 1997 and Mercer's Net Working Capital of $3,258,000 at December 31, 1997, rounded to the nearest hundred thousand dollars; WHEREAS, for the purposes of the Working Capital Target calculation, the parties did not include accrued interest in the calculation of Mercer's Net Working Capital of $3,776,000 at September 30, 1997; WHEREAS, for the purposes of the Working Capital Target calculation, the parties included $358,000 in accrued interest in the calculation of Mercer's Net Working Capital of $3,258,000 at December 31, 1997; WHEREAS, for the purposes of the Working Capital Target calculation, the parties agree to exclude the accrued interest of $358,000 as of December 31, 1997; WHEREAS, for the purposes of the Working Capital Target calculation, the amount of Mercer's Net Working Capital at December 31, 1997, excluding the $358,000 of accrued interest, should have been $3,616,000 ($3,258,000 + $358,000); WHEREAS, pursuant to Sections 2(c) and 2(g) of the Agreement, the parties used the estimated $3,500,000 Working Capital Target as a benchmark to establish the Net Working Capital adjustment thresholds at $3,400,000 to $3,600,000, representing $100,000 above and $100,000 below the estimated Working Capital Target of $3,500,000 (the average of $3,776,000 and $3,258,000); WHEREAS, the parties now desire to amend the Agreement to make the Working Capital Target equal to $3,700,000, reflecting the rounded average of Mercer's Net Working Capital of $3,776,000 at September 30, 1997 and Mercer's Net Working Capital of $3,616,000 at December 31, 1997; WHEREAS, the parties also desire to amend Sections 2(c) and 2(g) of the Agreement to establish the Net Working Capital thresholds at $3,600,000 to $3,800,000, representing $100,000 above and $100,000 below the amended estimated Working Capital Target of $3,700,000; WHEREAS, Section 8(b)(i) of the Agreement presently provides, in part, that Seller will be obligated to indemnify Buyer from and against all aggregate losses in excess of $25,000 resulting from any breach of any representation or warranty of Seller contained in Section 4 of the Agreement that causes Buyer to suffer aggregate losses in excess of a $250,000 threshold; WHEREAS, the parties now desire to amend Section 8(b)(i) of the Agreement to provide that Seller will be obligated to indemnify Buyer from and against all aggregate losses in excess of $100,000 resulting from any such breach; WHEREAS, the parties desire to amend the Agreement to add a new Section 8(b)(vii) to the Agreement pursuant to which Seller will indemnify Buyer, its successors, and successors in interest, from and against the entirety of any Adverse Consequences the Buyer, its successors, and successors in interest may suffer resulting from, arising out of, or relating to liability attributable to any and all claims made by Mrs. Sukie George against Mercer or any of its affiliates relating to, among other things, alleged employment discrimination and retaliation by Mercer or any of its affiliates prior to the Closing Date; and WHEREAS, the parties desire to amend Section 8(c) of the Agreement to add a new sentence at the end of Section 8(c) pursuant to which Buyer will indemnify Seller, its successors, and successors in interest, from and against the entirety of any Adverse Consequences the Seller, its successors, and successors in interest may suffer resulting from, arising out of, or relating to liability attributable to any and all claims by RTC Properties, Inc. against the Seller in relation to the additional security deposit of $25,000 which Seller will provide in connection with the assignment of that certain lease between RTC Properties, Inc. and Mercer Products Co., Inc., dated December 1, 1988, as amended by the Fourth Amendment of Lease, dated April __, 1998. NOW, THEREFORE, BE IT RESOLVED, that in consideration of the premises herein contained and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: AGREEMENT 1. The definition of Working Capital Target in the Agreement is hereby amended and restated in its entirety to read as follows: "'Working Capital Target' means $3,700,000." 2. The references to $3,400,000 and $3,600,000 in the first sentence of Section 2(c) and in all instances where they appear in Section 2(g) are hereby amended and restated to be $3,600,000 and $3,800,000, respectively. 3. The reference to $25,000 in the second proviso of Clause (A) of Section 8(b)(i) is hereby amended and restated to be $100,000. 4. A new Section 8(b)(vii) shall be added to the Agreement which will read as follows: "Seller shall be liable for, and hereby agrees to indemnify the Buyer, its successors, and successors in interest, from and against the entirety of any Adverse Consequences the Buyer, its successors, and successors in interest may suffer resulting from, arising out of, or relating to liability attributable to any and all claims made by Mrs. Sukie George against Mercer or any of its affiliates relating to, among other things, alleged employment discrimination and retaliation by Mercer or any of its affiliates prior to the Closing Date. The indemnification contained in this Section 8(b)(vii) shall not be subject to the two provisos contained in Section 8(b)(i)." 5. One new sentences shall be added to the end of Section 8(c) which will read as follows: "Buyer shall be liable for, and agrees to indemnify Seller, its successors, and successors in interest, from and against the entirety of any Adverse Consequences the Seller, its successors, and successors in interest may suffer resulting from, arising out of, or relating to liability attributable to any and all claims by RTC Properties, Inc. against the Seller in relation to the additional security deposit of $25,000 which Seller will provide in connection with the assignment of that certain lease between RTC Properties, Inc. and Mercer Products Co., Inc., dated December 1, 1988, as amended by the Fourth Amendment of Lease, dated April __, 1998." 6. This Amendment may be executed in one or more counterparts, all of which will constitute one and the same instrument. 7. Except as amended hereby, the Agreement shall continue in full force and effect. IN WITNESS WHEREOF, each of the parties hereto has executed this Amendment as of the date first above written. BUYER: BURKE INDUSTRIES, INC. By: /s/ DAVID E. WORTHINGTON -------------------------------------------- David E. Worthington, Vice-President SELLER: SOVEREIGN SPECIALTY CHEMICALS, INC. By: /s/ ROBERT B. COVALT -------------------------------------------- Robert B. Covalt, President, Chairman & CEO MERCER: MERCER PRODUCTS COMPANY, INC. By: /s/ ROBERT B. COVALT -------------------------------------------- Robert B. Covalt, Chairman EX-10.35 3 EXHIBIT 10.35 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, April 15, 1998, is made by and between Robert Steele, et al ("LESSOR") and Burke Industries, Inc., A California Corporation ("LESSEE"), (collectively the "PARTIES," or individually a "PARTY"). 1.2 PREMISES: That certain real property, including all improvements therein or to be provided by Lessor under the terms of this Lease, and commonly known as 10039 Norwalk Blvd. Santa Fe Springs, located in the County of Los Angeles, State of California, and generally described as (describe briefly the nature of the property and, if applicable, the "PROJECT", if the property is located within a Project) that approximately 56,068 square feet building situated on approximately 111,474 square feet of land and as shown on Exhibit "A" attached ("PREMISES"). (See also Paragraph 2) 1.3 TERM: 5 years and 2 months ("ORIGINAL TERM") commencing May 1, 1998 ("COMMENCEMENT DATE") and ending June 30, 2003 ("EXPIRATION DATE"). (See also Paragraph 3) 1.4 EARLY POSSESSION: upon lease execution ("EARLY POSSESSION DATE"). (See also Paragraphs 3.2 and 3.3) 1.5 BASE RENT: $20,184.48 per month ("BASE RENT"), payable on the 1st day of each month commencing May 1, 1998 (See also Paragraph 4) / / If this box is checked, there are provisions in this Lease for the Base Rent to be adjusted and/or for common area maintenance charges. 1.6 BASE RENT PAID UPON EXECUTION: $20,184.48 as Base Rent for the period July 1998. 1.7 SECURITY DEPOSIT: $20,184.48 ("SECURITY DEPOSIT"). (See also Paragraph 5) 1.8 AGREED USE: Manufacturing, warehousing, sales, administration, storage and distribution of custom molded elastomeric products, and hose extrusions. (See also Paragraph 6) 1.9 INSURING PARTY: Lessor is the "INSURING PARTY". The annual "BASE PREMIUM" is $6,600. (See also Paragraph 8) with evidence of premium invoice provided to Lessee. 1.10 REAL ESTATE BROKERS: (See also Paragraph 15) (a) REPRESENTATION: The following real estate brokers (collectively, the "BROKERS") and brokerage relationships exist in this transaction (check applicable boxes): /X/ CB Commercial represents Lessor exclusively ("LESSOR'S BROKER"); /X/ The Seeley Company represents Lessee exclusively ("LESSEE'S BROKER"); or / / _________________________ represents both Lessor and Lessee ("DUAL AGENCY"). (b) PAYMENT TO BROKERS: Upon execution and delivery of this Lease by both Parties, Lessor shall pay to the Broker the fee agreed to in their separate written agreement (or if there is no such agreement, the sum of __________________% of the total Base Rent for the brokerage services rendered by said Broker). 1.11 GUARANTOR. The obligations of the Lessee under this Lease are to be guaranteed by N/A ("GUARANTOR"). (See also Paragraph 37) 1.12 ADDENDA AND EXHIBITS. Attached hereto is an Addendum or Addenda consisting of Paragraphs 1 through 9 and Exhibit A & Exhibit B, 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 size set forth in this Lease, or that may have been used in calculating rental, is an approximation which the Parties agree is reasonable and the rental based thereon is not subject to revision whether or not the actual size is more or less. 2.2 CONDITION. Lessor shall deliver the Premises broom clean and free of debris on the Commencement Date or the Early Possession Date, whichever first occurs ("START DATE"), and warrants that the existing electrical, plumbing, fire sprinkler system, lighting, heating, ventilating and air conditioning systems ("HVAC"), loading doors, if any, and all other such elements of the building, in the Premises, other than those constructed by Lessee, shall be in good operating condition on said date and that the surface and structural elements of the roof, bearing walls and foundation of any buildings on the Premises (the "BUILDING") shall be free of material defects. If a non-compliance with said warranty exists as of the Start 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, after the Start Date, Lessee does not give Lessor written notice of any non-compliance with this warranty within (i) six (6) months as to the HVAC systems or (ii) thirty (30) days as to the remaining systems and other elements of the Building, correction of such non-compliance shall be the obligation of Lessee at Lessee's sole cost and expense, except for the roof, foundations, and bearing walls which are handled as provided in paragraph 7. 2.3 COMPLIANCE. Lessor warrants that the improvements on the Premises comply with all applicable laws, covenants or restrictions of record, building codes, regulations and ordinances ("APPLICABLE REQUIREMENTS") in effect on the Start 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. NOTE: Lessee is responsible for determining whether or not the zoning is appropriate for Lessee's intended use, and acknowledges that past uses of the Premises may no longer be allowed. If the Premises do not comply with said warranty, Lessor shall, except as otherwise provided, 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 Start Date, correction of that non-compliance shall be the obligation of Lessee at Lessee's sole cost and expense. If the Applicable Requirements are hereafter changed (as opposed to being in existence at the Start Date, which is addressed in Paragraph 6.2(e) below) so as to require during the term of this Lease the construction of an addition to or an alteration of the Building, the remediation of any Hazardous Substance, or the reinforcement or other physical modification of the Building ("CAPITAL EXPENDITURE"), Lessor and Lessee shall allocate the cost of such work as follows: (a) Subject to Paragraph 2.3(c) below, if such Capital Expenditures are required as a result of the specific and unique use of the Premises by Lessee as compared with uses by tenants in general, Lessee shall be fully responsible for the cost thereof, provided, however that if such Capital Expenditure is required during the last two (2) years of this Lease and the cost thereof exceeds six (6) months' Base Rent, Lessee may instead terminate this Lease unless Lessor notifies Lessee, in writing, within ten (10) days after receipt of Lessee's termination notice that Lessor has elected to pay the difference between the actual cost hereof and the amount equal to six (6) months' Base Rent. If Lessee elects termination, Lessee shall immediately cease the use of the Premises which requires such Capital Expenditure and deliver to Lessor written notice specifying a termination date at least ninety (90) days thereafter. Such termination date shall, however, in no event be earlier than the last day that Lessee could legally utilize the Premises without commencing such Capital Expenditure. (b) If such Capital Expenditure is not the result of the specific and unique use of the Premises by Lessee (such as, governmentally mandated seismic modifications), then Lessor and Lessee shall allocate the obligation to pay for such costs pursuant to the provisions of Paragraph 7.1(c); provided, however, that if such Capital Expenditure is required during the last two years of this Lease or if Lessor reasonably determines that it is not economically feasible to pay its share thereof, Lessor shall have the option to terminate this Lease upon ninety (90) days prior written notice to Lessee unless Lessee notifies Lessor, in writing, within ten (10) days after receipt of Lessor's termination notice that Lessee will pay for such Capital Expenditure. If Lessor does not elect to terminate, and fails to tender its share of any Capital Expenditure, Lessee may advance such funds and deduct same, with interest from Rent until Lessor's share of such costs have been fully paid. If Lessee is unable to finance Lessor's share, or if the balance of the Rent due and payable for the remainder of this Lease is not sufficient to fully reimburse Lessee on an offset basis, Lessee shall have the right to terminate this Lease upon thirty (30) days written notice to Lessor. (c) Notwithstanding the above, the provisions concerning Capital Expenditures are intended to apply only to non-voluntary, unexpected, and new Applicable Requirements. If the Capital Expenditures are instead triggered by Lessee as a result of an actual or proposed change in use, change in intensity of use, or modification of the Premises then, and in that event, Lessee shall be fully responsible for the cost thereof, and Lessee shall not have any right to terminate this Lease. 2 2.4 ACKNOWLEDGMENTS. Lessee acknowledges that: (a) it has been advised by the Lessor and/or Brokers to satisfy itself with respect to the condition of the Premises (including but not limited to the electrical, HVAC and fire sprinkler systems, security, environmental aspects, and compliance with Applicable Requirements) and their suitability for Lessee's intended use; (b) Lessee has made such investigation as it deems necessary with reference to such matters and assumes all responsibility therefor as the same relate to its occupancy of the Premises; and (c) neither Lessor, Lessor's agents, nor any Broker has made any oral or written representations or warranties with respect to the said matters other than as set forth in this Lease. In addition, Lessor acknowledges that: (a) Broker has made no representations, promises or warranties concerning Lessee's ability to honor the Lease or suitability to occupy the Premises; and (b) it is Lessor's sole responsibility to investigate the financial capability and/or suitability of all proposed tenants. 2.5 LESSEE AS PRIOR OWNER/OCCUPANT. The warranties made by Lessor in this Paragraph 2 shall be of no force or effect if immediately prior to the Start Date Lessee was the owner or occupant of the Premises. In such event, Lessee shall be responsibly for any necessary corrective work. 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 shall, however be in effect during such period. Any such early possession shall not affect the Expiration Date. 3.3 DELAY IN POSSESSION. Lessor agrees to use its best commercially reasonable efforts to deliver possession of the Premises to Lessee by the Commencement Date. If, despite said efforts, Lessor is unable to deliver possession as agreed, Lessor shall not be subject to any liability therefor, nor shall such failure affect the validity of this Lease. Lessee shall not, however, be obligated to pay Rent or perform any other obligation until it receives possession of the Premises. If possession is not delivered within sixty (60) days after the Commencement Date, Lessee may, at its option, by notice in writing within ten (10) days after the end of such sixty (60) day period, cancel this Lease, in which event the Parties shall be discharged from all obligations hereunder. If such written notice is not received by Lessor within said ten (10) day period, Lessee's right to cancel shall terminate. Except as otherwise provided, if possession is not tendered to Lessee by the Start Date and Lessee does not terminate this Lease, as aforesaid, any period of rent abatement 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. If possession of the Premises is not delivered within four (4) months after the Commencement Date, this Lease shall terminate unless other agreements are reached between Lessor and Lessee in writing. 3.4 LESSEE COMPLIANCE. Lessor shall not be required to tender possession of the Premises to Lessee until Lessee complies with its obligation to provide evidence of insurance (Paragraph 8.5). Pending delivery of such evidence, Lessee shall be required to perform all of its obligations under this Lease from and after the Start Date, including the payment of Rent, notwithstanding Lessor's election to withhold procession pending receipt of such evidence of insurance. Further, if Lessee is required to perform any other conditions prior to or concurrent with the Start Date, the Start Date shall occur but Lessor may elect to withhold possession until such conditions are satisfied. 4. RENT. 4.1 RENT DEFINED. All monetary obligations of Lessee to Lessor under the terms of this Lease (except for the Security Deposit) are deemed to be rent ("Rent"). 4.2 PAYMENT. Lessee shall cause payment of Rent to be received by Lessor in lawful money of the United States, without offset or deduction (except as specifically permitted in this Lease), on or before the day on which it is due. Rent 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 said month. Payment of Rent shall be made to Lessor at its address stated herein or to such other persons or place as Lessor may from time to time designate in writing. Acceptance of a payment which is less than the amount then due shall not be a waiver of Lessor's rights to the balance of such Rent, regardless of Lessor's endorsement of any check so stating. 5. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon execution hereof the Security Deposit as security for Lessee's faithful performance of its obligations under this Lease. If Lessee fails to pay Rent or 3 otherwise Defaults under this Lease, 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, expense, loss or damage 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 monies with Lessor sufficient to restore said Security Deposit to the full amount required by this Lease. If the Base Rent increases during the term of this Lease, Lessee shall, upon written request from Lessor, deposit additional monies with Lessor so that the total amount of the Security Deposit shall at all times bear the same proportion to the increase Base Rent as the initial Security Deposit bore to the initial Base Rent. Should the Agreed Use be amended to accommodate a material change in the business of Lessee or to accommodate a sublessee or assignee, Lessor shall have the right to increase the Security Deposit to the extent necessary, in Lessor's reasonable judgment, to account for any increased wear and tear that the Premises may suffer as a result thereof. If a change in control of Lessee occurs during this Lease and following such change the financial condition of Lessee is, in Lessor's reasonable judgment, significantly reduced, Lessee shall deposit such additional monies with Lessor as shall be sufficient to cause the Security Deposit to be at a commercially reasonable level based on said change in financial condition. Lessor shall not be required to keep the Security Deposit separate from its general accounts. Within fourteen (14) days after the expiration or termination of this Lease, if Lessor elects to apply the Security Deposit only to unpaid Rent, and otherwise within thirty (30) days after the Premises have been vacated pursuant to Paragraph 7.4(c) below, Lessor shall return that portion of the Security Deposit not used or applied by Lessor. No part of the Security Deposit shall be considered to be held in trust, to bear interest or to be prepayment for any monies to be paid by Lessee under this Lease. 6. USE. 6.1 USE. Lessee shall use and occupy the Premises only for the Agreed Use, or any other legal use which is reasonably comparable thereto, and for no other purpose. Lessee shall not use or permit the use of the Premises in a manner that is unlawful, creates damage, waste or a nuisance, or that disturbs owners and/or occupants of, or causes damage to neighboring properties. Lessor shall not unreasonably withhold or delay its consent to any written request for a modification of the Agreed Use, so long as the same will not impair the structural integrity of the improvements on the Premises or the mechanical or electrical systems therein, or is not significantly more burdensome to the Premises. If Lessor elects to withhold consent, Lessor shall within five (5) business days after such request give written notification of same, which notice shall include an explanation of Lessor's reasonable objections to the change in use. 6.2 HAZARDOUS SUBSTANCES. See Addendum Paragraph 9. (a) REPORTABLE USES REQUIRE CONSENT. The term "HAZARDOUS SUBSTANCE" as used in this Lease shall mean any product, 6.3 LESSEE'S COMPLIANCE WITH APPLICABLE REQUIREMENTS. Except as otherwise provided in this Lease, Lessee shall, at Lessee's sole expense, fully, diligently and in a timely manner, materially comply with all Applicable Requirements, the requirements of any applicable fire insurance underwriter or rating bureau, and the reasonable recommendations of Lessor's engineers and/or consultants which relate in any manner to the Premises, without regard to whether said requirements are not in effect or become effective after the Start Date. Lessee shall, within ten (10) days after receipt of Lessor's written request, provide Lessor with copies of all permits and other documents, and other information evidencing Lessee's compliance with any Applicable Requirements 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 Requirements. 6.4 INSPECTION; COMPLIANCE. Lessor and Lessor's "Lender" (as defined in Paragraph 30 below) and consultants shall have the right to enter into 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. The cost of any such inspections shall be paid by Lessor, unless a violation of Applicable Requirements, or a contamination is found to exist or be imminent, or the inspection is requested or ordered by a governmental authority. In any such case, Lessee shall upon request reimburse Lessor for the cost of such inspections, so long as such inspection is reasonably related to the violation or contamination. 7. MAINTENANCE; REPAIRS; UTILITY INSTALLATIONS; TRADE FIXTURES AND ALTERATIONS. 