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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
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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.
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TABLE OF OTHER REGISTRANTS
<TABLE>
<CAPTION>
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
- ------------------------------ --------------- --------------------- -------------- ---------------------
<S> <C> <C> <C> <C>
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
</TABLE>
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BURKE INDUSTRIES, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED JANUARY 1, 1999
<TABLE>
<CAPTION>
CAPTION PAGE
- ------- ----
PART I
<S> <C> <C>
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
</TABLE>
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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
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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
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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.
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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.
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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.
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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
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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.
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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
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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
<PAGE>
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
<TABLE>
<CAPTION>
PATENT NO. TITLE GATT EXPIRY
---------- -------------------------------------------- -----------
<S> <C> <C>
4,608,792 Roof membrane holdown system 11/12/08
4,603,790 Tensioned reservoir cover, rainwater run-off 3/11/05
enhancement system
</TABLE>
TRADEMARKS
<TABLE>
<CAPTION>
MARK EXPIRATION
---------------------------------------------------------------------- ----------
<S> <C>
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
</TABLE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
SQUARE
LOCATION FOOTAGE OWNERSHIP FUNCTION
- ----------------------------- ------- --------- -------------------------------------------------
<S> <C> <C> <C>
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
</TABLE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
<TABLE>
<CAPTION>
FISCAL YEAR
------------------------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
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
</TABLE>
<TABLE>
<CAPTION>
AS OF FISCAL YEAR END
------------------------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
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)
</TABLE>
(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
<PAGE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
PERCENTAGE PERCENTAGE PERCENTAGE
1996 OF NET SALES 1997 OF NET SALES 1998 OF NET SALES
---- ---------- ---- ------------ ---- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
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 --
------ ---- ------- ------ ---- -----
------ ---- ------- ------ ---- -----
</TABLE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
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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.
<TABLE>
<CAPTION>
NAME AGE POSITIONS
- ---- --- ---------
<S> <C> <C>
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
</TABLE>
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
<PAGE>
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
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<PAGE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION(1) COMPENSATION
------------------------------------------- ------------
SECURITIES
UNDERLYING
NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY ($) BONUS ($)(2) OTHER ($)(3) OPTIONS
----------- ---------- ------------ -------------- ------------
<S> <C> <C> <C> <C> <C>
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
</TABLE>
28
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Ronald A. Stieben 1998 132,500 -- -- --
Vice President--Sales and 1997 130,000 -- 183,757 7,500
Marketing--Purosil 1996 130,000 -- -- --
</TABLE>
(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.
<TABLE>
<CAPTION>
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)
- -------------------- ----------- -------------- ------------------- --------------------
<S> <C> <C> <C> <C>
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
</TABLE>
(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
<PAGE>
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.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
NAME OF INDIVIDUAL OR ENTITY(1) NUMBER OF SHARES(2) OUTSTANDING(3)
- --------------------------------------------------- ------------------- --------------------
<S> <C> <C>
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)............................... -- --
</TABLE>
30
<PAGE>
<TABLE>
<S> <C> <C>
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%
</TABLE>
* 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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
PAGE REFERENCE
FORM 10-K
--------------
<S> <C>
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
</TABLE>
34
<PAGE>
<TABLE>
<S> <C>
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
</TABLE>
(a)(2) Consolidated Financial Statement Schedules:
<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........................................... S-2
Schedule II--Valuation and Qualifying Accounts.............................................. S-3
</TABLE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
BURKE INDUSTRIES, INC. AND SUBSIDIARIES
<S> <C>
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
</TABLE>
F-1
<PAGE>
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
<PAGE>
BURKE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
-------------------------------------------
1998 1997 1996
-------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
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
------- ------- -------
------- ------- -------
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
F-3
<PAGE>
BURKE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
