- - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- 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 DECEMBER 31, 1999 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______________ TO ______________ COMMISSION FILE NUMBER 333-36675 ------------------------ BURKE INDUSTRIES, INC. (Exact name of Registrant as specified in its charter) CALIFORNIA 94-3081144 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 13767 FREEWAY DRIVE, SANTA FE SPRINGS, CALIFORNIA 90670 (Address of principal executive office) (Zip Code) (800) 221-0923 (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 $4,154,668. The aggregate market value has been calculated on a basis which excludes shares of Common Stock which may be acquired through exercise of options or warrants. As of March 15, 2000, the number of outstanding shares of the registrant's Common Stock was 3,894,500. DOCUMENTS INCORPORATED BY REFERENCE None. - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- TABLE OF OTHER REGISTRANTS ADDRESS INCLUDING ZIP CODE JURISDICTION PRIMARY IRS EMPLOYER AND AREA CODE AND OF STANDARD INDUSTRIAL IDENTIFICATION TELEPHONE NUMBER OF NAME OF CORPORATION INCORPORATION CLASSIFICATION NUMBER NUMBER PRINCIPAL EXECUTIVE OFFICES - - ------------------- ------------- --------------------- -------------- --------------------------- Burke Flooring Products, Inc....... California 3069 94-2147284 13767 Freeway Drive Santa Fe Springs, CA 90670 (800) 221-0923 Burke Rubber Company, Inc........ California 3069 94-2157283 13767 Freeway Drive Santa Fe Springs, CA 90670 (800) 221-0923 Burke Custom Processing, Inc..... California 3069 94-2157282 13767 Freeway Drive Santa Fe Springs, CA 90670 (800) 221-0923 BURKE INDUSTRIES, INC. INDEX TO ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 CAPTION PAGE - - ------- -------- PART I ITEM 1. BUSINESS.................................................... 1 ITEM 2. PROPERTIES.................................................. 10 ITEM 3. LEGAL PROCEEDINGS........................................... 11 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 11 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS......................................... 11 ITEM 6. SELECTED FINANCIAL DATA..................................... 11 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS................................... 13 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........................................................ 19 ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........................................................ 19 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ONACCOUNTING AND FINANCIAL DISCLOSURE.................................... 19 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......... 20 ITEM 11. EXECUTIVE COMPENSATION...................................... 25 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.................................................. 28 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 29 PART IV ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K......................................... 33 PART I ITEM 1. BUSINESS OVERVIEW Burke Industries, Inc. (the "Company" or "Burke"), headquartered in Santa Fe Springs, 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 leading 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, medical, marine, 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 southeastern United States developed by Mercer complement the Company's position as the market leading 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 over the last seven years. Burke's integration of these acquisitions has led to market leading positions in the aerospace 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. 1 ("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 in the markets in which it has chosen to compete 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 $28.9 million in 1999, and represented 27% of Burke's total net sales in 1999. PRODUCTS Burke's major aerospace seals products include: aerodynamic seals for commercial and military airframes, firewall seals for aircraft engines and nacelles, aircraft door and hatch seals, inflatable seals for cockpit canopies and large openings, aircraft window seals, and aircraft conductive seals for electromagnetic interference survivable conditions. Burke's product line ranges from the most basic extruded seals, costing 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 2 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. 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, quality, engineering, technical and production capabilities. The engineering staff at Burke works directly with Original Equipment Manufacturers ("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 OEM quality standards by Burke and its customers before final approval. In 1999, the top five customers of the Aerospace and Defense Products division accounted for $23.9 million in net sales, representing 22.3% and 82.9%, respectively, of the Company's total and the Aerospace and Defense Products 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, Boeing F-15 and F-18 fighters, the McDonnell Douglas DC and MD series, the Northrop Grumman F-14 fighter and the Lockheed Martin F-16 fighter. 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. 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. The Northrop Grumman B-2 low-observable materials program provides a solid base for Burke's defense business. Burke's revenues from this program are generated 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. 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 Aerospace and Defense Products business has recently qualified for the "over-wing-fairing" seal for the B-1 bomber and is now a second source for this program. 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. 3 COMPETITION Burke is the leading domestic supplier of highly-engineered silicone seals for the aerospace OEM market and aftermarket. Burke's domestic competitors are primarily small, privately-held companies, or small divisions of larger companies. 