7.1 LESSEE'S OBLIGATIONS. (a) IN GENERAL. Subject to the provisions of Paragraphs 2.2 (Condition), 2.3 (Compliance with Covenants, Restrictions and Building Code), 6.3 (Lessee's Compliance with Applicable Requirements), 7.2 (Lessor's Obligations), 9 (Damage and Destruction), and 14 (Condemnation), Lessee shall, at Lessee's sole 4 expense, keep the Premises, Utility Installations, and Alterations in good order, condition and repair (whether or not the portion of the Premises requiring repairs, or the means of repairing the same, are reasonably or readily accessible to Lessee, and whether or not the need for such repairs occurs as a result of Lessee's use, any prior use, the elements or the age of such portion of the Premises), including, but not limited to, all equipment or facilities, such as plumbing, heating, ventilating, air conditioning, ventilating, electrical, lighting facilities, boilers, pressure vessels, fire protection system, fixtures, walls (interior and exterior), ceilings, roofs, floors, windows, doors, skylights, landscaping, driveways, parking lots, fences, signs, sidewalks and parkways located in, on, or adjacent to the Premises. Lessee is also responsible for keeping the roof and roof drainage clean and free of debris. Lessor shall keep the surface and structural elements of the roof, foundations and bearing walls in good repair (see paragraph 7.2). Lessee, in keeping the Premises in good order, condition and repair, shall exercise and perform good maintenance practices. Lessee's obligations shall include restorations, replacements or renewals when necessary to keep the Premises and all improvements thereon or a part thereof in good order, condition and state of repair. Lessee shall, during the term of this Lease, keep the exterior appearance of the Building in a first-class condition (including, e.g., graffiti removal) consistent with the exterior appearance of other similar facilities of comparable age and size in the vicinity, including, when necessary, the exterior repainting of the Building. Lessee will not be required to paint the building exterior more frequently than every five (5) years. (b) SERVICE CONTRACTS. Lessee shall, at Lessee's sole expense, procure and maintain contracts, with copies to Lessor, in customary form and substance for, and with contractors specializing and experienced in the maintenance of the following equipment and improvements ("Basic Elements"), if any, if and when installed on the Premises: (i) HVAC equipment, (ii) boiler and pressure vessels, (iii) fire extinguishing systems, including the fire alarm and/or smoke detection, (iv) landscaping and irrigation systems, (v) driveways and parking lots, (vi) clarifiers, (vii) basic utility feed to the perimeter of the Building, and (viii) any other equipment, if reasonably required by Lessor. (c) REPLACEMENT. Subject to Lessee's indemnification of Lessor as set forth in Paragraph 8.7 below, and without relieving Lessee of liability resulting from Lessee's failure to exercise and perform good maintenance practices, if the Basic Elements described in Paragraph 7.1(b) cannot be repaired other than at a cost which is in excess of 50% of the cost of replacing such Basic Elements, then such Basic Elements shall be replaced by lessor, and the cost thereof shall be prorated between the Parties and Lessee shall only be obligated to pay, each month during the remainder of the term of this Lease, on the date on which Base Rent is due, an amount equal to the product of multiplying the cost of such replacement by a fraction, the numerator of which is one, and the denominator of which is the number of months of the useful life of such replacement as such useful life is specified pursuant to Federal income tax regulations or guidelines for depreciation thereof (including interest on the unamortized balance as is then commercially reasonable in the judgment of Lessor's accountants), with Lessee reserving the right to repay its obligation at any time. 7.2 LESSOR'S OBLIGATIONS. Subject to the provisions of Paragraphs 2.2 (Condition), 2.3 (Compliance with Covenants, Restrictions and Building Code), 9 (Damage or Destruction), and 14 (Condemnation), it is intended by the Parties hereto that Lessor have no obligation, in any manner whatsoever, to repair and maintain the Premises, or the equipment therein, all of which obligations are intended to be that of the Lessee, except for the surface and structural elements of the roof, foundation and bearing walls, the repair of which shall be the responsibility of Lessor upon receipt of notice that such a repair is necessary. 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, and they expressly waive the benefit of any statute now or hereafter in effect to the extent it is inconsistent with the terms of this Lease. 7.3 UTILITY INSTALLATIONS; TRADE FIXTURES; ALTERATIONS WHICH COST MORE THAN $25,000. (a) DEFINITIONS; CONSENT REQUIRED. The term "UTILITY INSTALLATIONS" refers to all floor and window coverings, air lines, power panels, electrical distribution, security and fire protection systems, communication systems, lighting fixtures, HVAC equipment, plumbing, and fencing in or on the Premises. The term "TRADE FIXTURES" shall mean Lessee's machinery and equipment that can be removed without doing material damage to the Premises. The term "ALTERATIONS" shall mean any modification of the improvements, 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 pursuant to Paragraph 7.4(a). Lessee shall not make any Alterations or Utility Installations to the Premises without Lessor's prior written consent. Lessee may, however, make non-structural Utility Installations to the interior of the Premises (excluding the roof) without such consent but upon notice to Lessor, 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 this Lease as extended does not exceed $150,000 in the aggregate or $25,000 per utility installation in any one year. 5 (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 detailed plan. Consent shall be deemed conditioned upon Lessee's: (i) acquiring all applicable governmental permits, (ii) furnishing Lessor with copies of such permits and the plans and specifications prior to commencement of the work, and (iii) compliance with all conditions of said permits and other Applicable Requirements in a prompt and expeditious manner. Any Alterations or Utility Installations shall be performed in a workmanlike manner with good and sufficient materials. Lessee shall promptly upon completion furnish Lessor with as-built plans and specifications. For work which costs an amount equal to the greater of one month's Base Rent, or $25,000, Lessor may condition its consent upon Lessee providing 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. (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. If Lessee shall contest the validity of any such lien, claim or demand, then Lessee shall, at its sole expense defend and protect itself, Lessor and the Premises against the same and shall pay and satisfy any such adverse judgment that may be rendered thereon before the enforcement thereof. If Lessor shall require, Lessee shall furnish a surety bond 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. If Lessor elects to participate in any such action, Lessee shall pay Lessor's attorneys' fees and costs. 7.4 OWNERSHIP; REMOVAL; SURRENDER, AND RESTORATION. (a) OWNERSHIP. Subject to Lessor's right to require removal or elect ownership as hereinafter provided, all Alterations and Utility Installations made by Lessee shall be the property of Lessee, but considered a part of the Premises. Lessor may, at any time, elect in writing 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 termination of this Lease, become the property of Lessor and be surrendered by Lessee with the Premises. (b) REMOVAL. By delivery to Lessee of written notice from Lessor not earlier than ninety (90) and not later than thirty (30) days prior to the end of the term of this Lease, Lessor may require that any or all Lessee Owned Alterations or Utility Installations be removed by the expiration or termination of this Lease. 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. (c) SURRENDER/RESTORATION. Lessee shall surrender the Premises by the Expiration Date or any earlier termination date, with all of the improvements, parts and surfaces thereof broom 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. Lessee shall repair any damage occasioned by the installation, maintenance or removal of Trade Fixtures, Lessee Owned Alterations and/or Utility Installations, furnishings and equipment 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 groundwater contaminated by Lessee. Trade Fixtures shall remain the property of Lessee and shall be removed by Lessee. The failure by Lessee to timely vacate the Premises pursuant to this Paragraph 7.4(c) without the express written consent of Lessor shall constitute a holdover under the provisions of Paragraph 26 below. 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 Paragraph 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 mortgage or deed of trust covering the Premises, increased valuation of the Premises and/or a premium rate increase. The parties are encouraged to fill in the Base Premium in Paragraph 1.9 with a reasonable premium for the Required Insurance based on the Agreed Use of the Premises. If the parties fail to insert a dollar amount in Paragraph 1.8, then the Base Premium shall be the lowest annual 6 premium reasonably obtainable for the Required Insurance as of the commencement of the Original Term for the Agreed Use of the Premises. In no event, however, shall Lessee be responsible for any portion of the increase in the premium cost attributable to liability insurance carried by Lessor under Paragraph 8.1(b) in excess of $2,000,000 per occurrence. (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 correspond to the term of this Lease. 8.2 LIABILITY INSURANCE. (a) CARRIED BY LESSEE. Lessee shall obtain and keep in force a Commercial General Liability Policy of Insurance protecting Lessee and Lessor against claims for bodily injury, personal injury and property damage based upon or arising out of the ownership, use, occupancy or maintenance of the Premises and all areas appurtenant thereto. Such insurance shall be on an occurrence basis providing single limit coverage in an amount not less than $2,000,000 per occurrence with an "Additional Insured-Managers or Lessors of Premises Endorsement" and contain the "Amendment of the Pollution Exclusion Endorsement" 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 shall not, however, limit the liability of Lessee nor relieve Lessee of any obligation hereunder. All insurance 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. Lessor shall maintain liability insurance as described in Paragraph 8.2(a) 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 a policy or policies in the name of Lessor, with loss payable to Lessor, any groundlessor, and to any 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 any Lenders, but in no event more than the commercially reasonable and available insurable value thereof. If Lessor is the Insuring Party, however, Lessee Owned Alterations and Utility Installations, Trade Fixtures, and Lessee's personal property shall be insured by Lessee under Paragraph 8.4 rather than by Lessor. 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 or included in the Base Premium), including coverage for debris removal and the enforcement of any Applicable Requirements requiring the upgrading, reconstruction or replacement of any portion of the Premises as the result of the covered loss. Said policy or policies shall also contain an agreed valuation provision in lieu of any coinsurance clause, waiver of subrogation, and inflation guard protection causing an increase in the annual property insurance coverage amount by a factor of not less than the adjusted U.S. Department of Labor Consumer Price Index for All Urban Consumers for the city nearest to where the Premises are located. (b) RENTAL VALUE. The Insuring Party shall obtain and keep in force a policy or policies in the name of Lessor, with loss payable to Lessor and any Lender, insuring the loss of the full Rent for one (1) year. 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 Rent 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 Rent otherwise payable by Lessee, for the next twelve (12) month period. (c) ADJACENT PREMISES. If the Premises are part of a larger building, or 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. 7 8.4 LESSEE'S PROPERTY/BUSINESS INTERRUPTION INSURANCE. (a) PROPERTY DAMAGE. Lessee shall obtain and maintain insurance coverage on all of Lessee's personal property, Trade Fixtures, and Lessee Owned Alterations and Utility Installations. Such insurance shall be full replacement cost coverage with a deductible of not to exceed $10,000 per occurrence. The proceeds from any such insurance shall be used by Lessee for the replacement of personal property, Trade Fixtures and Lessee Owned Alterations and Utility Installations. Lessee shall provide Lessor with written evidence that such insurance is in force. (b) BUSINESS INTERRUPTION. Lessee shall obtain and maintain loss of income and extra expense insurance in amounts as will reimburse Lessee for direct or indirect loss of earnings attributable to all perils commonly insured against by prudent lessees in the business of Lessee or attributable to prevention of access to the Premises as a result of such perils. (c) NO REPRESENTATION OF ADEQUATE COVERAGE. Lessor makes no representation that the limits or forms of coverage of insurance specified herein are adequate to cover Lessee's property, business operations or obligations under this Lease. 8.5 INSURANCE POLICIES. Insurance required hereunder shall be by companies duly licensed or admitted 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, as set forth in the most current issue of "Best's Insurance Guide," or such other rating as may be required by a Lender. Lessee shall not do or permit to be done anything which invalidates the required insurance policies. Lessee shall, prior to the Start Date, deliver to Lessor certified copies of policies of such insurance or certificates evidencing the existence and amounts of the required insurance. 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. Such policies shall be for a term of at least one year, or the length of the remaining term of this Lease, whichever is less. If either Party shall fail to procure and maintain the insurance required to be carried by it, the other Party may, but shall not be required to, procure and maintain the same. 8.6 WAIVER OF SUBROGATION. Without affecting any other rights or remedies, Lessee and Lessor each hereby release and relieve the other, and waive their entire right to recover damages against the other, for loss of or damage to its property arising out of or incident to the perils required to be insured against herein. The effect of such releases and waivers is not limited by the amount of insurance carried or required, or by any deductibles applicable thereto. The Parties agree to have their respective property damage insurance carriers waive any right to subrogation that such companies may have against Lessor or Lessee, as the case may be, so long as the insurance is not invalidated thereby. 8.7 INDEMNITY. Except for Lessor's negligence or willful misconduct, 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, liens, judgments, penalties, attorneys' and consultants' fees, expenses and/or liabilities arising out of, involving, or in connection with, the use and/or occupancy of the Premises by Lessee. If any action or proceeding is brought against Lessor by reason of any of the foregoing matters, Lessee shall upon notice 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 defended or 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, HVAC 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. 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. 8 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, Utility Installations and Trade Fixtures, which can reasonably be repaired in six (6) months or less from the date of the damage or destruction. Lessor shall notify Lessee in writing within thirty (30) days from the date of the damage or destruction as to whether or not the damage is Partial or Total. (b) "PREMISES TOTAL DESTRUCTION" shall mean damage or destruction to the Premises, other than Lessee Owned Alterations and Utility Installations and Trade Fixtures, which cannot reasonably be repaired in six (6) months or less from the date of the damage or destruction. Lessor shall notify Lessee in writing within thirty (30) days from the date of the damage or destruction as to whether or not the damage is Partial or Total. (c) "INSURED LOSS" shall mean damage or destruction to improvements on the Premises, other than Lessee Owned Alterations and Utility Installations and Trade Fixtures, 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 Requirements, and without deduction for depreciation. (e) HAZARDOUS SUBSTANCE CONDITION" shall mean the occurrence or discovery of a condition involving the presence of, or a contamination by, a Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the Premises. 9.2 PARTIAL DAMAGE -- INSURED LOSS. If a Premises Partial Damage that is an Insured Loss occurs, then Lessor shall, at Lessor's expense, repair such damage (but not Lessee's Trade Fixtures or Lessee Owned Alterations and Utility Installations) as soon as reasonably possible and this Lease shall continue in full force and effect; provided, however, that Lessee shall, at Lessor's election, make the repair of any damage or destruction the total cost to repair of which is $10,000 or less, and, in such event, Lessor shall make any applicable insurance proceeds available to Lessee on a reasonable basis for that purpose. Notwithstanding the foregoing, if the required insurance was not in force or the insurance proceeds are not sufficient to effect such repair, the Insuring Party shall promptly contribute the shortage in proceeds as and when required to complete said repairs. In the event, however, such shortage 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 such funds or assurance are not received, Lessor may nevertheless elect by written notice to Lessee within ten (10) days thereafter to: (i) 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; or (ii) have this Lease terminate thirty (30) days thereafter. Lessee shall not be entitled to reimbursement of 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, 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), Lessor may 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) terminate this Lease by giving written notice to Lessee within thirty (30) days after receipt by Lessor of knowledge of the occurrence of such damage. Such termination shall be effective sixty (60) days following the date of such notice. In the event Lessor elects to terminate this Lease, Lessee shall have the right within ten (10) days after the receipt of the termination notice to give written notice to Lessor of Lessee's commitment to pay for the repair of such damage without reimbursement from Lessor. Lessee shall provide Lessor with said funds or satisfactory assurance thereof within thirty (30) days after making such 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 after the required funds are 9 available. If Lessee does not make the required commitment, this Lease shall terminate as of the date specified in the termination notice. 9.4 TOTAL DESTRUCTION. Notwithstanding any other provision hereof, if a Premises Total Destruction occurs, this Lease shall terminate sixty (60) days following the date of such Destruction. If the damage or destruction was caused by gross negligence or willful misconduct of 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 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 terminate this Lease effective sixty (60) days following the date of occurrence of such damage by giving written termination notice to Lessee within thirty (30) days after the date of occurrence of such damage. Notwithstanding the foregoing, if Lessee at that time has an exercisable option to extend this Lease or to purchase the Premises, then Lessee may preserve this Lease by, (a) exercising such option and (b) providing Lessor with any shortage in insurance proceeds (or adequate assurance thereof) needed to make the repairs on or before the earlier of (i) the date which is ten days after Lessee's receipt of Lessor's written notice purporting to terminate this Lease, or (ii) the day prior to the date upon which such option expires. If Lessee duly exercises such option during such Period and provides Lessor with funds (or adequate assurance thereof) to cover any shortage in insurance proceeds, Lessor shall, at Lessor's commercially reasonable 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 such period, then this Lease shall terminate on the date specified in the termination notice and Lessee's option shall be extinguished. 9.6 ABATEMENT OF RENT; LESSEE'S REMEDIES. (a) ABATEMENT. In the event of Premises Partial Damage or Premises Total Destruction or a Hazardous Substance Condition for which Lessee is not responsible under this Lease, the Rent payable by Lessee for the period required for the repair, remediation or restoration of such damage shall be abated in proportion to the degree to which Lessee's use of the Premises is impaired, but not to exceed the proceeds received from the Rental Value insurance. All other obligations of Lessee hereunder shall be performed by Lessee, and Lessor shall have no liability for any such damage, destruction, remediation, repair or restoration except as provided herein. (b) REMEDIES. If Lessor shall be obligated to repair or restore the Premises and does not commence, in a substantial and meaningful way, such repair or restoration 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 and such repair or restoration is not commenced within thirty (30) days thereafter, this Lease shall terminate as of the date specified in said notice. If the repair or restoration is commenced within said thirty (30) days, this Lease shall continue in full force and effect. "COMMENCE" 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 TERMINATION -- ADVANCE PAYMENTS. Upon termination of this Lease pursuant to Paragraph 6.2(g) or 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. 9.8 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 DEFINITION OF "REAL PROPERTY TAXES." As used herein, the term "REAL PROPERTY TAXES" shall include any form of assessment; real estate, general, special, ordinary or extraordinary, or rental levy or tax (other than inheritance, personal income or estate taxes); improvement bond; and/or license fee imposed upon or levied against any legal or equitable interest of Lessor in the Premises, Lessor's right to other income therefrom, and/or Lessor's business of leasing, by any authority having the direct or indirect power to tax and where the funds are generated with reference to the Building address and where the proceeds so generated are to be applied by the city, county or other local taxing authority of a jurisdiction within which the Premises are located. The term "Real Property Taxes" shall also include any tax, fee, levy, assessment or charge, or any 10 increase therein, imposed by reason of events occurring during the term of this Lease, including but not limited to, a change in the ownership of the Premises. 10.2 (a) PAYMENT OF TAXES. Lessor shall pay the Real Property Taxes applicable to the Premises provided, however, that Lessee shall pay to Lessor the amount, if any, by which Real Property Taxes applicable to the Premises over the fiscal tax year during which the Commencement Date occurs ("Tax Increase"). Subject to Paragraph 10.2(b), payment of any such Tax Increase shall be made by Lessee to Lessor within thirty (30) days after receipt of Lessor's written statement setting forth the amount due and the computation thereof, if any such taxes shall cover any period of time prior to or after the expiration or termination of this Lease, Lessee's share of such taxes shall be prorated to cover only that portion of the tax bill applicable to the period that this Lease is in effect. (b) ADVANCE PAYMENT. In the event Lessee incurs a late charge on any Rent payment, Lessor may, at Lessor's option, estimate the current Real Property Taxes, and require that the Tax Increase 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 an amount equal to the amount of the estimated installment of the Tax Increase divided by the number of months remaining before the month in which said installment becomes delinquent. When the actual amount of the applicable Tax Increase is known, the amount of such equal monthly advance payments shall be adjusted as required to provide the funds needed to pay the applicable Tax Increase. If the amount collected by Lessor is insufficient to pay the Tax Increase when due, Lessee shall pay Lessor, upon demand, such additional sums as are necessary to pay such obligations. All monies paid to Lessor under this Paragraph may be intermingled with other monies of Lessor and shall not bear interest. In the event of a Breach by Lessee in the performance of its obligations under this Lease, then any balance of funds paid to Lessor under the provisions of this Paragraph may at the option of Lessor, be treated as an additional Security Deposit. (c) ADDITIONAL IMPROVEMENTS. Notwithstanding anything to the contrary in this Paragraph 10.2, 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. 10.3 JOINT ASSESSMENT. If the Premises are not separately assessed, Lessee's liability shall be an equitable proportion of the Tax Increase for all of the land and improvements included within the tax parcel assessed, such proportion to be conclusively determined by Lessor from the respective valuations assigned in the assessor's work sheets or such other information as may be reasonably available. 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. When possible, Lessee shall cause such 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's property within ten (10) days after receipt of a written statement. 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 changes jointly metered. 12. ASSIGNMENT AND SUBLETTING. 12.1 LESSOR'S CONSENT REQUIRED. (a) Lessee shall not voluntarily or by operation of law assign, transfer, mortgage or encumber (collectively, "ASSIGN OR ASSIGNMENT") or sublet all or any part of Lessee's interest in this Lease or in the Premises without Lessor's prior written consent. (b) A change in the control of Lessee shall constitute an assignment requiring consent. The transfer, on a cumulative basis, of fifty percent (50%) or more of the voting control of Lessee shall constitute a change in control for this purpose. 