----------------------
1998 1997
---- ----
(IN THOUSANDS)
<S> <C> <C>
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
--------- ---------
--------- ---------
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
F-4
<PAGE>
BURKE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED
STOCK CLASS A COMMON STOCK
--------------------- -------------------- TOTAL
ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT DEFICIT EQUITY (DEFICIT)
---------- -------- --------- -------- ----------- ----------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
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)
---------- -------- ------ ------- -------- --------
---------- -------- ------ ------- -------- --------
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
<PAGE>
BURKE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
------------------------------------------
1998 1997 1996
------- -------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
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 $ --
------- -------- -------
------- -------- -------
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
F-6
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
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
-------
-------
</TABLE>
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:
<TABLE>
<CAPTION>
Fiscal Year Ended 1998 1997
---- ----
(IN THOUSANDS)
<S> <C> <C>
Net Sales....................................... $113,223 $115,127
Net loss........................................ (12) (3,973)
</TABLE>
F-10
<PAGE>
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:
<TABLE>
<CAPTION>
1998 1997
(IN THOUSANDS)
<S> <C> <C>
Raw materials................................... $ 5,123 $ 4,626
Work-in-process................................. 2,085 1,593
Finished goods.................................. 7,366 4,968
------- -------
$14,574 $11,187
------- -------
------- -------
</TABLE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
---------------------------------------
1998 1997 1996
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
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
------- ------ ------
------- ------ ------
</TABLE>
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):
<TABLE>
<S> <C>
1999................................................ $1,985
2000................................................ 1,705
2001................................................ 1,117
2002................................................ 829
2003................................................ 560
Beyond 2003......................................... 1,686
------
$7,882
------
------
</TABLE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
WEIGHTED
OPTIONS AVERAGE PRICE
OUTSTANDING PER SHARE
----------- -------------
<S> <C> <C>
(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
------ -----
------ -----
</TABLE>
F-16
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
1998 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
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%
</TABLE>
F-18
<PAGE>
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:
<TABLE>
<CAPTION>
1998 1997 1996
----- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
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
----- ----- ----
----- ----- ----
</TABLE>
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:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
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
---- ------- -------
---- ------- -------
</TABLE>
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
<PAGE>
BURKE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
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
---- ------- ------
---- ------- ------
</TABLE>
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:
<TABLE>
<CAPTION>
1998 1997
------- ------
(IN THOUSANDS)
<S> <C> <C>
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)
------- -------
------- -------
</TABLE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED 1998 ORGANIC PRODUCTS SILICONE PRODUCTS TOTAL
- ---------------------- ---------------- ----------------- -----
(IN THOUSANDS)
<S> <C> <C> <C>
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
-------
-------
</TABLE>
OTHER SIGNIFICANT ITEMS
<TABLE>
<CAPTION>
SEGMENT TOTALS ADJUSTMENTS CONSOLIDATED TOTALS
-------------- ----------- -------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Expenditures for long-lived assets $1,812 $1,408 (1) $3,220
</TABLE>
(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
<TABLE>
<CAPTION>
1998 1997 1996
------- ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash paid for interest..................................... $12,223 $2,059 $1,950
Cash paid for income taxes................................. 484 3,047 2,771
</TABLE>
F-21
<PAGE>
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
<PAGE>
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
<PAGE>
SCHEDULE II
VALUATION & QUALIFYING ACCOUNTS
BURKE INDUSTRIES INC.
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
--------------------------
BALANCE AT CHARGED TO ACQUISITION
BEGINNING OF COSTS AND OF MERCER (a) BALANCE AT
DESCRIPTION PERIOD EXPENSES PRODUCTS DEDUCTIONS END OF PERIOD
- ----------- ------------ ---------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C>
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
</TABLE>
- ------------------------
(a) Includes write-offs and reversals.
S-3
<PAGE>
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
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/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
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ BRUCE D. GORCHOW Director
- ----------------------------- March 23, 1999
Bruce D. Gorchow
/s/ JOSEPH A. STROUD Director
- ----------------------------- March 23, 1999
Joseph A. Stroud
</TABLE>
II-2
<PAGE>
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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/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
</TABLE>
II-3
<PAGE>
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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/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
</TABLE>
II-4
<PAGE>
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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/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
</TABLE>
II-5
<PAGE>
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)
<PAGE>
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.