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 product quality will continue to support its position as a 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 $45.4 million in 1999, comprising 42.2% of the Company's total net sales. Burke's trademark BurkeBase has enjoyed the leading 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 leading 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 southeastern 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, safety 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, safety 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 4 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, Grand Prairie, Texas and South Kearny, New Jersey. In 1999, the top five customers of the Flooring Products division accounted for $11.1 million in net sales, representing 10.3% and 24.4%, respectively, of Burke's total and the Flooring Products division's net sales in that year. 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 $33.3 million in 1999, and represented 30.9% of the Company's total net sales in 1999. 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 has also become qualified 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 medical, marine, 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 5 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 manufactured from DuPont's patented Hypalon polymer material and Theromoplastic Olefin ("TPO"). Hypalon, which is an extremely durable and flexible material, is widely regarded as the highest-quality single-ply product available in the commercial roofing and membrane market. TPO products, which were added to the product line in 1999, give Burke a lower cost, complementary product offering targeted to less demanding more cost sensitive applications. Burke's membrane products typically incorporate structural fabric laminated between thin layers of Hypalon or TPO. Burkeline 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 leading 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 1999, the top five customers of the Commercial Products division accounted for $9.5 million in net sales, 6 representing 8.8% and 28.6%, respectively, of the Company's total and the Commercial Products division's net sales in that year. COMPETITION The marketplace for engineered silicone hose applications is supplied by three principal companies: Flexfab Horizons International, Thermopol Incorporated and the Company. In both roofing and liner systems, Burke competes with other Hypalon-based product manufacturers and with lower-cost alternatives. Leading manufacturers of these alternative systems include JPS Elastomerics Corp. and Carlisle Companies, Inc. Each has significant single-ply membrane roofing businesses and emphasize their membrane products manufactured from alternative materials as lower-cost, higher-volume products. Their Hypalon offerings represent a small portion of their aggregate sales. There are a number of manufacturers that compete in the 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 19 direct sales representatives who manage direct sales and orchestrate the Company's national marketing efforts through approximately 350 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 to OEMs in the heavy-duty truck and bus market, either directly or through independent sales representatives. The Company also manufactures a number of "standard" product hoses which are marketed through independent sales representatives and a national network of distributors. The other commercial products that Burke produces are primarily sold through specialized in-house representatives adept at identifying potential customers who can benefit from Burke's vertically integrated manufacturing, compound formulation and engineering capabilities. MANUFACTURING RAW MATERIALS Principal raw materials purchased by the Company for use in its products include various custom and standard grades of rubber, silicone gum and vinyl as well as the Hypalon polymer material. The Company has historically not experienced any significant supply restrictions and has generally been able to pass 7 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. 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 December 31, 1999, the Company incurred insignificant warranty costs with respect to its roofing products. EMPLOYEES At December 31, 1999, the Company employed 975 employees at its various locations, including 821 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 is currently being renegotiated for a new term and the agreement for the San Jose 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. 8 PATENTS, TRADEMARKS, TRADE NAMES AND TRADE SECRETS The success of the Company's various businesses depends in part on the Company's ability to exploit certain proprietary patents, trademarks, trade names and trade secrets on an exclusive basis in reliance upon the protections afforded by applicable copyright, patent and trademark laws and regulations. The loss of certain of the Company's rights to such patents, trademarks, trade names and trade secrets or the inability of the Company effectively to protect or enforce such rights could adversely affect the Company. The duration of the Company's intellectual property rights is as follows: PATENTS PATENT NO. TITLE GATT EXPIRY - - ---------- ------------------------------------------------------ ----------- 4,608,792... Roof membrane holdown system 11/12/08 4,603,790... Tensioned reservoir cover, rainwater run-off 3/11/05 enhancement system TRADEMARKS MARK EXPIRATION - - ---- ---------- VAC-Q-ROOF.................................................. 12/1/02 ROULEAU..................................................... 12/1/02 BURKEBASE................................................... 6/4/05 SURETITE.................................................... 7/4/01 BURKE INDUSTRIES............................................ 4/19/07 ARGONAUT.................................................... 4/1/09 DOCKSIDERS & DESIGN......................................... 11/26/05 MAXXI-TREAD................................................. 8/20/05 MERCER FRICTION GRIP........................................ 12/03/08 MERCER & DESIGN............................................. 12/14/03 MERCER...................................................... 8/30/04 MIRROR-FINISH............................................... 7/20/03 RUBBERLYTE.................................................. 2/14/09 RUBBERMYTE.................................................. 7/23/01 UNICOLOR.................................................... 