11 (c) The involvement of Lessee or its assets in any transaction, or series of transactions (by way of merger, sale, acquisition, financing, transfer, leveraged buy-out or otherwise), whether or not a formal assignment or hypothecation of this Lease or Lessee's assets occurs, which results or will result in a reduction of the Net Worth of Lessee by an amount greater than fifty percent (50%) of such Net Worth as it was represented at the time of the execution 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, whichever was or is greater, shall be considered an assignment of this Lease to which Lessor may withhold its consent. "NET WORTH OF LESSEE" shall mean the net worth of Lessee (excluding any guarantors) established under generally accepted accounting principles. (d) An assignment or subletting without 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 unapproved assignment or subletting as a noncurable Breach, Lessor may either: (i) terminate this Lease, or (ii) upon thirty (30) days' written notice, increase the monthly Base Rent to one hundred ten percent (110%) of the Base Rent then in effect. Further, in the event of such Breach and rental adjustments, (i) the purchase price of any option to purchase the Premises held by Lessee shall be subject to similar adjustment to one hundred ten percent (110%) of the price previously in effect, and (ii) all fixed and non-fixed rental adjustment scheduled during the remainder of the Lease term shall be increased to One Hundred Ten Percent (110%) of the scheduled adjusted rent. (e) Lessee's remedy for any breach of this Paragraph 12.1 by Lessor shall be limited to compensatory damages and/or 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 Rent or for the performance of any other obligations to be performed by Lessee. (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 Rent or performance shall constitute a waiver or estoppel of Lessor's right to exercise its remedies for Lessee's Default or Breach. (c) Lessor's consent to any assignment or subletting shall not constitute a consent to any subsequent assignment or subletting. (d) In the event of any Default or Breach by Lessee, Lessor may proceed directly against Lessee, any Guarantors or anyone else responsible for the performance of the Lessee's obligations under this Lease, including any assignee or sublessee, without first exhausting Lessor's remedies against any other person or entity responsible therefor to Lessor, or any security held by Lessor. (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 fee of $1,000 or ten percent (10%) of the current monthly Base Rent applicable to the portion of the Premises which is the subject of the proposed assignment or sublease, whichever is greater, as consideration for Lessor's considering and processing said request. Lessee agrees to provide Lessor with such other or additional information and/or documentation as may be reasonably requested. (f) Any assignee of, or sublessee under, this Lease shall, by reason of accepting such assignment or entering into such sublease, be deemed 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. 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 Rent payable on any sublease, and Lessor may collect such Rent and apply same toward Lessee's obligations under this 12 Lease; provided, however, that until a Breach shall occur in the performance of Lessee's obligation, Lessee may collect said Rent. Lessor shall not, by reason of the foregoing or any assignment of such sublease, nor by reason of the collection of Rent, be deemed liable to the sublessee for any failure of Lessee to perform and comply with any of lessee's obligations to such sublessee, Lessee hereby irrevocably authorizes and directs any such sublessee, upon receipt of a written notice front Lessor stating that a Breach exists in the performance of Lessee's obligations under this Lease, to pay to Lessor all Rent due and to become due under the sublease. Sublessee shall rely upon any such notice from Lessor and shall pay all Rents to Lessor without any obligation or right to inquire as to whether such Breach exists, notwithstanding any claim from Lessee to the contrary. (b) In the event of a Breach by Lessee, Lessor may, at is option, require sublessee to attorn to Lesser, 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 prior Defaults or Breaches of such sublessor. (c) Any matter requiring the consent of the sublessor under a sublease shall also require the consent of Lessor. (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. A "DEFAULT" is defined as a failure by the Lessee to comply with or perform any of the terms, covenants, conditions or rules under this Lease. A "BREACH" is defined as the occurrence of one or more of the following Defaults, and the failure of Lessee to cure such Default within any applicable grace period: (a) The abandonment of the Premises; or the vacating of the Premises without providing a commercially reasonable level of security, and/or Security Deposit or where the coverage of the property insurance described in Paragraph 8.3 is jeopardized as a result thereof, or without providing reasonable assurances to minimize potential vandalism. (b) The failure of Lessee to make any payment of Rent or any Security Deposit required to be made by Lessee hereunder, whether to Lessor or to a third party, when due, to provide reasonable evidence of insurance or surety bond, or to fulfill any obligation under this Lease which endangers or threatens life or property, where such failure continues for a period of five (5) business days following written notice to Lessee. (c) The failure by Lessee to provide (i) reasonable written evidence of compliance with Applicable Requirements, (ii) the service contracts, (iii) the rescission of an unauthorized assignment or subletting, (iv) an Estoppel Certificate, (v) a requested subordination, (vi) evidence concerning any guaranty and/or Guarantor, (vii) 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 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, other than those described in subparagraphs 13.1(a), (b) or (c), above, where such Default continues for a period of thirty (30) days after written notice; provided, however, that if the nature of Lessee's Default is such that more than thirty (30) days are reasonably inquired for its cure, then it shall not be deemed to be a Breach 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 of any general arrangement or assignment for the benefit of creditors; (ii) becoming a "DEBTOR" as defined in 11 U.S.C. Section 101 or any successor statute thereto (unless, in the case of a petition filed against Lessee, the same is dismissed within sixty (60) days); (iii) the appointment of a trustee or receiver to take possession of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where possession is not restored to Lessee within thirty (30) days; or (iv) the attachment, execution or other judicial seizure of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where such seizure is not discharged 13 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 that any financial statement of lessee or of any Guarantor given to Lessor 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 term 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 basis, and Lessee's failure, within sixty (60) days following written notice of any such event, to provide written alternative assurance or security, which, when coupled with the then existing resources of Lessee, equals or exceeds the combined 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 of its affirmative duties or obligations due to insufficient funds, within ten (10) days after written notice (or in case of an emergency, without notice), Lessor may, at its option, 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 upon receipt of 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 by Lessee to be by cashier's check. In the event of a Breach, Lessor may, 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: (a) Terminate Lessee's right to possession of the Premises by any lawful means, in which case this Lease shall terminate and Lessee shall immediately surrender possession to Lessor. In such event Lessor shall be entitled to recover from Lessee: (i) the unpaid Rent which had been earned at the time of termination; (ii) the worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that the Lessee proves could have been reasonably avoided; (iii) the worth at the time of award of the amount by 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 Lessee's failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom, including but not limited to the cost of recovering possession of the Premises, expenses of reletting, including necessary renovation and alteration of the Premises, reasonable attorneys' fees, and that portion of any leasing commission paid by Lessor in connection with this Lease 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 immediately preceding sentence shall be computed by discounting such amount at the discount rate of the Federal Reserve Bank of the District within which the Premises are located at the time of award plus one percent (1%). Efforts by Lessor to mitigate damages caused by Lessee's Breach of this Lease shall not waive Lessor's right to recover damages under Paragraph 12. If termination of this Lease is obtained through the provisional remedy of unlawful detainer, Lessor shall have the right to recover in such proceeding any unpaid Rent and damages as are recoverable therein, or Lessor may reserve the right to recover all or any part thereof in a separate suit. If a notice and grace period required under Paragraph 13.1 was not previously given, a notice to pay rent or quit, or to perform or quit given to Lessee under the unlawful detainer statute shall also constitute the notice required by Paragraph 13.1. In such case, the applicable grace period required by Paragraph 13.1 and the unlawful detainer statute shall run concurrently, 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 this Lease and Lessee's right to possession and recover the Rent as it becomes due, in which event Lessee may sublet or assign, subject only to reasonable limitations. Acts of maintenance, efforts to relet, and/or the appointment of a receiver to protect the Lessor's interests, shall not constitute a termination of the Lessee's right to possession. (c) Pursue any other remedy now or hereafter available under the laws or judicial decisions of the state wherein the Premises are located. 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. 14 13.3 INDUCEMENT RECAPTURE. Any agreement for free or abated rent charges, 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 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. Upon Breach of this Lease by Lessee, 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, 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 of rent 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 any Lender. Accordingly, if any Rent 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 ten percent (10%) of each 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 such late payment. 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 exercise of 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 any provision of this Lease to the contrary, Base Rent shall, at Lessor's option, become due and payable quarterly in advance. 13.5 INTEREST. Any monetary payment due Lessor hereunder, other than late charges, not received by Lessor, when due as to scheduled payments (such as Base Rent) or within thirty (30) days following the date on which it was due for non-scheduled payment, shall bear interest from the date when due, as to scheduled payments, or the thirty-first (31st) day after it was due as to non-scheduled payments. The interest ("INTEREST") charged shall be equal to the prime rate reported in the Wall Street Journal as published closest prior to the date when due plus 4%, but shall not exceed the maximum rate allowed by law. Interest is payable in addition to the potential late charge provided for in Paragraph 13.4. 13.6 BREACH BY LESSOR. (a) NOTICE OF BREACH. 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, a reasonable time shall in no event be less than thirty (30) days after receipt by Lessor, and any Lender 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 are reasonably required for its performance, then Lessor shall not be in breach if performance is commenced within such thirty (30) day period and thereafter diligently pursued to completion. (b) PERFORMANCE BY LESSEE ON BEHALF OF LESSOR. In the event that neither Lessor nor Lender cures said breach within thirty (30) days after receipt of said written notice, or if having commenced said cure they do not diligently pursue it to completion, then Lessee may elect to cure said breach at Lessee's expense and offset from Rent an amount equal to the greater of one month's Base Rent or the Security Deposit, and to pay an excess of such expense under protest, reserving Lessee's right to reimbursement from Lessor. Lessee shall document the cost of said cure and supply said documentation to Lessor. 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 (collectively "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 any building portion of the premises, or more than twenty-five percent (25%) of the land area portion of the premises 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 Lessee does not terminate this Lease in accordance with the foregoing, this Lease shall remain in full force and effect as to the portion of the Premises remaining, except that the Base Rent shall be reduced in the same proportion to reduction in utility of the Premises caused by such Condemnation. Condemnation awards and/or payments shall be the property of Lessor, whether such award shall be made as compensation for diminution in 15 value of the leasehold, the value of the part taken, or for severance damages; provided, however, that Lessee shall be entitled to any compensation for Lessee's relocation expenses, loss of business goodwill and/or Trade Fixtures, without regard to whether or not this Lease is terminated pursuant to the provisions of this Paragraph. All Alterations and Utility installations made to the Premises by Lessee, for purposes of Condemnation only, shall be considered the property of the Lessee and Lessee shall be entitled to any and all compensation which is payable therefor. In the event that this Lease is not terminated by reason of the Condemnation, Lessor shall repair any damages to the Premises caused by such Condemnation. 15. BROKERAGE FEE. 15.1 ADDITIONAL COMMISSION. In addition to the payments owed pursuant to Paragraph 1.10 above, and unless Lessor and the Brokers otherwise agree in writing, Lessor agrees that; (a) if Lessee exercises any Option; (b) if Lessee acquires any rights to the Premises or other premises owned by Lessor and located within the same Project, if any, within which the Premises is located; (c) if Lessee remains in possession of the Premises, with the consent of Lessor, after the expiration of this Lease; or (d) if Base Rent is increased, whether by agreement or operation of an escalation clause herein, then, Lessor shall pay Brokers a fee in accordance with the schedule of said Brokers in effect at the time of the execution of this Lease. 15.2 ASSUMPTION OF OBLIGATIONS. Any buyer or transferee of Lessor's interest in this Lease shall be deemed to have assumed Lessor's obligation hereunder. Each Broker shall be a third party beneficiary of the provisions of Paragraphs 1.10, 15, 22 and 31. If Lessor fails to pay to a Broker any amounts due as and for commissions pertaining to this Lease when due, then such amounts shall accrue interest. In addition, if Lessor fails to pay any amount to Lessee's Broker when due, Lessee's Broker may send written notice to Lessor and Lessee of such failure and if Lessor fails to pay such amounts within ten (10) days after said notice, Lessee shall pay said monies to its Broker and offset such amounts against Rent. In addition, Lessee's Broker shall be deemed to be a third beneficiary of any commission agreement entered into by and/or between Lessor and Lessor's Broker. 15.3 REPRESENTATIONS AND INDEMNITIES OF BROKER RELATIONSHIPS. 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) in connection with this Lease, and that no one other than said named Brokers is entitled to any commission or finder's fee in connection herewith. Lessee and Lessor of 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 party by reason of any dealings or actions of the indemnifying Party, including any costs, expenses, attorneys' fees reasonably incurred with respect thereto. 16. ESTOPPEL CERTIFICATES. (a) Each Party (as "RESPONDING PARTY") shall within ten (10) business 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 "ESTOPPEL CERTIFICATE" 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. (b) If the Responding Party shall fail to execute or deliver the Estoppel Certificate within such ten day period, the Requesting Party may execute an Estoppel Certificate stating that: (i) the Lease is in full force and effect without modification except as may be represented by the Requesting Party; (ii) there are no uncured defaults in the Requesting Party's performance; and (iii) if Lessor is the Requesting Party, not more than one month's rent has been paid in advance. Prospective purchasers and encumbrancers may rely upon the Requesting Party's Estoppel Certificate, and the Responding Party shall be estopped from denying the truth of the facts contained in said Certificate. (c) If Lessor desires to finance, refinance, or sell the Premises, or any part thereof, Lessee and all Guarantors shall deliver to any potential lender or purchaser designated by Lessor such financial statements as may be reasonably required by such lender or purchaser, including but not limiting 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. DEFINITION OF LESSOR. 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. Except as provided in Paragraph 15, upon such transfer or assignment and delivery of the Security Deposit, as aforesaid, the prior Lessor shall be relieved of all liability with respect to the obligations and/or covenants under this Lease 16 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. Notwithstanding the above, and subject to the provisions of Paragraph 20 below, the original Lessor under this Lease, and all subsequent holders of the Lessor's interest in this Lease shall remain liable and responsible with regard to the potential duties and liabilities of Lessor pertaining to Hazardous Substances as outlined in Paragraph 6 above. 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. DAYS. Unless otherwise specifically indicated to the contrary, the word "DAYS" as used in this Lease shall mean and refer to calendar days. 20. LIMITATION ON LIABILITY. Subject to the provisions of Paragraph 17 above, the obligations of Lessor under this Lease shall not constitute personal obligations of Lessor, the individual partners of Lessor or its or their individual partners, directors, officers or shareholders, and Lessee shall look to the Premises, and to no other assets of Lessor, for the satisfaction of any liability of Lessor with respect to this Lease, and shall not seek recourse against the individual partners of Lessor, or its or their individual partners, directors, officers or shareholders, or any of their personal assets for such satisfaction. 21. 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. 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. The liability (including court costs and Attorneys' fees), of any Broker with respect to negotiation, execution, delivery or performance by either Lessor or Lessee under this Lease or any amendment or modification hereto shall be limited to an amount up to the fee received by such Broker pursuant to this Lease; provided, however, that the foregoing limitation on each Broker's liability shall not be applicable to any gross negligence or willful misconduct of such Broker. 23. NOTICES. 23.1 NOTICE REQUIREMENTS. All notices required or permitted by this Lease shall be in writing and may be delivered in person (by hand or courier) or may be sent by regular, certified or registered mail or U.S. Postal Service Express Mail, with postage prepaid, or by facsimile transmission, and shall be deemed sufficiently given if served in a manner specified in this Paragraph 23. The addresses noted adjacent to a Party's signature on this Lease shall be that Party's address for delivery or mailing of notices. Either Party may by written notice to the other specify a different address for notice, except that upon Lessee's taking possession of the Premises, the Premises shall constitute Lessee's address for notice. A copy of all notices to Lessor shall be concurrently transmitted to such party or parties at such addresses as Lessor may from time to time hereafter designate in writing. 23.2 DATE OF NOTICE. 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 Postal Service or courier. Notices transmitted by facsimile transmission or similar means shall be deemed served upon telephone confirmation of receipt, provided a copy is also delivered via delivery or mail. If notice is received on a Saturday, 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. Lessors consent to, or approval of, any act shall not be deemed to render unnecessary the obtaining of Lessors 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. The acceptance of rent by Lessor shall not be a waiver of any Default or Breach by Lessee. Any payment by Lessee may be accepted by Lessor on account of monies or 17 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 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 termination of this Lease. In the event that Lessee holds over, then the Base Rent shall be increased to one hundred fifty percent (150%) of the Base Rent applicable during the month immediately preceding the expiration or termination. Nothing contained herein shall be construed as consent by Lessor to any holding over by Lessee. 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; CONSTRUCTION OF AGREEMENT. All provisions of this Lease to be observed or performed by Lessee are both covenants and conditions. In construing this Lease, all headings and titles are for the convenience of the parties only and shall not be considered a part of this Lease. Whenever required by the context, the singular shall include the plural and vice versa. This Lease shall not be construed as if prepared by one of the parties, but rather according to its fair meaning as a whole, as if both parties had prepared it. 29. BINDING EFFECT; CHOICE OF LAW. This Lease shall be binding upon the parties, their personal representatives, successors and assigns and be governed by the laws of the State in which the Premises are located. Any litigation between the Parties hereto concerning this Lease shall be initiated in the county in which the Premises are located. 30. SUBORDINATION; ATTORNMENT; NON-DISTURBANCE. 30.1 SUBORDINATION. This Lease and any Option granted hereby shall be subject and subordinate to any ground lease, mortgage, deed of trust or other hypothecation or security device (collectively, "SECURITY DEVICE"), now or hereafter placed upon the Premises, to any and all advances made on the security thereof, and to all renewals, modifications, and extensions thereof. Lessee agrees that the holding any such Security Device (in this Lease together referred to as "LENDER") shall have no liability or obligation to perform any of the obligations of Lessor under this Lease. Any Lender may elect to have this Lease and/or any Option granted hereby superior to the lien of its Security Device by giving written notice thereof to Lessee whereupon this Lease and such Options shall be deemed prior to such Security Device, notwithstanding the relative dates of the documentation or recordation thereof. 30.2 ATTORNMENT. Subject to the 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 a commercially reasonable non-disturbance agreement (a "Non-Disturbance Agreement") from the Lender which Non-Disturbance Agreement provides that Lessee's possession of the Premises, 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. Further, within sixty (60) days after the execution of this Lease, Lessor shall use its commercially reasonable efforts to obtain a Non-Disturbance Agreement from the holder of any pre-existing Security Device which is secured by the Premises. In the event that Lessor is unable to provide the Non-Disturbance Agreement within said sixty (60) days, then Lessee may, at Lessee's option, directly contract Lessor's lender and attempt to negotiate for the execution and delivery of a Non-Disturbance Agreement. 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, attornment and/or Non-Disturbance Agreement provided for herein. 18 31. ATTORNEYS' FEES. If any Party or Broker brings an action or proceeding involving the Premises to enforce the terms hereof or declare rights hereunder, the Prevailing Party (as hereafter defined) in any such proceeding, action, or appeal thereof shall be entitled to reasonable attorneys' fees. Such fees may be awarded in the same suit or recovered in a separate suit, whether or not such action or proceeding is pursued to decision or judgment. The term "PREVAILING PARTY" shall include, without limitation, a Party or Broker who substantially obtains or defeats the relief sought, as the case may be. The attorneys' fees award shall not be computed in accordance with any court fee schedule, but shall be such as to fully reimburse all attorneys' fees reasonably incurred. In addition, Lessor shall be entitled to attorneys' fees, costs and expenses incurred in the preparation and service of notices of Default and consultations in connection therewith, whether or not a legal action is subsequently commenced in connection with such Default or resulting Breach. 32. LESSOR'S ACCESS; SHOWING PREMISES; REPAIRS. Lessor and Lessor's agents shall have the right to enter the Premises at any time, in the case of an emergency, and otherwise at reasonable times for the purpose of showing the same to prospective purchasers, lenders, or lessees, and making such alterations, repairs, improvements or additions to the Premises as Lessor may deem necessary. All such activities of Lessor shall be without abatement of rent or liability to Lessee. Lessor may at any time place on the Premises any ordinary "For Sale" signs and Lessor may during the last six (6) months of the term hereof place on the Premises any ordinary "For Lease" signs. Lessee may at any time place on or about the Premises and ordinary "For Sublease" sign. 33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted, any auction upon the Premises without Lessor's prior written consent. Lessor shall not be obligated to exercise any standard of reasonableness in determining whether to permit an auction. 