<PAGE>
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.
<PAGE>
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
<PAGE>
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."
<PAGE>
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.
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
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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
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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.
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(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
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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.
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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.
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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
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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
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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.
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(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
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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
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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.
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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
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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
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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
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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.
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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.
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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
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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
<PAGE>
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
<PAGE>
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
<PAGE>
(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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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
<PAGE>
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
<PAGE>
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.
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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.
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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
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<PAGE>
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
- ----------------------------------------------------------------------------
<PAGE>
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.
<PAGE>
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
<PAGE>
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.
<PAGE>
(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.
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(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
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<PAGE>
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
<PAGE>
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
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<PAGE>
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.
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<PAGE>
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
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<PAGE>
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.
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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
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<PAGE>
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
<PAGE>
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
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<PAGE>
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
<PAGE>
BURKE INDUSTRIES, INC.
EXECUTIVE DEFERRED COMPENSATION AGREEMENT
- -------------------------------------------------------------------------------
Schedule 1 - Survivor Benefit
Initial Survivor Benefit _________________
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Date of Revision Revised Amount & Signature Authority
- -------------------------------------------------------------------------------
<S> <C>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
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</TABLE>
13
<PAGE>
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.
<TABLE>
<CAPTION>
-----------------------------------------------------------
FUND Percentage
-----------------------------------------------------------
<S> <C>
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 %
-----------------------------------------------------------
%
-----------------------------------------------------------
-----------
</TABLE>
Burke Industries, Inc.
/s/ Rocky Genovese
- ------------------------------
Rocky Genovese
Date:
-------------------------
14
<PAGE>
BURKE INDUSTRIES, INC.
EXECUTIVE DEFERRED COMPENSATION AGREEMENT
Exhibit E
Qualified Plan Designation
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Date of Plan Description
- -------------------------------------------------------------------------------
<S> <C>
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- -------------------------------------------------------------------------------
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- -------------------------------------------------------------------------------
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- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
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- -------------------------------------------------------------------------------
</TABLE>
15
<PAGE>
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.
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
EXHIBIT 12.1
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
AND COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------------------
1994 1995 1996 1997 1998
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
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
------ ------ ------- ------- -------
------ ------ ------- ------- -------
</TABLE>
- ------------------------
(A) Earnings were insufficient to cover fixed charges by $5,790 in
fiscal year 1997.
<PAGE>
<TABLE>
<CAPTION>
Jurisdiction of
Name Incorporation
- ---- ---------------
<S> <C>
Burke Flooring Products, Inc. California
Burke Rubber Company, Inc. California
Burke Custom Processing, Inc. California
Burkeline Construction Company, Inc. California
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0001046777
<NAME> Burke Industries, Inc.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-01-1999
<PERIOD-START> JAN-03-1998
<PERIOD-END> JAN-01-1999
<CASH> 2,981
<SECURITIES> 0
<RECEIVABLES> 13,921
<ALLOWANCES> 812
<INVENTORY> 14,574
<CURRENT-ASSETS> 35,677
<PP&E> 31,315
<DEPRECIATION> 12,300
<TOTAL-ASSETS> 93,945
<CURRENT-LIABILITIES> 16,731
<BONDS> 140,000
18,160
3,000
<COMMON> 25,464
<OTHER-SE> (113,936)
<TOTAL-LIABILITY-AND-EQUITY> 93,945
<SALES> 107,019
<TOTAL-REVENUES> 107,019
<CGS> 77,053
<TOTAL-COSTS> 77,053
<OTHER-EXPENSES> 15,761
<LOSS-PROVISION> 196
<INTEREST-EXPENSE> 13,819
<INCOME-PRETAX> 190
<INCOME-TAX> 160
<INCOME-CONTINUING> 30
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 30
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