34. SIGNS. Except for ordinary "For Sublease" signs, Lessee shall not place any sign upon the Premises without Lessor's prior written consent. All signs must comply with all Applicable Requirements. 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 lessor estate in the Premises; provided, however, that Lessor may elect to continue any one or all existing subtenancies. Lessor's failure within ten (10) days following any such event to elect to the contrary by written notice to the holder of any such lesser interest, shall constitute Lessor's election to have such event constitute the termination of such interest. 36. CONSENTS. Except 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' and other consultants' fees) incurred in the consideration of, or response to, a request by Lessee for any Lessor consent, including but not limited to consents to an assignment, a subletting or the presence or use of a Hazardous Substance, shall be paid by Lessee upon receipt of an invoice and supporting documentation therefor. Lessor's consent to any act, assignment or subletting shall not constitute an acknowledgment that no Default or Breach by Lessee of this Lease exists, nor shall such consent be deemed a waiver of any then existing Default or Breach, except as may be otherwise specifically stated in writing by Lessor at the time of such consent. 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. In the event that either Party disagrees with any determination made by the other hereunder and reasonably requests the reasons for such determinations, the determining party shall furnish its reasons in writing and in reasonable detail within ten (10) business days following such request. 37. GUARANTOR. 37.1 EXECUTION. The Guarantors, if any, shall each execute a guaranty in the form most recently published by the American Industrial Real Estate Association, and each Guarantor shall have the same obligations as Lessee under this Lease. 37.2 DEFAULT. It shall constitute a Default of the Lessee if any Guarantor fails or refuses, upon request to provide: (a) evidence of the execution of the guaranty, including the authority of the party signing on Guarantor's behalf to obligate Guarantor, and in the case of a corporate Guarantor, a certified copy of a resolution of its board of directors authorizing the making of such guaranty, (b) current financial statements, (c) an Estoppel Certificate, or (d) written confirmation that the guaranty is still in effect. 19 38. QUIET POSSESSION. Subject to payment by Lessee of the Rent 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 and quiet enjoyment of the premises during the term hereof. 39. OPTIONS. 39.1 DEFINITION. "OPTION" shall mean: (a) the right to extend the term of or renew this Lease or to extend or renew any lease that Lessee has on other property of Lessor; (b) the right of first refusal or first offer to lease either the Premises or other property of Lessor; (c) the right to purchase or the right of first refusal to purchase the Premises or 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, and cannot be assigned or exercised by anyone other than said original Lessee and only while the original Lessee is in full possession of the Premises and, if requested by Lessor, with Lessee certifying that Lessee has no intention of thereafter assigning or subletting. 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 have been exercised. 39.4 EFFECT OF DEFAULT ON OPTIONS. (a) Lessee shall have no right to exercise an Option: (i) during the period commencing with the giving of any notice of Default and continuing until said Default is cured; (ii) during the period of time any Rent is unpaid (without regard to whether notice thereof is given Lessee); (iii) during the time Lessee is in Breach of this Lease; or (iv) in the event that Lessee has been given three (3) or more notices of separate Default, 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) 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 prior to the commencement of the extended term, (i) Lessee fails to pay Rent for a period of thirty (30) days after such Rent becomes due (without any necessity of Lessor to give notice thereof), (ii) Lessor gives to Lessee three (3) or more notices of separate Default 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 a part of a group of buildings controlled by Lessor, Lessee agrees that it will observe all reasonable rules and regulations which Lessor may make from time to time for the management, safety, and care of said properties, including the care and cleanliness of the grounds and including the parking, loading and unloading of vehicles, and that Lessee will pay its fair share of common expenses incurred in connection therewith. 41. SECURITY MEASURES. Lessee hereby acknowledges that the rental payable to Lessor hereunder does not include the cost of guard service or other security measures, and that Lessor shall have no obligation whatsoever to provide same. Lessee assumes all responsibility for the protection of the Premises, Lessee, its agents and invitees and their property from the acts of third parties. 42. RESERVATIONS. Lessor reserves to itself the right, from time to time, to grant, without the consent or joinder of Lessee, such easements, rights and dedications that Lessor deems necessary, and to cause the recordation of parcel maps and restrictions, so long as such easements, rights, dedications, maps and restrictions do not unreasonably interfere with the use of the Premises by Lessee. Lessee agrees to sign any documents reasonably requested by Lessor to effectuate any such easement rights, dedication, map or restrictions. 43. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to any amount or sum of money to be paid by one Party to the other under the provisions hereof, the Party against whom the obligation to pay the money is asserted shall have the right to make payment "under protest" and such payment shall not be regarded as a voluntary payment and there shall survive the right on the part of said Party to institute suit for recovery of such sum. If it shall be adjudged that there was no legal obligation on the part of said Party to pay such sum or any part thereof, said Party shall be entitled to recover such sum or so much thereof as it was not legally required to pay. 44. AUTHORITY. If either Party hereto is a corporation, trust, limited liability company, partnership, or similar entity, each individual executing this Lease on behalf of such entity represents and warrants that he or she is 20 duly authorized to execute and deliver this Lease on its behalf. Each party shall, within thirty (30) days after request, deliver to the other party satisfactory evidence of such authority. 45. CONFLICT. Any conflict between the printed provisions of this Lease and the typewritten or handwritten provisions shall be controlled by the typewritten or handwritten provisions. 46. OFFER. Preparation of this Lease by either Party or their agent and submission of same to the other Party shall not be deemed an offer to lease to the other Party. This Lease is not intended to be binding until executed and delivered 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. 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 a Lender in connection with the obtaining of normal financing or refinancing of the Premises. 48. MULTIPLE PARTIES. If more than one person or entity is named herein as either Lessor or Lessee, such multiple Parties shall have joint and several responsibility to comply with the terms of this Lease. 49. MEDIATION AND ARBITRATION OF DISPUTES. An Addendum requiring the Mediation and/or the Arbitration of all disputes between the Parties and/or Brokers arising out of this Lease / / is / / is not attached to this Lease. 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. ATTENTION: NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY ANY BROKER AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH IT RELATES. THE PARTIES ARE URGED TO: 1. SEEK ADVICE OF COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE. 2. RETAIN APPROPRIATE CONSULTANTS TO REVIEW AND INVESTIGATE THE CONDITION OF THE PREMISES. SAID INVESTIGATION SHOULD INCLUDE BUT NOT BE LIMITED TO: THE POSSIBLE PRESENCE OF HAZARDOUS SUBSTANCES, THE ZONING OF THE PREMISES, THE STRUCTURAL INTEGRITY, THE CONDITION OF THE ROOF AND OPERATING SYSTEMS, AND THE SUITABILITY OF THE PREMISES FOR LESSEE'S INTENDED USE. WARNING: IF THE PREMISES IS LOCATED IN A STATE OTHER THAN CALIFORNIA, CERTAIN PROVISIONS OF THE LEASE MAY NEED TO BE REVISED TO COMPLY WITH THE LAWS OF THE STATE IN WHICH THE PREMISES IS LOCATED. The parties hereto have executed this Lease at the place and on the dates specified above their respective signatures. Executed at Santa Fe Springs Executed at Santa Fe Springs ---------------- ---------------- on 4.20/98 on 4.20/98 ------- ------- by LESSOR: by LESSEE: Robert A. Steele Burke Industries, Inc., ---------------- ----------------------- A California Corp. ------------------ By /s/ Robert A. Steele By /s/ Hisham Alameddine ---------------------------- ---------------------------------- Name Printed: Robert A. Steele Name Printed: Hisham Alameddine ----------------- ---------------------- Title: Partner Title: Vice President, Operations ------------------------ ----------------------------- By By ---------------------------- ---------------------------------- Name Printed: Name Printed: ----------------- ----------------------- Title: Title: ------------------------ ------------------------------ Address: 801 North Parkcenter Drive, Address: 13767 Freeway Drive ---------------------------- ----------------------------- H210 Santa Fe Springs, CA 90670 ---------------------------- ----------------------------- Santa Ana, California 92705 Telephone: (562) 926-6556 ----------------------------- -------------------------- Telephone: (714) 547-1733 Facsimile: (562) 926-3710 --------------------------- -------------------------- Facsimile: (714) 972-1492 Federal ID No. --------------------------- ---------------------- Federal ID No. ----------------------- NOTE: These forms are often modified to meet changing requirements of law and industry needs. Always write or call to make sure you are utilizing the most current form: AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION, 700 So. Flower Street, Suite 600, Los Angeles, CA 90017. (213) 687-8777. Fax No. (213) 687-8616. 21 ADDENDUM TO STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE-GROSS DATED APRIL 15, 1998 BY AND BETWEEN ROBERT STEELE, ET AL ("LESSOR") AND BURKE INDUSTRIES, INC. ("LESSEE") FOR THE PROPERTY LOCATED AT 10039 NORWALK BOULEVARD SANTA FE SPRINGS, LOS ANGELES, CALIFORNIA. PARAGRAPH 1 - Months of June and July 1998 shall be rent-free. PARAGRAPH 2- Lessor will do all necessary repair work on the roof to put it into a water-tight condition. PARAGRAPH 3 - Lessor will be responsible for compliance with any ADA/Title 24/Building code issues that come up during the lease that are not a result of Lessee's specific operations or any additional improvements that Lessee makes to the premiums during the lease term. PARAGRAPH 4 - Lessor shall deliver the HVAC system in good operating condition prior to lease commencement. Lessee shall maintain the HVAC system through a regular maintenance contract. However, Lessee will be responsible for all other expenses beyond the normal maintenance required by said contracts. If it is determined by an HVAC expert that the existing unit cannot function properly, the Lessor will replace the HVAC system, and the Lessee will resume the scheduled maintenance responsibility thereafter for the new HVAC system. PARAGRAPH 5 - Lessor, at Lessor's expense, shall install one truck-height loading position. The location shall be mutually agreed upon by Lessor and Lessee. This work shall be completed as soon as reasonably possible recognizing that time is of the essence so that Lessee can utilize the truck-height loading position for its business. PARAGRAPH 6 - Other than Lessor's work as outlined in Addendum Paragraph 2, 4 and 5, and Lessor delivering the building in good working condition as called for in Paragraph 2.2 Condition, Lessee accepts the property in its "as is" condition. Subject to Lessor's approval which shall not be unreasonably withheld Lessee may do refurbishing, make changes, alterations and/or additions to the premises. Lessor will reimburse Lessee for its expenses up to $100,000. Any reimbursed payments over $50,000 shall be amortized over the 60 month term of the lease at 10%. Example: $50,000 at 10% for 60 months would amortize at $1,062.35 per month or 1.895 CENTS per square foot, per month. PARAGRAPH 7 - Rent Adjustment. See attached/Addendum Paragraph 7. PARAGRAPH 8 - Option to Extend. See attached/Addendum Paragraph 8. PARAGRAPH 9 - 6.2 Hazardous Substances (a) Reportable Liens 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 potential 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 or byproducts thereof. Lessee shall not engage in any activity in 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 Requirements (as hereinafter defined in paragraph 63). "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, and (iii) the presence in, on or about the Premises or neighboring properties. Notwithstanding the foregoing, Lessee may, without Lessor's prior consent, but upon notice to Lessor and in compliance with all Applicable Requirements, use any ordinary and customary materials reasonably required to be used by Lessee in the normal course of the Permitted Use, 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 any reportable Use of any Hazardous Substance 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 therefor, 1 including but not limited to the installation (and, at Lessor's option, 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) Notice of Release. If, during the term (including any extensions), either Lessor or Lessee becomes aware of any (a) any actual or threatened release of any Hazardous Substance on, under, or about the Premises or the Building or (b) any injury, investigation, proceeding, or claim by any government agency or other person regarding the presence of Hazardous Substance on, under, or about the Premises or the Building, that party shall give the other party written notice of the release or investigation immediately (or as soon as practical in case of an emergency) after learning of it and shall simultaneously furnish the other party copies of any claims, notices of violation, reports or other writings received by the party providing notice that concern the release or investigation. (c) Warranties. Lessor warrants and represents to Lessee that, to the best of Lessor's knowledge without independent investigation inquiry, as of the effective date of the Lease: (i) There has been no release onto or under the Premises or the Building of any Hazardous Substance in violation of any Applicable Requirements; (ii) The Building contains no PCBs, PCB contaminated electrical equipment, or asbestos containing materials which in its present condition poses a health hazard to Lessee's employees; and (iii) Landlord has received no notice that the Premises or the Building is in violation of any Applicable Requirements. (d) Lessee's 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 damages, liabilities, judgments, costs, claims, liens, expenses, penalties, loss of permits and attorneys' and consultants' fees arising out of or involving any Hazardous Substance brought onto the Premises by or for Lessee or by anyone under Lessee's control. Lessee's obligations under this Paragraph 6.2 (D.) shall include, but not be limited to, the effects of any combination or injury to person, property or the environment created or suffered by Lessee, and the cost of investigation (including consultants' and attorneys' fees in testing), removal and remediation, restoration and abatement thereof, or of any combination therein involved, and shall survive the expiration or earlier termination of this Lease. No termination, cancellation or release agreement entered into by Lessor and Lessee shall release Lessee from its obligations under this Lease with respect to Hazardous Substances, unless specifically so agreed by Lessor in writing at the time of such agreement. (e) Lessor's Indemnification. Lessor shall indemnify, protect, defend and hold Lessee, its agents, employees, lenders and subtenants, if any, harmless from and against any and all damages, liabilities, judgments, cost, claims, liens, expenses, penalties, loss of permits, and attorneys, and consultants' fees arising out of or involving any Hazardous Substance brought onto the Premises by or for Lessor or by anyone under Lessor's control. Lessor's obligations under this paragraph 6.2(D.) shall include, but not be limited to, the effects of any combination or injury to person, property or the environment created or suffered by Lessor, and the cost of investigation (including consultants' and attorneys' fees in testing), removal and remediation, gestation and abatement thereof, or of any combination therein involved, and shall survive the expiration of earlier termination of this Lease. No termination, cancellation or release agreement entered into by Lessor and Lessee shall release Lessor from its obligations under the Lease with respect to Hazardous Substances, unless specifically so agreed by Lessee in writing at the time of such agreement. (f) Lessor's Consent to Reportable Uses. Notwithstanding any contrary provision of this Lease, Lessor hereby consents to the installation or use of any above ground storage tank for the generation, possession, storage, loss, transportation, or disposal of, in, on or about the Premises, of the substances described in Exhibit B hereto, together with any additional Hazardous Substance, provided Lessee does not generate, possess, store, use, transport or dispose of more than fifty five gallons of each such additional Hazardous Substance. PARAGRAPH 10 - 8.7.1. Lessee's Indemnification to Landlord. To the fullest extent permitted by law but subject to this section 8.7, Lessee shall, at Lessee's sole expense and with counsel reasonably acceptable to Landlord, indemnify, defend, and hold harmless Landlord from, and against all claims, as defined in subsection 8.7.2, from any cause arising out of or relating (directly or indirectly) to this Lease, the tenancy created under this Lease, or the Premises, including: (a) The use or occupancy, or manner of use or occupancy, of the Premises or building by Lessee Parties; 2 (b) Any act, error, omission, or negligence of Lessee in, on, or about the Premises; (c) Lessee's conducting of its business; (d) Any alterations, activities, work, or things done, omitted, or permitted by Lessee in, at, or about the Premises or Building, including the violation of or failure to comply with any applicable laws, statutes, ordinances, standards, rules, regulations, orders, decrees, or judgments in existence on the Lease Commencement Date or enacted, promulgated, or issued after the date of this Lease, except to the extent that compliance with such legal requirements is made the responsibility of Landlord pursuant to this Lease; and (e) Any breach or default in performance of any obligation on Lessee's part to be performed under this Lease. 8.7.2. Definition of Claims. For purposes of the Lease, "Claims" means any and all claims, losses, costs, damage, expenses, liabilities, liens, actions; causes of action (whether in tort or contract, law or equity, or otherwise), charges, assessments, fines, and penalties of any kind (including consultant and expert expenses, court costs, and attorneys' fees actually incurred). 8.7.3. Type of Injury or Loss. This indemnification extends to and includes Claims for: (a) Injury to any persons (including death at any time resulting from that injury); (b) Loss of injury or damage to, or destruction of tangible property (including all loss of use resulting from that loss, injury, damage, or destruction); and (c) Economic losses and consequential or resulting damage, but only to the extent incurred by Landlord in connection with (1) a holdover of the Premises by Lessee after the expiration or earlier termination of this Lease or (2) any repair, physical construction, or work of improvement performed by or on behalf of Lessee in the Building. 8.7.4. Indemnification Negligence and Willful Misconduct; Consequential Damages. Despite any other provision of this Lease: (a) Lessee's indemnification in subsection 8.7.1 shall not apply to any claim caused by or arising out of the active or passive negligence of Landlord or to the extent that a Claim against Landlord actually or allegedly arises out of the willful misconduct of Landlord, except for damage to the Lessee Improvements or Lessee's personal property, fixtures, furniture, and equipment in the Premises to the extent that such damage is covered by insurance that Lessee is required to carry under this Lease (or would have been covered had Lessee carried the insurance required under this Lease); and (b) Except as provided in subsection 8.7.3: (1) Nothing in this Lease shall impose any obligation on Landlord to be responsible or liable for, and Lessee releases Landlord from all liability for, consequential damages suffered by Lessee; and (2) Nothing in this Lease imposes any obligation on Lessee to be responsible or liable for, and Landlord releases Lessee from all liability for, consequential damages suffered by Landlord. 8.7.5 Relationship of Indemnity to Other Lease Obligations. Lessees' agreement to indemnify Landlord and landlords' agreement to indemnify Lessee under this section 8.7 are not intended to and shall not: (a) Restrict, limit, or modify the parties' respective insurance and other obligations under this Lease, such indemnity covenants being independent of the parties' insurance and other obligations; (b) Be restricted, limited, or modified by the parties' compliance with their respective insurance requirements and other obligations under this Lease; (c) Relieve any insurance carrier of its obligations under policies required to be carried under this Lease to the extent that such policies cover, or if carried would have covered, the matters subject to the parties' respective indemnification obligations; or (d) Supersede any inconsistent agreement of the parties set forth in any other provision of this Lease. 8.7.6. Attorney Fees. The prevailing party shall be entitled to recover its actual attorney fees and court costs incurred in enforcing the indemnification clauses set forth in this section 8.7.3. 3 8.7.7. Survival of Indemnification. The clauses of this section 8.7 shall survive the expiration or earlier termination of this Lease for a period of three (3) years but only to the extent that the Claims are covered and actually paid by the indemnifying party's insurance coverage. 8.7.8. Landlord's Indemnification of Lessee. Because Landlord is required to maintain insurance on the Building and because of the waivers of subrogation in this Lease, Landlord shall, with counsel reasonably acceptable to Lessee, indemnify, defend, and hold harmless Lessee from and against all Claims for damage to property outside the Premises to the extent that such Claims are covered by such insurance (or would have been covered had Landlord carried the insurance required under this Lease), even if resulting from the negligent acts, omissions, or willful misconduct of Lessee. In addition, Landlord shall, with counsel reasonably acceptable to Lessee, indemnify, defend, and hold harmless Lessee from and against all Claims resulting from the negligent acts, omissions, or willful misconduct of Landlord in connection with Landlord's activities in, on, or about the Premises or Building, except to the extent that such claim is for damage to the Lessee Improvements and Lessee's personal property, fixtures, furniture, and equipment on the Premises and is covered by insurance that Lessee is required to obtain under this Lease (or would have been covered had Lessee carried the insurance required under this Lease). AMERICANS WITH DISABILITIES ACT ("ADA"): The parties hereto agree to comply with all applicable federal, state and local laws, regulations, codes, ordinances and administrative orders having jurisdiction over the parties, property of the subject matter of this agreement, including, but not limited to, the 1964 Civil Rights Act and all amendments thereto, the Foreign Investment In Real Property Tax Act, the Comprehensive Environment Liability Act and The Americans With Disabilities Act. CONSULT YOUR ATTORNEYS/ADVISORS This document has been prepared for approval by your attorney. No representation is made by CB Commercial Real Estate Group, Inc., or its agents or employees as to the legal sufficiency, legal effect, or tax consequences of this document or the transaction to which it relates. These are questions for your attorney. In any real estate transaction, it is recommended that you consult with a professional, such as a civil engineer, industrial hygienist or other person, with experience in evaluating the condition of the property, including the possible presence of asbestos, hazardous materials and underground storage tanks. /s/ Robert A. Steele 4/20/98 ---------------------- -------- SIGNATURE DATE /s/ Hisham Alameddine 4/20/98 ---------------------- -------- SIGNATURE DATE 4 RENT ADJUSTMENT(S) STANDARD LEASE ADDENDUM DATED APRIL 15, 1998 BY AND BETWEEN (LESSOR) ROBERT STEELE, ET AL (LESSEE) BURKE INDUSTRIES, INC. ADDRESS OF PREMISES: 10039 NORWALK BLVD., SANTA FE SPRINGS Addendum Paragraph 7 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: (Check Method(s) to be Used and Fill in Appropriately) /X/ I. COST OF LIVING ADJUSTMENT(s) (COLA) a. On (Fill in COLA Date): December 1, 2000 (32nd month) 63rd and 94th months if Option to Extend is exercised the Base Rent shall be adjusted by the change, if any, from the Base Month specified below, in the Consumer Price Index of the Bureau of Labor Statistics of the U.S. Department of Labor for (select one): /X/ CPI W (Urban Wage Earners and Clerical Workers) or / / CPI U (All Urban Consumers), for (Fill in Urban Area): ______________________________________________________________________ _____________________________________________. All items (1982-1984 = 100), herein referred to as "CPI". b. This monthly rent payable in accordance with paragraph A.I.a of this Addendum shall be calculated as follows: the Base Rent set forth in paragraph 1.5 of the attached Lease, shall be multiplied by a fraction the numerator of which shall be the CPU of the calendar month two months prior to the month(s) specified in A.I.a above during which the adjustment is to take effect, and the denominator of which shall be the CPI of the calendar month which is two months prior to (select one) /X/ the first month of the term of this Lease as set forth in paragraph 1.3 ("Base Month") or / / (Fill in Other "Base Month"):_____________________. The sum so calculated shall constitute the new monthly rent hereunder, but in no event, shall any such new monthly rent be less than the rent payable for the month immediately preceding the rent adjustment. c. In the event the compilation and/or publication of the CPI shall be transferred to any other governmental department or bureau or agency or shall be discontinued, then the index most nearly the same as the CPI shall be used to make such calculation. In the event that the Parties cannot agree on such alternative index, then the matter shall be submitted for decision to the American Arbitration Association in accordance with the then rules of said Association and the decision of the arbitrators shall be binding upon the Parties. The cost of said Arbitration shall be paid equally by the Parties. See Addendum Paragraph A.d. page 2 B. NOTICE: Unless specified otherwise herein, notice of any such adjustments, other than Fixed Rental Adjustments, shall be made as specified in paragraph 23 of the Lease. C. BROKER'S FEE: The Brokers specified in paragraph 1.10 shall be paid a Brokerage Fee for each adjustment specified above in accordance with paragraph 15 of the Lease. Paragraph A.d. In no event shall the Cost of Living Adjustment for any period have an increase of less than 2% per annum nor more than 6% per annum when compared to the monthly rent last paid in the previous period. Initials: _____ Initials: _____ _____ _____ Rent Adjustment(s) Page 1 of 1 For this form, write: American Industrial Real Estate Association, 700 S. Flower Street, Suite 600, Los Angeles, California 90071. -C-1997 - American Industrial Real Estate Association OPTION(S) TO EXTEND ADDENDUM TO STANDARD LEASE DATED APRIL 15, 1998 BY AND BETWEEN (LESSOR) ROBERT STEELE, ET AL (LESSEE) BURKE INDUSTRIES, INC. ADDRESS OF PREMISES: 10039 NORWALK BLVD., SANTA FE SPRINGS Addendum Paragraph 8 A. OPTION(S) TO EXTEND: Lessor hereby grants to Lessee the option to extend the term of this Lease for (1) additional (5) year period(s) commencing when the prior term expires upon each and all of the following terms and conditions: (i) Lessee gives to lessor, and Lessor actually receives on a date which is prior to the date that the option period would commence (if exercised) by at least (6) months, a written notice of the exercise of the option(s) to extend this Lease of said additional term(s), time being of essence, if said notification of the exercise of said option(s) is (are) not so given and received, the option(s) shall automatically expire; said option(s) may (if more than one) only be exercised consecutively; (ii) The provisions of 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) All of the terms and conditions of this Lease except where specifically modified by this option shall apply; (iv) The monthly rent for each month of the option period shall be calculated as follows, using the method(s) indicated below: (Check Method(s) to be Used and Fill in Appropriately) /X/ I. COST OF LIVING ADJUSTMENT(s) (COL) (a) On (Fill in COL Date): See Addendum Paragraph 7 the monthly rent payable under paragraph 1.5 ("Base Rent") of the attached Lease shall be adjusted by the change,, if any, from the Base Month specified below, in the Consumer Price Index of the Bureau of Labor Statistics of the U.S. Department of Labor for (select one): /X/ CPI W (Urban Wage Earners and Clerical Workers) or / / CPI U (All Urban Consumers), for (Fill in Urban Area): ____________________________. All terms (1982-1984 = 100), herein referred to as "CPI". (b) This monthly rent payable in accordance with paragraph A.I.(a) of this Addendum shall be calculated as follows: the Base Rent set forth in paragraph 1.5 of the attached Lease, shall be multiplied by a fraction the numerator of which shall be the CPI of the calendar month 2 (two) months prior to the month(s) specified in paragraph A.I.(a) above during which the adjustment is to take effect, and the denominator of which shall be the CPI of the calendar month which is 2 (two) months prior to (select one): / / the first month of the term of this Lease as set forth in paragraph 1.3 ("Base Month") or / / (Fill in Other "Base Month"):_______________. The sum so calculated shall constitute the new monthly rent hereunder, but in no event, shall any such new monthly rent be less than the rent payable for the month immediately preceding the rent adjustment. (c) In the event the compilation and/or publication of the CPI shall be transferred to any other governmental department or bureau or agency or shall be discontinued, then the index most nearly the same as the CPI shall be used to make such calculation. In the event that the Lessor and Lessee cannot agree on such alternative index, then the matter shall be submitted for decision to the American Arbitration Association in accordance with the then rules of said Association and the decision of the arbitrators shall be binding upon the parties. The cost of said Arbitration shall be paid equally by the Lessor and Lessee. OPTION(S) TO EXTEND PAGE 2 OF 2 NOTICE: These forms are often modified to meet changing requirements of law and industry needs. Always write or call to make sure you are utilizing the most current form: American Industrial Real Estate Association, 700 S. Figueroa Street, Suite M-1, Los Angeles, California 90071. (213) 687-8777. Fax No. (213) 687-6616. B. NOTICE: Unless specified otherwise herein, notice of any escalations other than Fixed Rental Adjustments shall be made as specified in paragraph 23 of the 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 Lease. Initials: _____ Initials: _____ _____ _____ OPTION(S) TO EXTEND PAGE 2 OF 2 NOTICE: These forms are often modified to meet changing requirements of law and industry needs. Always write or call to make sure you are utilizing the most current form: American Industrial Real Estate Association, 700 S. Figueroa Street, Suite M-1, Los Angeles, California 90071. (213) 687-8777. Fax No. (213) 687-6616. EXHIBIT A Exhibit A is intended only to show the general layout of the Industrial Building as of the beginning of the Term of this Lease. It is not to be scaled; any measurements shown should be take as approximate distances. 10039 NORWALK BOULEVARD SANTA FE SPRINGS, CA 90670 Floor plan of the Industrial Building as of the beginning of the Term of this Lease. EXHIBIT B Burke Industries Purosil Division Hazardous Material List March 1998 MATERIAL NAME DESCRIPTION Manufacturing Materials Isopropanol Alcohol Cleaning Solvent Methyl Ethyl Ketone Cleaning Solvent Toluene Cleaning Solvent Stepanal WAC Soap - Release Agent Laboratory Materials ASTM Oil #1 Test Fluid ASTM Oil #2 Test Fluid ASTM Oil #3 Test Fluid ASTM Fuel #A Test Fluid ASTM Fuel #B Test Fluid 10W-40 Motor Oil Test Fluid Mil-H-5505 Hyd. Fluid Test Fluid Mil-L-7808 Luce Oil Test Fluid Maintenance Materials AW46 Hydraulic Oil Press Fluid 220 Gear Oil Machine Lubrication EX-10.36 4 EXHIBIT 10.36 MANAGEMENT SERVICES AGREEMENT This Management Services Agreement ("Agreement") is entered into as of June 18, 1998, between Burke Industries, Inc., a California corporation ("Burke"), and J.F. Lehman & Company, a Delaware corporation ("JFL"). In consideration of the premises, it is agreed as follows: 1. BACKGROUND AND PURPOSE. 1.1 Burke is engaged in the business, INTER ALIA, of designing, manufacturing, and marketing numerous types of rubber related products for both commercial and military applications. Burke conducts such business operations worldwide, but is focused primarily in the United States. 1.2 Key personnel of JFL have substantial expertise that is useful to Burke. Burke desires to obtain management services from JFL, and JFL desires to provide management services to Burke, all on the terms and conditions of this Agreement. 2. AGREEMENT TO PROVIDE MANAGEMENT SERVICES. JFL hereby agrees to provide to Burke and at Burke's request the management services ("Services") listed in Schedule "A" attached hereto and hereby made a part hereof. JFL's key personnel will devote as much of their business time and effort to the provision of Services hereunder as is reasonably required for the prompt and efficient accomplishment of the Services to be provided, and will not, except with Burke's express consent, accept undertakings for other clients that are likely to interfere or conflict with their availability to perform Services when required hereunder. JFL agrees further to comply with the reasonable directions of Burke and to use its best efforts to promote Burke's interests. 3. MANAGEMENT FEES. In consideration for the advisory and consulting services to be rendered by JFL to Burke hereunder, including services in connection with strategic financial planning, investment management, management and administration and other matters relating to the business and operations of Burke, Burke shall pay to JFL a fee (the "Annual Fee") in the amount of $500,000 per annum for each year during the period commencing on October 1, 1998 and ending on the date of the termination this Agreement. The Annual Fee shall be payable in quarterly installments, payable in advance beginning on October 1, 1998 and on the same calendar day of every third month thereafter until the date of termination of this Agreement. 4. EXPENSES. Burke shall reimburse JFL promptly upon request for travel and other out-of-pocket expenses reasonably incurred in connection with the performance of Services pursuant to this Agreement, subject to the provision by JFL of satisfactory documentation of such expenses. Salaries of JFL employees and the ordinary expenses of maintaining JFL's offices are not reimbursable expenses pursuant to this Agreement. 1 5. STATUS. It is the intention of the parties that JFL shall be an independent contractor pursuant to this Agreement, and that this Agreement shall not be construed to create or give rise to any partnership, agency or joint venture. 6. TERM AND TERMINATION. This Agreement shall be effective as of August 20, 1997 and shall continue in effect until the earliest to occur of (i) the tenth anniversary of this Agreement and (ii) the closing of a sale to an entity which is not an "Affiliate" (as defined in Section 12b-2 of the Securities Exchange Act of 1934) of the Company or any of its existing shareholders on the date hereof of all or substantially all of the capital stock or assets of the Company. The provisions of Section 4 and otherwise as the context so requires shall survive the termination of this Agreement. 7. REPRESENTATIONS AND WARRANTIES. JFL represents and warrants that it is not a party to or bound by any agreement or contract or subject to any restrictions, particularly, but without limitation, in connection with any previous or other consulting relationship, which prevents JFL from entering into and performing its obligations under this Agreement. 8. MISCELLANEOUS. 8.1 This Agreement contains the entire understanding of the parties with respect to the subject matter contained herein and may be altered, amended or superseded only by an Agreement in writing, signed by the party against whom enforcement of any waiver, change, modification, extension or discharge is sought. This Agreement may be assigned by either party only with the written consent of the other. 8.2 If any provision of this Agreement shall be prohibited or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity without invalidating the remainder of such provision or the remaining provisions of this Agreement. 8.3 This Agreement shall be binding upon and shall inure to the benefit of the parties and their respective successors and permitted assigns. 8.4 Notices delivered pursuant to this Agreement shall be in writing, and shall be deemed to have been duly given when (a) delivered by hand; (b) sent by facsimile (with receipt confirmed), provided that a copy is promptly thereafter mailed by first-class prepaid certified mail, return receipt requested; (c) received by the addressee, if sent with delivery receipt requested by Express Mail, Federal Express, other express delivery service or first-class prepaid certified mail, in each case to the appropriate addresses and facsimile numbers set forth below, or to such other address(es) or facsimile number(s) as a party may designate as to itself by notice to the other party. 8.4.1 If to Burke: Burke Industries, Inc. 2250 South Tenth St. 2 San Jose, California 95112 Attention: Mr. Rocco C. Genovese Facsimile: (408) 995-5163 with a copy sent by any of the foregoing methods simultaneously to: Kenneth M. Doran, Esq. Gibson, Dunn & Crutcher LLP 333 South Grand Avenue Los Angeles, CA 90071-3197 Facsimile: (213) 229-7520 8.4.2 If to JFL: 450 Park Avenue, 6th Floor New York, New York 10022 Attention: Donald Glickman Facsimile: (212) 634-1160 8.5 This Agreement shall be governed by, and interpreted in accordance with, the laws of the State of New York applicable to contracts made and to be performed in that State. 3 IN WITNESS WHEREOF, this Agreement has been executed all as of the date first above written. BURKE INDUSTRIES, INC. By: /s/ Rocco C. Genovese ------------------------------------------ Name: Rocco C. Genovese Title: President and Chief Executive Officer J.F. LEHMAN & COMPANY By: /s/ Donald Glickman ------------------------------------------ Name: Donald Glickman Title Managing Principal 4 SCHEDULE A TO MANAGEMENT SERVICES AGREEMENT DATED AS OF AUGUST 20, 1997 BETWEEN BURKE INDUSTRIES, INC. AND J.F. LEHMAN & COMPANY - ------------------- MANAGEMENT SERVICES - ------------------- STRATEGIC PLANNING: - Development of new products for U.S. Navy and other Military branches. - Development of new commercial products - Marketing - Other Opportunities OVERSIGHT AND SUPERVISION: - Contracting and contract compliance - Supervise investor relations - Security compliance - Advice on engineering issues - Application of existing commercial products to military operations - Arrangement/management of domestic bank facilities - Assistance in identifying/retaining key personnel and other service providers - Advice on cash flow management - Advice on potential acquisitions - ---------------------------------------------------------------------------- TOTAL QUARTERLY MANAGEMENT FEES $125,000.00 - ---------------------------------------------------------------------------- EX-10.37 5 EXHIBIT 10.37 AMENDMENT NO. 1 TO MANAGEMENT AGREEMENT This Amendment No. 1 to the Management Agreement (this "Amendment") is made and entered into as of June __, 1998 by and among Burke Industries, Inc. (the "Company") and J.F. Lehman & Company, Inc. (the "Advisor"). Except as otherwise provided herein, capitalized terms used herein will have the meanings ascribed to them in the Management Agreement (as defined below). W I T N E S S E T H WHEREAS, the Company and the Advisor entered into that certain Management Agreement dated as of August 20, 1997 (the "Agreement"), pursuant to which the parties agreed, among other things, that the Advisor shall be entitled to receive an Annual Fee for certain management services rendered by the Advisor to the Company in accordance with the terms of Section 1(b) of the Agreement; WHEREAS, the Company and the Advisor also entered into that certain Management Services Agreement dated as of June 18, 1998 (the "Management Services Agreement"), effective as of August 20, 1997, which sets forth in greater detail the management services to be provided by the Advisor to the Company and the fees to be paid to the Advisor in connection with the provision of those services; and WHEREAS, the Company and the Advisor now desire to amend the Agreement to delete Section 1(b) from the Agreement, effective as of August 20, 1997, and to replace the matters discussed therein with the Management Services Agreement. NOW, THEREFORE, BE IT RESOLVED, that in consideration of the premises herein contained and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: AGREEMENT 1. Section 1(b) of the Agreement is hereby amended in its entirety to read: "(b) Intentionally left blank." 2. This Amendment may be executed in one or more counterparts, all of which will constitute one and the same instrument. 3. Except as amended hereby, the Agreement shall continue in full force and effect. IN WITNESS WHEREOF, each of the parties hereto has executed this Amendment as of the date first above written. BURKE INDUSTRIES, INC. By: /s/ Rocco C. Genovese --------------------------------- Name: Rocco C. Genovese Title: President and Chief Executive Officer J.F. LEHMAN & COMPANY, INC. By: /s/ Donald Glickman --------------------------------- Name: Donald Glickman Title: Managing Principal EX-10.38 6 EXHIBIT 10.38 BURKE INDUSTRIES, INC. EXECUTIVE DEFERRED COMPENSATION AGREEMENT THIS AGREEMENT, made and entered into as of this 30th day of November 1995, by and between Burke Industries, Inc., a California corporation, with principal offices and place of business 2250 South Tenth Street, San Jose, CA 95112 (hereinafter referred to as the "Corporation" or the "Employer"), and that executive employee indicated on the signature page hereto, an individual residing in the State of California (hereinafter referred to as the "Employee"). WITNESSETH THAT: WHEREAS, the Employee is employed by the Corporation, and has been selected by the Corporation for participation in this plan; and WHEREAS, the Corporation recognizes the valuable services heretofore performed for it by the Employee and wishes to encourage Employee's continued employment; and WHEREAS, the Employee wishes to defer a certain portion of compensation payable to him; and the Employer may from time to time determine by Board of Directors resolution make supplemental contributions to the retirement account established hereunder, WHEREAS, the parties hereto wish to provide the terms and conditions upon which the Corporation shall pay such deferred compensation to the Employee or his designated beneficiary; and WHEREAS, the parties hereto intend that this Agreement be considered an unfunded arrangement maintained primarily to provide deferred compensation benefits for the Employee, a member of a select group of management or highly compensated employees of the Corporation for purposes of the Employee Retirement Income Security Act of 1974, as amended. NOW THEREFORE, in consideration of the mutual promises herein contained, the parties hereto agree as follows: 1. DEFINITION OF TERMS. Certain words and phrases are defined when first used in later paragraphs of this Agreement. In addition, the following words and phrases when used herein, unless the context clearly requires otherwise, shall have the following respective meanings: (a) Accrued Benefit. The sum of all Deferred Amounts, including Employee Deferrals and Supplemental Deferrals (subject to any vesting schedule), credited to the Employee's Retirement Account and due and owing to the Employee or his designated beneficiaries pursuant to this Agreement, together with Additions thereto calculated as set forth in paragraph 3, hereof, minus any distributions made hereunder. (b) Affiliate. Any corporation, partnership, joint venture, association, or similar organization or entity, the employees of which would be treated as employed by the Corporation under Section 414(b) or 414(c) of the Code. (c) Agreement. This Agreement, together with any amendments or supplements thereto. (d) Code. The Internal Revenue Code of 1986, as amended or as it may be amended from time to time. (e) Compensation. Total salary and commissions of the Employee paid or accrued by the Corporation, excluding any bonus, commissions, Accrued Benefits, stock options, stock appreciation rights, or any employer contributions or payments to any trust fund, agreement or plan providing retirement, pension, profit sharing, health, welfare, death, insurance or similar benefits. (f) Early Retirement Date. The date the Employee attains the age of fifty-five (55). The date upon which the Employee attains the age of sixty-five (65) shall be referred to as the Normal Retirement Date. (g) Effective Date. December 1, 1995. (h) Election of Deferral. A written notice filed by the Employee with the chief financial officer or controller of the Corporation in substantially the form attached hereto as Exhibit A, specifying the amount of Compensation to be deferred. (i) Fiscal Year. The taxable year of the Corporation. (j) Normal Retirement Date. The date the Employee attains the age of sixty-five (65). The date upon which the Employee attains the age of fifty-five (55) shall be referred to as the Early Retirement Date. (k) Notice of Discontinuance. A written notice filed by the Employee with the chief financial officer or controller of the Corporation in substantially the form attached hereto as Exhibit D, requesting discontinuance of the deferral of the Employee's Compensation. (l) Plan Year. The administrative accounting year of the deferred compensation program established under administrative policies established by the Employer for the administration of the obligations under the terms of this Agreement, which shall be the calendar year or a portion thereof in the initial or final year of the Agreement. 2 (m) Qualified Plan. The pension or profit sharing plan qualified under section 401 of the Internal Revenue Code, more specifically described at Exhibit E, attached hereto. (n) Retirement Account. Book entries maintained by the Corporation reflecting the Accrued benefit, including Employee Deferrals, Supplemental Deferrals and Additions thereon, subject to any vesting schedule applicable to Supplemental Deferrals described herein; provided, however, that the existence of such book entries and the Retirement Account shall not create and shall not be deemed to create a trust of any kind, or a fiduciary relationship between the Corporation and the Employee, his designated beneficiaries or other beneficiaries under this Agreement. (o) Survivor Benefit. The Survivor Benefit shall be the greater of: (a) the amount set forth at Schedule 1, attached hereto, which may be updated from time to time by the Corporation, minus any distributions made hereunder, or (b) the Accrued Benefit. In either (a) the absence of any amount set forth at Schedule 1, or (b) in the event that the Employee's death is the result of suicide occurring within three years of the date of this Agreement, then the Survivor Benefit shall be equal to the Accrued Benefit. 2. DEFERRED COMPENSATION. a. Employee Deferrals. Commencing on the Effective Date, and continuing through the date on which the Employee's employment terminates because of his death, retirement, disability, or any other cause, the Employee and the Corporation agree that the Employee shall defer into his Retirement Account the amount set forth in the Election of Deferral, which the Employee would otherwise be entitled to receive from the Corporation in each Fiscal Year of the Corporation. The amount selected for deferral by the Employee pursuant to an Election of Deferral is referred to as the "Annual Deferral Sum." The amounts of compensation actually deferred, taking into account discontinuance of deferral pursuant to a Notice of Discontinuance, are hereinafter collectively referred to as the "Deferred Amounts." The Employee's Deferred Amounts shall be credited to the Employee's Retirement Account as of the dates such Deferred Amounts would, but for such deferral, be payable to the Employee. 3. ADDITIONS TO DEFERRED AMOUNTS. The Corporation agrees that it will credit Deferred Amounts in the Employee's Retirement Account with additions thereon ("Additions") from and after dates Deferred Amounts are credited to the Retirement Account. Additions to Deferred Amounts shall accrue commencing on the date the Retirement Account first has a positive balance and shall continue up to the date that the 3 Retirement Account has been reduced to zero. Additions shall be calculated as an amount (the "As If Rate") equal to the yield that would be realized, including any dividends, interest, or other current yield, as well as any capital gain or loss based on an adjustment to fair market value on any date of calculation, as if hypothetically invested in whole or fractional shares in the assets set forth at Schedule 2 (the Calculation Assets), which may be changed at the sole discretion of the Employer, from time to time. The Employer shall have no obligation to actually acquire any of the Calculation Assets set forth at Schedule 2, and such return shall be only for purposes of calculating Additions to Deferred Amounts hereunder. The Employee shall have no rights in or to any Calculation Assets set forth at Schedule 2, as provided elsewhere in this Agreement. The As If Rate shall be adjusted on the last day of each fiscal quarter the plan year at the mean trading price of the Calculation Assets on such date or the first business date thereafter, as quoted in Barrons financial news publication, or in the absence of a quotation therein, in a similar publication or other authoritative valuation of the specified Calculation Assets. Any such designation of new Calculation Assets by the Employer must be in writing. For purposes of calculating Additions, it shall be assumed that the Calculation Assets is sold and the alternate Calculation Assets is purchased on the first business day following such revised designation by the Corporation. 4. ELECTION TO DEFER COMPENSATION. The Employee may elect an Annual Deferral Sum hereunder by filing an Election of Deferral. The initial Election of Deferral must be filed within twenty (20) days of the Effective Date of this Agreement. Such initial Election of Deferral, if any, shall be effective commencing with the first day of the month after it is filed. Thereafter, an Election of Deferral must be filed at least twenty (20) days prior to the beginning of the Plan Year to which it pertains and shall be effective on the first day of the Plan Year following the filing thereof. The maximum amount of the Annual Deferral Sum shall be an amount equal to the maximum amount that can be deferred under section 402(g), which limits deferrals under qualified cash or deferred arrangement, which amount is equal to $7000 adjusted annually so that for 1995 the limitation hereunder, for example, is $9240. The minimum deferral shall be One Thousand Dollars ($1,000). 5. TERMINATION OF ELECTION. The Employee's initial Election of Deferral shall continue in effect, pursuant to the terms of the Election of Deferral, unless and until the Employee files with the Corporation a Notice of Discontinuance or a subsequent Election of Deferral specifying a different amount of deferral. Each Election of Deferral filed subsequent to the initial Election of Deferral shall similarly continue in effect until the Employee files a Notice of Discontinuance or a new Election of Deferral. Any new Election of Deferral, to be effective, must be filed at least twenty (20) days prior to the beginning of the Plan Year in which deferral is sought. A notice of Discontinuance shall be effective if filed at least twenty (20) days prior to any 1st day of the first month, 1st day of the fourth month, 1st day of the seventh month, or 1st day of the tenth month of the Plan Year. Such Notice of Discontinuance shall be effective commencing with the 1st day of the first month, 1st day of the fourth month, 1st day of the seventh month, or 1st day of the tenth month of the Plan Year following its filing, whichever applies, and 4 shall apply only with respect to the Employee's Compensation attributable to services not yet performed. 6. (a) RETIREMENT BENEFIT. The Corporation agrees that, from and after the retirement of the Employee from the service of the Corporation upon reaching his Early Retirement Date or Normal Retirement Date, the Corporation shall thereafter pay as a retirement benefit ("Retirement Benefit") to the Employee the Employee's entire Accrued Benefit in equal monthly installments for one hundred twenty (120) consecutive months, commencing on the first day of the second calendar month immediately following the Employee's retirement; provided, however, that the Employee may, at his sole option make one election prior to the time benefit payments begin to receive the Accrued Benefit in his Retirement Account in equal monthly installment payments over a shorter period, to be designated by him in writing, than would otherwise apply, or in a single payment. The election referred to in the preceding sentence must be made at least on hundred eighty (180) days prior to the date benefit payments begin and shall be irrevocable. In the event of such election by the Employee, the first designated monthly payment or the single payment, whichever applies, shall be due and payable on the first day of the second month following the Employee's filing of an effective written election to accelerate benefits. Monthly installment payments, if applicable, shall continue monthly thereafter, for the period designated by the Employee. (b) ELECTION OF BENEFITS UPON RETIREMENT DATE. The Employee shall have the option, upon attaining his Early Retirement Date or Normal Retirement Date, to elect to receive his Retirement Benefit, notwithstanding his continued employment with the Corporation after he has attained his Early Retirement Date or Normal Retirement Date. The Employee's election to receive his Retirement Benefit notwithstanding his continued employment must be made in writing at least sixty (60) days prior to his Early Retirement Date or Normal Retirement Date, whichever applies. The Retirement Benefit payable upon election pursuant to this paragraph 6.b. shall be the amount that would have been payable had the Employee retired from service with the Corporation as of his Early Retirement Date or Normal Retirement Date, whichever applies. Any such election shall be irrevocable, and shall result in the termination of the Employee's right to any further deferrals hereunder. 7. DISABILITY RETIREMENT. Notwithstanding any other provision hereof, the Employee shall be entitled to receive payments hereunder prior to his Early Retirement Date or Normal Retirement Date, whichever applies, in any case in which it is determined by a duly licensed physician selected by the Corporation that, because of ill health, accident, disability or general inability because of age, the Employee is no longer able, properly and satisfactorily, to perform his regular duties as an Employee. In the event that the Employee's employment is terminated, then, pursuant to this paragraph 7, the disability retirement benefit payable hereunder ("Disability Retirement Benefit") shall be 5 that amount that would have been payable as a Retirement Benefit had the Employee attained his Normal Retirement Date on the date of the physician's disability determination. The Disability Retirement Benefit payable under this paragraph 7 shall be distributed in accordance with the provisions of paragraph 6.a. as if the Employee had retired on the date of the physician's disability determination. 8. (a) DEATH BENEFIT PRIOR TO COMMENCEMENT OF RETIREMENT BENEFITS. In the event of the Employee's death while in the employment of the Corporation and prior to commencement of the Retirement Benefits or Disability Retirement Benefits, the Corporation shall pay as a survivor's benefit the Employee's entire Survivor Benefit in a single lump sum to the Employee's designated beneficiary (the "Beneficiary"), in accordance with the last such designation received by the Corporation from the Employee prior to death. If no such designation has been received by the Corporation from the Employee prior to death or if said payment is not otherwise to be made as provided herein, said payment shall be made to the Employee's then living spouse, so long as such surviving spouse shall live and thereafter to such person or persons, including the estate of the spouse, as the spouse may appoint by Will, making specific reference hereto; if the Employee is not survived by a spouse or if the spouse shall fail to do so appoint, then said payment shall be made to the then living children of the Employee, if any, in equal shares, for their joint and survivor lives; and if none or after their respective joint and survivor lives, in one lump sum to the estate of the Employee. Such payment shall commence on the first day of the second month following the Employee's death. (b) DEATH BENEFIT AFTER COMMENCEMENT OF BENEFITS. In the event of the Employee's death after commencement of Retirement benefits, Normal Retirement Benefits, or Disability Retirement Benefits, but prior to the completion of all such payments due and owing hereunder, the Corporation shall pay the balance of the Accrued Benefit in a single lump sum the Employee's designated beneficiary, in accordance with the last such designation received by the Corporation form the Employee prior to his death. If no such designation has been received by the Corporation from the Employee prior to his death or if said payments are not otherwise to be made as provided herein, said payments shall be made to the Employee's then living spouse, so long as she shall live and thereafter to such person or persons, including his estate, as he may appoint under his Will, or other testamentary instrument, making specific referenced hereto; if the Employee is not survived by a spouse or if he shall fail to so appoint, then said payments shall be made to the then living children of the Employee, if any, in equal shares, for their joint and survivor lives; and if none or after their respective joint and survivor lives, any balance thereof in one lump sum to the estate of the Employee. Such payments shall commence on the first day of the first month following the Employee's death. At its sole option, the Corporation may pay the Employee's entire Accrued Benefit as a single lump sum. 6 9. TERMINATION BENEFIT. In the event the Employee's termination of employment with the Corporation before his Early Retirement Date or Normal Retirement Date for any reason, other than disability, retirement or death, the Corporation shall pay to the Employee, as compensation for services rendered prior to such termination, a single sum equal to the total Deferred Amounts hereunder, including any Additions thereto (the "Termination Benefit"), subject to the vesting schedule described at paragraph 2 above. The Termination Benefit shall be payable on the first day of the second month following the termination of the Employee's employment with the Corporation. 10. HARDSHIP WITHDRAWAL. In the event the Employee suffers from unforeseen financial emergency, as defined hereafter, the Corporation may, if it deems advisable in its sole and absolute discretion, distribute to or utilize on behalf of the Employee as a hardship benefit (the "Hardship Benefit") any portion of the Employee's Retirement Account. The Corporation shall have exclusive authority to determine whether to make a hardship distribution, and the Corporation's decision shall be final and binding on all parties. Any hardship distribution shall, like all distributions, reduce the amounts available for subsequent distributions and be deducted from the Retirement Account. The Employee shall apply for such a Hardship Benefit in writing in a form approved by the Corporation and shall provide such additional information as the Corporation shall require. For purposes of this Paragraph, "unforeseen financial emergency" means an immediate and heavy financial need caused by an unforeseeable emergency, as described in Treasury Regulations Section 1.457-2(h) (4) and (5), resulting from any of the following, and in an amount not in excess of the amount needed to pay for the following unreimbursed expenses: a. expenses which are not covered by insurance and which the Employee or his or her spouse or dependents (as defined in Code Section 152(a)) has incurred as a result of, or is required to incur in order to receive, medical care described in Code Section 213(d), as a result of a sudden or unexpected illness; b. loss of an employee's property as a result of casualty, or, c. other similar extraordinary, unforeseeable circumstances attributable to forces beyond the Employee's control. No distribution shall be made pursuant to this paragraph in excess of the amount of the immediate and heavy financial need of the Participant. The amount of the immediate and heavy financial need may include any amounts necessary to pay federal, state or local 11. QUALIFIED PLAN ELECTION. As soon as practicable each Plan Year of the Qualified Plan and not later than January 31 of the next ensuing year, the Employer shall perform a preliminary actual deferral percentage and actual contribution percentage testing to determine the maximum amount of additional elective contributions that could be made to the Qualified Plan for the current Plan Year, consistent with Code section 402(g) and the limitations of section 401(k)(3), on behalf of Employee as a participant in 7 the Qualified Plan. The lesser of those amounts, or the Employee's salary deferral for the Plan Year as set forth at the Deferral Election Form at Exhibit A for the Plan Year, will be paid to the Employee as soon as practicable, but in no event later than March 15 of the Plan Year following the Plan Year for which such determination is made, unless the Employee previously elected to have such amount contributed to the Qualified Plan as an elective contribution. The Employee's election to have such amount contributed to the Qualified Plan must be made at the same time as the Election of Deferral under this Agreement, which must in no event be later than the December 31 of the calendar year in which the compensation to which the salary deferral relates is earned and, once made, the election shall be irrevocable. If the Employee so elects, the Employer shall cause the elected amount to be contributed directly to the Qualified Plan in accordance with this paragraph. In no event will any earnings under this Plan be credited to the Qualified Plan. 12. BENEFICIARY DESIGNATION. The Employee shall have the right, at any time to submit in substantially the form attached hereto as Exhibit B, a written designation of primary and secondary beneficiaries to whom payment under this Agreement shall be made in the event of his death prior to complete distribution of the benefits due and payable under the Agreement. Each beneficiary designation shall become effective only when receipt thereof is acknowledged in writing by the Corporation. 13. DETERMINATION OF BENEFITS. a. Claim A person who believes that he is being denied a benefit under the Plan (hereinafter referred to as a "Claimant") may file a written request for such benefit with the Corporation, setting forth his claim. The request must be addressed to the Treasurer of the Corporation at its then principal place of business. b. Claim Decision. Upon receipt of a claim, the Corporation shall advise the Claimant that a reply will be forthcoming within ninety (90) days and shall, in fact, deliver such reply within such period. The Corporation may, however, extend the reply period for an additional ninety (90) days for reasonable cause. If the claim is wholly or partially denied, the Corporation shall provide a written notice within ninety (90) days specifying the reason for the denial, the plan provisions on which the denial is based, and additional material or information necessary to receive benefits, if any, and why such material or information is necessary. Also, such written notice shall indicate the steps to be taken if a review of the denial is desired. c. Request for Review. 8 If a claim is denied and a review is desired, the Employee (or designated beneficiary in the case of the Employee's death) shall notify the Corporation in writing within sixty (60) days after receipt of a written notice of a denial of a claim. In requesting a review the Employee may, but need not, review the pertinent documents and submit issues and comments in writing for consideration of the corporation and refer to plan documents. d. Review of Decision. The Corporation shall then review the claim and provide a written decision within sixty (60) days of receipt of a request for review. This decision shall state the specific reasons for the decision and shall include references to specific provisions on which the decision is based. If special circumstances require that the sixty (60) day time period be extended, the Corporation will so notify the Claimant and will render the decision as soon as possible, but no later than one hundred twenty (120) days after receipt of the request for review. 14. BENEFITS NOT TRANSFERABLE. Neither the Employee nor any designated beneficiary shall have any right to transfer, assign, anticipate, hypothecate or otherwise encumber any part or all of the amounts payable hereunder. No such amounts shall be subject to seizure by any creditor of such beneficiary, by a proceeding in law or equity, nor shall such amounts be transferable by operation of law in the event of bankruptcy, insolvency or death of the Employee, his designated beneficiary, or any other beneficiary hereunder. Any such attempted transfer shall be void. 15. NO CONTRACT OF EMPLOYMENT. Nothing contained herein shall be construed to be a contract of employment for any term of years, not as conferring upon the Employee the right to continue to be employed by the Corporation, in any capacity. It is expressly understood by the parties hereto that this Agreement relates exclusively to deferral of otherwise currently payable compensation for the Employee's services; such deferral to be payable after termination of Employee's employment with the Corporation, or as otherwise provided. This Agreement is not intended to be an employment contract. 16. CONSTRUCTION OF AGREEMENT. Any payments under this Agreement shall be independent of, and in addition to, those under any other plan, program, or agreement which may be in effect between the parties hereto, or any other compensation payable to the Employee or the Employee's designated beneficiary by the Corporation. 17. NO TRUST CREATED. Nothing contained in this Agreement, and no action taken pursuant to its provisions by either party hereto, shall crate nor be construed to create, a trust or any kind of a fiduciary relationship between the Corporation and the Employee, the Employee's designated beneficiary, any other beneficiary of the Employee or any other person. 18. BENEFITS PAYABLE ONLY FROM GENERAL CORPORATE ASSETS; UNSECURED GENERAL CREDITORS STATUS OF EMPLOYEE. The payments to the Employee, the Employee's designated beneficiary or any other beneficiary hereunder 9 shall be made from assets which shall continue, for all purposes, to be a part of the general, unrestricted assets of the Corporation; no person shall have nor acquire any interest in any such assets by virtue of the provisions of this Agreement. The Corporation's obligation hereunder shall be an unfunded and unsecured promise to pay money in the future. To the extent that the Employee or any person acquires a right to receive payments from the Corporation under the provisions hereof, such right shall be no greater than the right of any unsecured general creditor of the Corporation, no such person shall have nor require any legal or equitable right, interest or claim in or to any property or assets of the Corporation. In the event that, in its sole discretion, the Corporation purchases an insurance policy or policies insuring the life of the Employee (or any other property) to allow the Corporation to recover the cost of providing the benefits, in whole, or in part, hereunder, neither the Employee, the Employee's designated beneficiary, any other beneficiary nor any other person shall have nor acquire any rights whatsoever therein or in the proceeds therefrom. The Corporation shall be the sole owner and beneficiary of any such policy or policies and, as such, shall possess and, may exercise all incidents of ownership therein. No such policy, policies or other property shall be held in any trust for the Employee or any other person nor as collateral security for any obligation of the Corporation hereunder. 19. AMENDMENT. This Agreement may not be altered, amended, or revoked except by a written agreement signed by the Corporation and Employee. 20. INTERPRETATION. Where appropriate in this Agreement, words used in the singular shall include the plural and words used in the masculine shall include the feminine. 21. ARBITRATION. All disputes, controversies or differences arising out of, or in relation to or in connection with this Agreement, which cannot be settled by discussion and mutual accord, shall be resolved exclusively by binding arbitration in the country in which the principal office of the Employer is located in accordance with the then prevailing Commercial Arbitration Rules of the American Arbitration Association. Demand for arbitration shall be made in writing and shall be served upon the party or parties to whom the demand is addressed in the manner provided at paragraph 22 below. If the parties are unable to mutually agree on an arbitrator within twenty (20) days after delivery of the request for arbitration, each shall have the right to petition an appropriate court that would have jurisdiction over this matter in the country in which the principle office of the Employer is located, to appoint an arbitrator with experience in manners of executive compensation law and business practice. Unless otherwise agreed in writing by the parties, they shall make their initial submissions to the arbitrator(s) and the arbitration hearing shall commence within thirty (30) days of the agreement on or appointment of the arbitrator. The arbitration hearing shall be completed within thirty (30) days thereafter. The award shall be made promptly by the arbitrator(s) and, unless otherwise agreed by the parties, no later than thirty (30) days after the completion of the hearing; provided however, that any failure to render the award within such time shall not affect the validity of such award. The award rendered by the arbitrator(s) shall set forth his/her findings of the facts and conclusions of law and shall be final, and judgment upon the award rendered may be entered in 10 any court having jurisdiction or application may be made to such court for a judicial acceptance of the award and an order of enforcement, as the case may be. In that regard, each of the parties to this Agreement hereby submits to the jurisdiction of the courts of the State of California, and to the federal courts of the United States of America located in the county in which the principle office of the Employer is located. 22. TERMINATION OF PLAN. The Employer may at any time during the term of this Agreement, file a Notice of Termination with the Employee thereby terminating this Plan as of the first day of the subsequent month. If the Employer elects to terminate this Agreement, the Employee shall be entitled to receive the amounts computed as provided in Section (9) hereinabove, provided however, that in the event of a termination of the Plan by the Employer, there shall be no reduction of the Retirement Account as a result of any vesting schedule otherwise applicable to Supplemental Deferrals. 23. OFFSET FOR OBLIGATIONS TO CORPORATION. If, at such time as the Employee becomes entitled to benefit payments hereunder, the Employee has any debt, obligation or other liability representing and amount owing to the corporation or an affiliate of the corporation, and if such debt, obligation or other liability is due and owning at the time benefit payments are payable hereunder, the corporation may offset the amount owning it or an affiliate against the amount of benefits otherwise distributable hereunder. 24. MISCELLANEOUS. (a) The law of the State of California shall govern this Agreement. (b) This Agreement may be executed in one or more counterparts, each of which shall be deemed an original and all of which together shall constitute one instrument. (c) To the extent that any of the provisions of this Agreement are found by a court of competent jurisdiction to be invalid, illegal, or unenforceable for any reason, such provision shall be modified or deleted in such a manner so as to make the Agreement as modified valid, legal and enforceable, and the balance of the Agreement shall not be affected thereby. (d) Any notice required or permitted hereunder shall be given to the appropriate party at the address specified beneath such party's signature below or at such other address as the party may hereafter specify in writing. Such notice shall be deemed given upon personal delivery to the appropriate address, three business days after the date of mailing sent by certified or registered mail, or one business day after the date of deposit with Federal Express or similar overnight courier. (e) If any arbitration, action or proceeding is commenced to enforce or interpret the terms of this Agreement, the prevailing party shall be entitled 11 to its reasonable attorney's fees, costs and expenses from the other party in addition to any other relief to which such prevailing party may be entitled. IN WITNESS WHEREOF, the parties hereto have executed this Agreement the day and year first hereinabove written. BURKE INDUSTRIES, INCORPORATED /s/ Rocky Genovese ------------------------------------ Rocky Genovese Its: President 2250 South Tenth Street San Jose, CA 95112 WITNESS /s/ Anne Howe ------------------------------------ Anne Howe 225 South 10th Street San Jose, CA 95112 EMPLOYEE ------------------------------------ Address: ---------------------------- ------------------------------------ 12 BURKE INDUSTRIES, INC. EXECUTIVE DEFERRED COMPENSATION AGREEMENT - ------------------------------------------------------------------------------- Schedule 1 - Survivor Benefit Initial Survivor Benefit _________________
- ------------------------------------------------------------------------------- Date of Revision Revised Amount & Signature Authority - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
13 BURKE INDUSTRIES, INC. EXECUTIVE DEFERRED COMPENSATION AGREEMENT Schedule 2, Calculation Assets - ------------------------------------------------------------------------------- The Corporation agrees that it will credit Deferred Amounts in the Employee's Retirement Account with additions from and after dates Deferred Amounts are credited to the Retirement Account at the "As If" rate specified in the Agreement. In determining the "As If" calculation under the agreement the Company will utilize the following Calculation Assets, which may be revised in writing from time to time, at the discretion of the Company.
----------------------------------------------------------- FUND Percentage ----------------------------------------------------------- Large Cap Growth, Cohen Klingenstein & Marks % ----------------------------------------------------------- International Equity, GAM Co. % ----------------------------------------------------------- Balanced, The Crabble Huson Group % ----------------------------------------------------------- Index, State Street % ----------------------------------------------------------- Stable Asset, Morley Capital % ----------------------------------------------------------- Guaranteed Index % ----------------------------------------------------------- Fidelity Equity Retail Growth % ----------------------------------------------------------- % ----------------------------------------------------------- -----------
Burke Industries, Inc. /s/ Rocky Genovese - ------------------------------ Rocky Genovese Date: ------------------------- 14 BURKE INDUSTRIES, INC. EXECUTIVE DEFERRED COMPENSATION AGREEMENT Exhibit E Qualified Plan Designation
- ------------------------------------------------------------------------------- Date of Plan Description - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
15 EX-10.39 7 EXHIBIT 10.39 BURKE INDUSTRIES, INC. 1997 Stock Option Plan 1. PURPOSE. This Stock Option Plan (the "Plan") is intended as an incentive to encourage stock ownership by officers and directors and executive and professional employees of Burke Industries, Inc. (the "Company") and its Parent and Subsidiary corporations so that they may acquire or increase their equity interest in the success of the Company and its Parents and Subsidiaries, and to encourage them to remain in the service of the Company or of its Parents or Subsidiaries. Each option granted under this Plan will be designated as either an "Incentive Stock Option" or a "Nonqualified Stock Option." It is intended that each option designated as an Incentive Stock Option granted under this Plan will qualify as an incentive stock option within the meaning of Section 422(b) of the Code. 2. DEFINITIONS. 2.1 "Board of Directors" means the board of directors of the Company. 2.2 "Change in Control" shall mean the happening of any of the following: 2.2.1 any person who is not a stockholder of the Company or of any Parent on the date of adoption of this Plan (or group of such persons acting in concert) acquires, during any period of twelve consecutive calendar months, stock of the Company or of a Parent representing a majority of the voting power of all stock of the Company or any Parent having the right to vote for the election of directors; 2.2.2 the stockholders of the Company approve a merger or consolidation of the Company with any other corporation, other than (i) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than eighty percent (80%) of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation or (ii) a merger or consolidation effected to implement a Recapitalization of the Company; 2.2.3 the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets or any transaction having a similar effect; or 2.2.4 if the Company enters into an agreement with an unrelated party for the sale of all or substantially all of the assets or outstanding stock of a Subsidiary (or a transaction having a similar effect), or any other event occurs by reason of which a Subsidiary ceases to be a Subsidiary of the Company, a Change in Control shall be deemed to have occurred with respect to those Employees who are then employed by such Subsidiary. 2.3 "Change in Control Date" shall mean the earliest date on which one of the events described in the definition of "Change in Control" occurs, as determined by the Board of Directors, in its sole discretion, provided that, if Section 2.2.4 of the definition of "Change of Control" applies, the Change in Control Date shall be deemed to be the date of the agreement, provided that the transaction does close. 2.4 "Change in Control Price" shall mean the highest fair market value, or the highest price paid or offered in any bona tide transaction related to a Change in Control of the Company, at any time during the sixty (60) days preceding the Change in Control Date. 2.5 "Code" means the Internal Revenue Code of 1986, as amended. 2.6 "Company" means Burke Industries, Inc., a California corporation. 2.7 "Employee" means any bona fide full or part time common law employee of the Company or of any Parent or Subsidiary of the Company. 2.8 "Incentive Stock Option" means an Option granted pursuant to this Plan intended to qualify and designated as an incentive stock option within the meaning of Section 422 of the Code. 2.9 "Nonqualified Stock Option" means any Option granted pursuant to this Plan other than an Incentive Stock Option. 2.10 "Option" or "Stock Option" means any stock option granted pursuant to this Plan. 2.11. "Optionee" means any individual to whom an Option is granted pursuant to this Plan. 2.12 "Parent" means, at the time of granting any Option, any corporation (other than the Company) in an unbroken chain of corporations ending with the Company if each of the corporations other than the Company owns stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. 2.13 "Plan" means the Burke Industries, Inc. 1997 Stock Option Plan. 2.14 "Recapitalization" means any reorganization, merger or other subdivision, consolidation, recapitalization, reclassification, stock split, combination of shares, issuance of warrants, stock dividend or similar event with respect to or affecting the common stock of the Company, no par value per share. 2.15 "Stock Option Committee" means the committee appointed to administer the Plan pursuant to Article 7 herein, if such committee is appointed. 2.16 "Subsidiary" means, at the time of granting any Option, any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company if each of the corporations other than the last corporation in the unbroken chain owns stock possessing fifty 2 percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. 2.17 "Ten Percent Shareholder" means any person who owns (or is considered by reason of Section 425(d) of the Code to own) stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or of any Parent or Subsidiary of the Company. 3. ELIGIBILITY. The persons who shall be eligible to receive Options shall be such officers, directors and executive and professional employees of the Company or its Parent or Subsidiary Corporations as the Board of Directors shall select from time to time. An Optionee may hold more than one Option, but only on the terms and subject to the restrictions hereafter set forth. 4. STOCK. The stock subject to the Options shall be shares of the Company's authorized but unissued or reacquired no par value common stock, hereafter sometimes called Stock. The aggregate number of shares which may be issued under Options shall not exceed five hundred thousand (500,000) shares of Stock. The limitation established by the preceding sentence shall be subject to adjustment as provided in Section 5.12 of the Plan. If any outstanding Option for any reason expires or is terminated, the shares of Stock allocable to the unexercised portion of such Option may again be subjected to an Option under the Plan. 5. TERMS AND CONDITIONS. 5.1 OPTION AGREEMENT. Stock Options granted pursuant to the Plan shall be authorized by the Board of Directors and shall be evidenced by agreements in such form as the Board of Directors shall from time to time approve, which agreements shall comply with and be subject to the terms and conditions set forth in this Article 5. The agreements shall not impose upon the Company or its Parents or Subsidiaries any obligation to retain the Optionee in their employ for any period. 5.2 NUMBER OF SHARES. Each Option shall state the number of shares of Stock to which it pertains. 5.3 OPTION PRICE. Each Option shall state the option price, which in the case of an Incentive Stock Option shall be not less than (i) one hundred percent (100%) 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 (ii) one hundred ten percent (110%) 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. The fair market value of the shares of Stock shall be determined pursuant to Section 7.2. 5.4 MEDIUM AND TIME OF PAYMENT. The option price shall be payable upon the exercise of the Option and may be paid in cash or by good check. At the sole option of the Company, it approved by the Board of Directors, a portion of the purchase price may be paid by delivery of shares of Stock previously owned by the Optionee, duly endorsed for transfer to 3 the Company, with a fair market value (as determined by the Board of Directors) on the date of delivery equal to the option price, or by delivery of a recourse promissory note bearing interest at such rate, on such other terms and in form and with security satisfactory to the Company, or any combination of the foregoing approved by the Board of Directors. Exercise of an Option shall not be effective until the Company has received written notice of exercise, specifying the number of whole and fractional shares of Stock to be purchased, accompanied by payment in full of the aggregate option price of the number of shares purchased. 5.5 TERM OF OPTIONS. Each Option, by its terms, shall not be exercisable after the expiration of ten years from the date the Option is granted, provided, however, that any Incentive Stock Option granted to a Ten Percent Shareholder, by its terms, shall not be exercisable after the expiration of five years from the date the Option is granted. Any Option may provide that it will expire within a shorter period than the maximum permitted hereby. 5.6 INSTALLMENTS. Each Option shall be exercisable on such dates and in such amounts (SUBJECT to the other provisions hereof) as shall be determined by the Board of Directors. It is not required that each Option have the same installment provisions. In its sole discretion, the Board of Directors may accelerate the exercise date of part or all of any Option. 5.7 TRANSFERABILITY. Each Option, by its terms, shall not be transferable by the individual to whom granted otherwise than by will or the laws of descent and distribution, and shall be exercisable, during the Optionee's lifetime, only by the Optionee. 5.8 LIMITS ON EXERCISE. Each Option shall be subject to the requirement that, if at any time the Board of Directors, in its discretion, shall determine that the listing, registration, or qualification of the shares subject to such Option upon any securities exchange or under any state or federal law, or the consent or approval of any government regulatory body, is necessary or desirable as a condition of, or in connection with, the granting of such Option, or the issue or purchase of shares thereunder, such Option may not be exercised in whole or in part unless such listing, registration, qualification, consent or approval shall have been effected or obtained free of any conditions not acceptable to the Board of Directors. 5.9 LIMIT ON OPTIONS. An Option shall not be an Incentive Stock Option to the extent that the aggregate fair market value of stock with respect to which such Option is exercisable for the first time by any individual during any calendar year (taking into account all Incentive Stock Options simultaneously or previously granted under all stock option plans of the Company and its Parents and Subsidiaries) exceeds One Hundred Thousand Dollars ($100,000). 5.10 TERMINATION OF EMPLOYMENT. Each Option by its terms shall not be exercisable after thirty (30) days after the termination of employment of the individual to whom the Option was granted, unless such termination was a result of the death or disability of the employee, and may provide that it shall not be exercisable after the date of termination of employment of the individual to whom the Option was granted. 5.11 EXPIRATION OF PLAN. No Option shall be granted under this Plan more than ten years from the date on which this Plan was adopted or approved by the stockholders of the 4 Company, whichever is earlier. No Option granted under this Plan shall be valid unless the Plan is approved by the stockholders of the Company within twelve (12) months before or after its adoption by the Board of Directors. 5.12 RECAPITALIZATION. Upon any Recapitalization, the Board of Directors shall make an appropriate and equitable adjustment in the number and kind of securities with respect to which rights may he granted under this Plan and the price at which such securities may be purchased, and an appropriate and equitable adjustment in the number and kind of securities that may be purchased under each outstanding Option and the price at which shares may be purchased under each such Option. The grant of an Option pursuant to the Plan shall not affect in any way the right or power of the Company to make or authorize any adjustments, recapitalizations, reorganizations, or other changes in the Company's capital structure or business, any merger or consolidation, any issuance of bonds, debentures, preferred shares or common shares, the dissolution or liquidation of the Company, any sale or transfer of all or any part of the Company's assets or business, or any other act, whether or not similar to the events described above. 5.13 RIGHTS AS A STOCKHOLDER. An Optionee or a transferee of an Option shall have no rights as a stockholder with respect to any shares covered by the Option until the date of the issuance of a stock certificate for such shares. No adjustment shell be made for dividends (ordinary or extraordinary, whether in cash, securities or other property) or distributions or other rights for which the record date is prior to the date such stock certificate is issued, except as provided in Section 5.12 hereof. 5.14 MODIFICATION, EXTENSION AND RENEWAL OF OPTIONS. Subject to the terms and conditions and within the limitations of the Plan, the Board of Directors may modify, extend or renew outstanding Options granted under the Plan, or accept the surrender of outstanding Options (to the extant not theretofore exercised) and authorize the granting of new Options in substitution therefor (to the extent not theretofore exercised). Notwithstanding the foregoing, no modification of an Option shall, without the consent of the Optionee, alter or impair any rights or obligations under any Option theretofore granted under the Plan. 5.15 INVESTMENT PURPOSE. Each Option under the Plan shall be granted on the condition that the purchases of stock thereunder shall be for investment purposes, and not with a view to resale or distribution unless the stock subject to such Option is registered under the Securities Act of 1933, as amended, and any applicable state securities laws, or a resale of such stock without such registration would otherwise be permissible. Each person exercising an Option must represent that such condition is fulfilled, unless in the opinion of counsel for the Company such condition is not required under the Securities Act of 1933 or any other applicable law, regulation, or rule of any governmental agency. 5.16 WITHHOLDING TAXES. Whenever under the Plan shares are to be issued or cash is to be paid in satisfaction of Options, the Company shall have the right to require the recipient to remit to the Company an amount sufficient to satisfy federal, state and local 5 withholding tax requirements prior to the delivery of any certificate or certificates for such shares or payment of such cash. 5.17 TERMINATION OF OPTIONS. Each Option, by its terms, shall reserve to the Company the right to terminate the Option in connection with a Change in Control or a payment in cash equal to the difference between the exercise price for the shares of Stock subject to the Option and the Change in Control Price of such Stock. 5.18 OTHER PROVISIONS. The Option agreements authorized under the Plan shall contain such other provisions, including, without limitation, such rights of redemption, purchase and first refusal, and such other restrictions upon the exercise of Options or the transfer of the Stock issued upon exercise, as the Board of Directors of the Company shall deem advisable. Any Incentive Stock Option agreement shall contain such limitations and restrictions upon the exercise of the Option as shall be necessary in order that such Option will be an incentive Stock Option" as defined in Section 422 of the Code. 6. EXERCISE OF OPTIONS. 6.1 STOCK TRANSFER BOOKS. Notwithstanding any other provision of this Plan or of any Option, no stock shall be issued by the Company while its stock transfer books are closed. 6.2 SECURITIES LAWS. Notwithstanding any other provision of this Plan or of any Option, no Option shall be exercisable, and no stock shall be issued upon the exercise of any Option, if such exercise or such issuance of stock would result in any violation of law or the imposition on the Company of a requirement that it commence filing periodic reports under the Securities Exchange Act of 1934 or any similar provision of law. 7. ADMINISTRATION. 7.1 ADMINISTRATION BY BOARD OF DIRECTORS. The Plan shall be administered by the Board of Directors. The interpretation and construction by the Board of Directors of any provisions of the Plan or of any Option granted under it shall be final. The Board of Directors shall have the authority to appoint a Stock Option Committee to assume the duties and responsibilities of administering the Plan. The Stock Option Committee, if such be established by the Board of Directors, shall be composed of no less than three (3) persons (who shall be members of the Board of Directors), each of whom shall be a "disinterested person" as defined herein, and such Stock Option Committee shall have the same power, authority and rights in the administration of the Plan as the Board of Directors. No director shall be liable for any action or determination made in good faith with respect to the Plan or any Option granted under it. The Board of Directors shall determine from time to time the persons who shall receive Options hereunder; provided, however, Options may be granted hereunder only to persons who, at the time of the grant thereof, are officers, directors or key employees of the Company and its Parents and Subsidiaries, except as otherwise provided in this Plan; provided, further, that any decision to award Options hereunder to any person or the determination of the 6 maximum number of shares of Stock (as hereinafter defined) which may be subject to Options granted to any such director, employee or officer shall be made by either (i) the Board of Directors, all of the directors of which and all of the directors acting in such matter shall be disinterested persons as defined herein, or (ii) the Stock Option Committee appointed by the Board of Directors pursuant to this section. For purposes of this Plan, "disinterested person" shall mean a director who is not, during the one year prior to service as an administrator of the Plan, or during such service, granted or awarded equity securities pursuant to the Plan or any other plan of the Company or any of its Parents or Subsidiaries entitling the participants therein to acquire stock, stock options or stock appreciation rights of the Company or any of its Parents or Subsidiaries. 7.2 DETERMINATION OF FAIR MARKET VALUE. For the purpose of granting Incentive Stock Options, the Board of Directors shall determine the fair market value of the Stock of the Company as follows: 7.2.1 If the Company's Stock is traded on any recognized stock exchange or exchanges, such fair market value shall be deemed to be the highest closing price of the Stock on such stock exchange or exchanges on the day the Option is granted or if no sale of the Company's Stock shall have been made on any stock exchange on that day, on the next preceding day on which there was a sale of such stock. 7.2.2 During such time as the Stock is not listed on an established exchange, but, is actively traded on the over-the-counter market, the fair market value per share shall be the mean between dealer "bid" and "ask" prices of the Stock in the over-the-counter market on the day the Option is granted, as reported by the National Association of Securities Dealers, Inc. 7.2.3 During such time as the Company's Stock is neither listed on any recognized exchange nor actively traded over-the-counter, the fair market value shall be determined in good faith by the Board of Directors. In making such determination, the Board of Directors may (but shall not be required to) rely on the opinions of one or more qualified, independent appraisers. 7.3 INDEMNIFICATION. In addition to such other rights of indemnification as they may have as directors or as members of the Stock Option Committee, the members of the Board of Directors shall be indemnified by the Company against the reasonable expenses, including attorneys' fees actually and necessarily incurred in connection with the defense of any action, suit or proceeding, or in connection with any appeal therein, to which they or any of them may be a party by reason of any action taken or failure to act under or in connection with the Plan or any Option granted hereunder, and against all amounts paid by them in settlement thereof (provided such settlement is approved by independent legal counsel selected by the Company) or paid by them in satisfaction of a judgment in any such action, suit or proceeding, except in relation to matters as to which it shall be adjudged in such action, suit or proceeding that such Board or Stock Option Committee member is liable for negligence or misconduct in the performance of his duties; provided that within sixty (60) days after institution of any such action, suit or 7 proceeding a Board or Stock Option Committee member shall in writing offer the Company the opportunity, at its own expense, to handle and defend the same. 8. AMENDMENT AND TERMINATION. 8.1 AMENDMENT. The Board of Directors of the Company may, insofar as permitted by law, from time to time, with respect to any shares at the time not subject to Options, suspend or discontinue the Plan or revise or amend it in any respect whatsoever except that, without approval of the stockholders, no such revision or amendment shall change the number of shares subject to the Plan, change the designation of the class of employees eligible to receive Options or decrease the price at which Incentive Stock Options may be granted, materially increase the benefits accruing to participants under the Plan, materially increase the number of securities which may be issued under the Plan, or materially modify the requirements as to eligibility for participation in the Plan. 9. MISCELLANEOUS. 9.1 GOVERNING LAW. This Plan shall be governed by, and construed in accordance with, the laws of the State of California. 9.2 CONSTRUCTION. in the event any parts of this Plan are found to be void, the remaining provisions of this Plan shall nevertheless be binding with the same effect as though the void parts were deleted. 9.3 APPLICATION OF FUNDS. The proceeds received by the Company from the sale of Stock pursuant to Options will be used for general corporate purposes. 9.4 NO OBLIGATION TO EXERCISE OPTION. The grant of an Option shall impose no obligation upon the Optionee to exercise such Option. 9.5 APPROVAL OF STOCKHOLDERS. The Plan shall take effect immediately upon adoption by the Board of Directors. However, if this plan is not approved by the stockholders of the Company within the period beginning twelve (12) months before and ending twelve (12) months after the date the Plan is adopted by the Board of Directors, no Options granted hereunder shall constitute Incentive Stock Options. 8 9.6 COMPLIANCE WITH RULE 16b-3. With respect to persons subject to Section 16 of the Securities Exchange Act of 1934 ("1934 Act"), transactions under the Plan are intended to comply with all applicable conditions of Rule 16b-3 or its successors under the 1934 Act. To the extent any provision of the Plan or action by the Plan administrators fails to so comply, it shall be deemed null and void, to the extent permitted by law and deemed advisable by the plan administrators. BURKE INDUSTRIES, INC. By:/s/ Rocco C. Genovese -------------------------------- Dated: December 19, 1997 ATTEST: /s/ Keith Oster - ---------------------------------- Secretary 9 BURKE INDUSTRIES, INC. Incentive Stock Option Agreement No. of Shares subject to Option.: 10,000. Option No.: 3. This Agreement dated as of December 19, 1997 between Burke Industries, Inc., a California corporation (the "Company"), and Dave E. Worthington (the "Optionee"). W I T N E S S E T H: 1. GRANT OF OPTION. Pursuant to the provisions of the Burke Industries, Inc. Stock option Plan (the "Plan"), the Company hereby grants to the Optionee, subject to the terms and conditions of the Plan and subject further to the terms and conditions herein set forth, the right and option to purchase from the Company all or any part of an aggregate of Ten Thousand (10 000) shares of Common Stock, no par value., of the Company (the "Shares"), at the purchase price of Six Dollars and Fifty Cents ($6.50) per Share, such Option to he exercised as hereinafter provided. This is an Incentive Stock Option, and shall be so construed. All terms defined in the Plan are used herein as so defined. 2. TERMS AND CONDITIONS. It is understood and agreed that the Option evidenced hereby is subject to the following terms and conditions: 2.3. TIME OF EXERCISE OF OPTION. 2.1.1 INSTALLMENT SCHEDULE. This Option may be exercised as to (a) twenty-five percent (25%) of the shares beginning one (1) year from the Commencement Date; (b) an additional twenty-five percent (25%) of the Shares beginning two (2) years from the Commencement Date; (c) an additional twenty-five percent (25%) of the Shares beginning three (3) year. from the Commencement Date; and (d) in full, to the extent not theretofore exercised, beginning on the earlier of the Change in Control Date or four (4) years from the Commencement Date. For purposes of this Option, the Commencement Date is agreed to be August 20, 1997. 2.1.2 EXPIRATION DATE. This Option shall expire absolutely ten (10) years from the date hereof. 2.1.3 EXERCISE UPON TERMINATION OF EMPLOYMENT. If the Optionee shall cease to be employed by the Company or a Parent or Subsidiary for any reason other than the Optionee's death or disability (within the meaning of Section 105(d)(4) of the Code), this Option, to the extent no; then exercisable in accordance with its terms, shall terminate and be without further effect. To the extent this Option is exercisable on the date of termination of employment, it may be exercised at any time within thirty (30) days after such date by the Optionee or, in case of the subsequent death of the Optionee.. then by the executors or administrators of the Optionee's estate or by any person or persons who shall have acquired the Option directly from the Optionee by bequest or inheritance, and this Option, to the extent not exercised, shall in all events terminate upon the expiration of such thirty (3D) day period or, if earlier, ten (10) years from the date hereof. 2.1.4 EXERCISE UPON LOSS OF PARENT OR SUBSIDIARY STATUS. If the Optionee ceases to be employed by the Company or a Parent or Subsidiary by reason of the employer of the Optionee ceasing to be a Parent or Subsidiary of the Company, then this Option, to the extent not then exercisable in accordance with its terms, shall terminate and be without further effect.. Within a reasonable time after such event (not to exceed thirty (30) days), the Company shall provide written notice to the Optionee of such event (including specific reference to the provisions of this section). To the extent this Option is exercisable on the date of such event it way be exercised at any time within thirty (30) days after the later of the date of such event or the data of the notice required by the preceding sentence by the Optionee, or, in case of the subsequent death of the optionee, then by the executors or administrators of the Optionee's estate or by any person or persons who shall have acquired the Option directly from the Optionee by bequest or inheritance, and this Option, to the extent not exercised, shall in all events terminate upon the expiration of such thirty (30) day period, or, if earlier, ten (10) years from the date hereof. 2.1.5 EXERCISE UPON DEATH OR DISABILITY. It the Optionee shall cease to be employed by the Company or a Parent or Subsidiary by reason of the Optionee's death or disability, this Option, to the extent not then exercisable in accordance with its terms, shall terminate and be without further effect. To the extent this Option is exercisable on the date of death or disability, it may be exercised at any time within twelve (12) months after the date of death or disability by the Optionee in case of disability, or in case of the death of the Optionee, then by the executors or administrators of the Optionee's estate or by any person or persons who shall have acquired the Option directly from the Optionee by bequest or inheritance, and this Option, to the extent not exercised, shall in all events terminate upon the expiration of such twelve (12) month period or, if earlier, ten (10) years from the date hereof. 2.1.6 ACCELERATION OF EXERCISE DATE. In its sole discretion, the Board of Directors may accelerate the date or dates on which this Option may be exercised in whole or in part. 2 2.2 METHOD OF EXERCISE. This Option may be exercised as follows: 2.2.1 NOTICE OF EXERCISE. The Optionee shall deliver written notice to the Company specifying the number of Shares as to which the Option is being exercised. 2.2.2 PAYMENT OF PURCHASE PRICE. At the time of any exercise the purchase price of the shares as to which this Option is being exercised shall be paid to the Company in cash or good check, or it approved by the Board of Directors, by the delivery of Shares previously owned by the Employee, duly endorsed for transfer to the Company with a fair market value (as determined by the Hoard of Directors) On the date of delivery equal to the aggregate purchase price of the Shares with respect to which the Option is being exercised, or by the delivery of a recourse promissory note bearing interest at such rate, or on such other terms and in form and with security satisfactory to the Company, or any Combination of the foregoing approved by the Board of Directors, in its sole discretion. Notation of any partial exercise shall be made by the Company on Schedule I hereto. 2.2.3 RESTRICTIONS ON TRANSFER RIGHT OF REPURCHASE; INVESTMENT REPRESENTATION. Prior to the issuance of any shares upon the exercise of all or any part of this Option, the Company may require the person exercising the Option to execute, become a party to, and subject such shares to restrictions in accordance with the terms of a Stockholders' Agreement dated as of August 20, 1997 among the Company and all or substantially all the parsons who are stockholders owning shares of Common Stock of the Company as of the date of this Option, as such agreement may be amended and/or restated and in effect at the time of each exercise of this Option. If the Company so requires, the certificate or certificates evidencing the shares issued upon the exercise of all or any part of this Option shall be legended in accordance with said agreement. 2.3 NONTRANSFERABILITY. This Option shall not be transferable except by will or by the laws of descent and distribution. During the lifetime of the Optionee, this Option shall be exercisable only by the Optionee. 2.4 ADJUSTMENTS. In the event of any change in the Stock of the Company by reason of any stock dividend, recapitalization, reorganization, merger, consolidation, split-up, combination or exchange of shares, or any similar change affecting the Stock, then in any such event the number and kind of shares subject to this option and their purchase price per share may be adjusted pursuant to Section 5.12 of the Plan, in such manner as the Board of Directors may in its sole discretion deem equitable. Any adjustment so made shall be final and binding upon the Optionee. 2.5 NO RIGHTS AS STOCKHOLDER. The Optionee shall have no rights as a stockholder with respect to any shares of Stock subject to this Option prior to the date of issuance to the Optionee of a certificate or certificates for such shares. 2.6 COMPLIANCE WITH LAW AND REGULATIONS. This Option and the obligation of the Company to sell and deliver shares hereunder shall be subject to all applicable federal and state laws, rules and regulations and to such approvals by any government or regulatory agency 3 as may be required. The Company shall not be required to issue or deliver any certificates for shares of Stock if the Company determines that such issue or delivery would (a) require any registration or qualification of such shares under any federal or state law, or any rule or regulation of any government body which the Company shall, in its sole discretion, determine to be applicable; (b) require the commencement of the filing by the company of periodic reports pursuant to the Securities Exchange Act of 1934, or (c) violate any law or governmental regulation, if at any time the Board of Directors in its discretion determines that the listing, registration of qualification of the shares subject to this Option upon any securities exchange or under any law or regulation, or the consent or approval of any government regulatory body is necessary or desirable as a condition of, or in connection with, the issue or purchase of shares hereunder, this Option may not he exercised in whole or in part unless such listing, registration, qualification, consent or approval shall have been effected or obtained free of any conditions not acceptable to the Board of Directors. 2.7 WITHHOLDING TAXES. Whenever under this Option shares are to be issued or cash is to be paid, the Company shall have the right to require the recipient to remit to the Company an amount sufficient to satisfy federal, state and local withholding tax requirements prior to the delivery of any certificate or certificates for such shares or payment of such cash. 2.8 MODIFICATION; EXTENSION AND RENEWAL. Subject to the terms and conditions and within the limitations of the Plan, the Board of Directors may modify, extend or renew c-his Option, or accept the surrender hereof (to the extent not theretofore exercised) and authorize the granting of a new Option or Options in substitution therefor (to the extent not theretofore exercised). Notwithstanding the foregoing, no modification of this Option shall, without the consent of the Optionee, alter or impair any rights or obligations under any Option theretofore granted under the Plan. 2.9 TERMINATION. The Company hereby reserves the right to terminate this Option in connection with any Change in Control for a payment in cash equal to the difference between the Exercise Price for the shares of Stock subject to the Option and the Change in Control Price of such Stock. 2.10 PARACHUTE PAYMENTS. In the event that the aggregate present value of the payments to the Employee under this Agreements and any other plan, program, or arrangement maintained by the Company or a Subsidiary, constitutes an "excess parachute payment" (within the meaning of Section 260G(b)(1) of the Code) and the excise tax on such payment would cause the net parachute payments (after taking into account federal, state and local income and excise taxes) to which the Employee otherwise would be entitled to be less than what the Employee would have netted (after taking into account federal, state and local income taxes) had the present value of the Employee's total parachute payments equaled One Dollar ($1.00) less than three (3) times the Employee's "base amount" (within the meaning of Code Section 280(G)(b)(3)(A)), the Employee's total "parachute payments" (within the meaning of Code Section 280G(b)(2)(A)) shall be reduced (by the minimum possible amount) so that their aggregate present value equals One Dollar ($1.00) less than three (2) times such base amount. For purposes of this calculation, it shall be assumed that the Employee's tax rate will be the maximum marginal federal, State and 4 local income tax rate on earned income, with such maximum federal rate to be computed with regard to Code Section 1(g), if applicable. In the event that the Employee and the Company are unable to agree as to the amount of the reduction described above, if any, the Employee shall select a law firm or accounting firm from among those regularly consulted (during the twelve (12) month period immediately prior to the change in control that resulted in the characterization of the payments as parachute payments) by the Company regarding federal income tax or employee benefit matters, and such law firm or accounting firm shall determine the amount of much reduction and such determination shall be final and binding upon the Employee and the Company. 3. REPRESENTATIONS AND OBLIGATIONS OF OPTIONEE. In consideration of the grant of this Option, the Optionee hereby represents and agrees as follows: 3.1 OPTIONEE BOUND BY PLAN. Optionee hereby acknowledges receipt of a copy of the Plan and agrees to be bound by all the terms and provisions thereof. Any term used herein with the first letter of such term capitalized shall have the same meaning as in the Plan. 3.2 INVESTMENT REPRESENTATION. Optionee hereby represents that any shares purchased pursuant to this Option will be acquired for the Optionee's own account for investment and not with a view to, or for c-he offer or sale in connection with, the distribution of any such shares. 3.3 BEST EFFORTS. Optionee agrees to use his or her best effort for the benefit of the Company during his or her employment or other relationship with the Company. 3.4 RESTRICTIONS. The Optionee agrees that any shares of Stock acquired pursuant to exercise of this option shall be subject 'to rights of repurchase and other restrictions as contemplated by Section 2.2.3 of this Agreement. 3.5 NO RIGHTS TO CONTINUED EMPLOYMENT. The Optionee acknowledges that neither any of the terms and provisions of the Plan or this Agreement nor the grant of this option to the Optionee shall be construed to give to the Options. any rights to continued employment with the Company or a Parent or Subsidiary thereof, or to give to the Optionee any rights whatsoever in connection with such employment, except as expressly provided in the Plan or this Agreement. Except as may otherwise be provided in a written agreement between the Optionee and the Company or a Parent or Subsidiary, the Optionee is an employee at will, and each party to the employment relation has a right to terminate such employment at any time and for any reason, or for no reason at all. 4. NOTICES. Notices delivered pursuant to this Agreement shall be in writing, and shall be deemed to have been duly given when (a) delivered by hand; (b) sent by facsimile (with receipt confirmed), provided that a copy is promptly thereafter mailed by first-class prepaid certified 5 mail, return receipt requested; (c) received by the addressee, if sent with delivery receipt requested by Express Mail, Federal Express, other express delivery service or first-class prepaid certified mail, in each case to the appropriate addresses and facsimile numbers set forth below, or to such other address(es) or facsimile number(s) as a party may designate as to itself by notice to the other party. (a) It to the Company: Burke Industries, Inc. 2250 South Tenth Street San Jose, CA 95112 Facsimile: (408) 280-0699 Attention: Mr. Rocco C. Genovese with a copy sent by any of the foregoing methods simultaneously to: George A. Sawyer c/o J.F. Lehman & Company 2001 Jefferson Davis Highway, Suite 507 Arlington, VA 22202 Facsimiles (703) 418-5099 (b) If to the Optionee; To the latest home address as shown on the Company's personnel records subject to the right of either party to designate at any time hereafter in writing some other address. 5. COUNTERPARTS. This Agreement has been executed in two counterparts each of which shall constitute one and the same instrument. 6 IN WITNESS WHEREOF, Burke Industries, Inc. has caused this Agreement to be executed by its President or a Senior Vice President or a Vice President and Optionee has executed this Agreement, both as of the day and year first above written. BURKE INDUSTRIES, INC. By:/s/ Rocco C. Genovese ------------------------------- OPTIONES /s/ David E. Worthington ------------------------------- Dave E. Worthington 7 EX-12.1 8 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)
FISCAL YEAR ENDED ----------------------------------------------------- 1994 1995 1996 1997 1998 --------- --------- --------- --------- --------- Interest expense...... $2,836 $3,039 $ 2,771 $ 5,900 $14,062 Estimated interest portion of rent expense............. 174 335 381 468 694 ------ ------ ------- ------- ------- Fixed charges......... $3,010 $3,374 $ 3,152 $ 6,368 $14,756 ------ ------ ------- ------- ------- ------ ------ ------- ------- ------- Income (loss) before income taxes........ $3,408 $5,966 $ 8,499 $(5,761) 190 Fixed charges......... 3,010 3,374 3,152 6,368 14,756 Less: interest charges capitalized.. (11) (30) (19) (29) (13) ------ ------ ------- ------- ------- Earnings ............. $6,407 $9,310 $11,632 $ 578 $14,833 ------ ------ ------- ------- ------- ------ ------ ------- ------- ------- Ratio of earnings to fixed charges(A).... 2.1x 2.8x 3.7x -- 1.0x ------ ------ ------- ------- ------- ------ ------ ------- ------- -------
- ------------------------ (A) Earnings were insufficient to cover fixed charges by $5,790 in fiscal year 1997. EX-21.1 9 EXHIBIT 21.1
Jurisdiction of Name Incorporation - ---- --------------- Burke Flooring Products, Inc. California Burke Rubber Company, Inc. California Burke Custom Processing, Inc. California Burkeline Construction Company, Inc. California
EX-27 10 EXHIBIT 27
5 0001046777 Burke Industries, Inc. 1,000 YEAR JAN-01-1999 JAN-03-1998 JAN-01-1999 2,981 0 13,921 812 14,574 35,677 31,315 12,300 93,945 16,731 140,000 18,160 3,000 25,464 (113,936) 93,945 107,019 107,019 77,053 77,053 15,761 196 13,819 190 160 30 0 0 0 30 0 0
-----END PRIVACY-ENHANCED MESSAGE-----