4/05/04 ENVIRONMENTAL LIABILITY The Company is subject to various evolving federal, state and local environmental laws and regulations governing, among other things, emissions to air, discharge to waters and the generation, handling, storage, transportation, treatment and disposal of hazardous and non-hazardous substances and wastes. These laws and regulations provide for substantial fees and sanctions for violations and, in many cases, could require the Company to remediate a site to meet applicable legal requirements. In 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 9 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 Burke is transitioning its corporate headquarters from San Jose, California to Santa Fe Springs, California, where it believes it can take advantage of a labor market for professional and technical employees that is not as tight as the Silicon Valley. Santa Fe Springs, California will serve as the corporate headquarters for Burke and is the west coast manufacturing center for Aerospace and Defense Products. The Company also operates two other facilities in Santa Fe Springs dedicated to Purosil hose and specialty silicone product manufacturing. San Jose, California is the manufacturing headquarters for Burke's Flooring organic production activities and houses part of the Flooring Products business and all of its organic Commercial Products businesses. 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. Burke's Flooring Products are produced in San Jose, California and Eustis, Florida. In addition, the Company leases and operates distribution centers in Santa Fe Springs, California, South Kearny, New Jersey and most recently, Grand Prairie, Texas. Burke allowed the leases on its warehouse and distribution space in Bensonville, Illinois and Rancho Cucamonga, California to expire and leased new space in Grand Prairie, Texas as part of its final efforts to consolidate Mercer's operations into Burke's. 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. 10 As of March 15, 2000, Burke maintained operations at the following locations: SQUARE LOCATION FOOTAGE OWNERSHIP FUNCTION - - -------- -------- --------- ---------------------------------------------- San Jose, CA................... 123,000 Owned Manufacturing, Engineering, Distribution, Offices San Jose, CA................... 82,000 Leased Manufacturing, Warehouse Santa Fe Springs, CA........... 80,000 Leased Manufacturing, Engineering, Distribution, Offices Santa Fe Springs, CA........... 56,000 Leased Manufacturing, Engineering, Distribution, Offices Santa Fe Springs, CA........... 25,000 Leased Mixing Santa Fe Springs, CA........... 25,000 Leased Warehouse, Distribution Taunton, MA.................... 85,000 Leased Manufacturing, Engineering, Distribution, Offices Eustis, FL..................... 96,500 Owned Manufacturing, Engineering, Distribution, Offices Grand Prairie, Texas........... 24,450 Leased Warehouse, Distribution South Kearny, NJ............... 25,000 Leased Warehouse, Distribution In addition to the facilities identified above, the Company leases a 113,000 square foot facility in Modesto, California, which is subleased to the purchaser of the Company's custom-molded products business in connection with the sale of that business in 1996. ITEM 3. LEGAL PROCEEDINGS The Company is not presently involved in any pending legal proceedings. 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. 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 December 31, 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 Company's $110,000,000 principal amount of Senior Notes Due 2007 (the "Senior Notes") and the $30,000,000 principal amount of Floating-Rate Notes (the "Floating Rate Notes"), and, with respect to the Common Stock, the Company's Articles of Incorporation. ITEM 6. SELECTED FINANCIAL DATA SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA The selected consolidated financial data below for the Company for each of the three years ended December 31, 1999 and as of December 31, 1999 and January 1, 1999 have been derived from the Consolidated Financial Statements of the Company which have been audited by Ernst & Young LLP, 11 independent auditors, and are included elsewhere in this Report. The selected consolidated financial data below for the Company for the years ended December 29, 1995 and January 3, 1997 and as of December 29, 1995, January 3, 1997 and January 2, 1998 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. FISCAL YEAR ----------------------------------------------------------------- 1995 1996 1997 1998 1999 -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS) OPERATING DATA: Net sales................................ $68,411 $72,466 $ 90,228 $107,019 $107,504 Cost of sales............................ 49,226 49,689 62,917 76,145 78,288 ------- ------- -------- -------- -------- Gross profit............................. 19,185 22,777 27,311 30,874 29,216 Selling, general and administrative expenses............................... 10,212 11,610 12,238 16,865 19,848 Transaction expenses(1).................. -- -- 1,321 -- -- Stock option purchase(2)................. -- -- 14,105 -- -- ------- ------- -------- -------- -------- Income (loss) from operations............ 8,973 11,167 (353) 14,009 9,368 Interest expense, net.................... 3,007 2,668 5,408 13,819 14,821 ------- ------- -------- -------- -------- Income (loss) before income tax provision (benefit), cumulative effect of accounting change, extraordinary loss and discontinued operation(3).......... 5,966 8,499 (5,761) 190 (5,453) Income tax provision (benefit)........... 3,393 3,466 (1,818) 160 921 ------- ------- -------- -------- -------- Income (loss) from continuing operations before cumulative effect of accounting change, extraordinary loss and discontinued operation(3).............. $ 2,573 $ 5,033 $ (3,943) $ 30 $ (6,374) ------- ------- -------- -------- -------- Net income (loss)(3)..................... $ 1,094 $ 4,101 $ (3,943) $ 30 $ (6,374) ------- ------- -------- -------- -------- OTHER DATA: EBITDA(4)................................ $10,461 $12,586 $ 16,851(5) $ 17,184 $ 13,549 EBITDA margin(4)......................... 15.3% 17.4% 18.7%(5) 16.1% 12.6% Depreciation and amortization............ 1,488 1,419 1,499 3,175 4,181 Capital expenditures(6).................. 3,647 1,684 1,454 3,220 2,229 Cash interest expense.................... 2,683 1,950 2,059 12,223 13,848 Ratio of earnings to fixed charges(7).... 2.8x 3.7x -- 1.0x -- BALANCE SHEET DATA: Working capital.......................... $ 5,402 $ 5,328 $ 21,678 $ 18,946 $ 14,348 Total assets............................. 39,729 40,673 62,837 93,945 87,034 Long-term obligations, less current portion................................ 21,803 18,126 110,000 140,000 140,000 Redeemable preferred stock............... -- -- 16,148 18,160 20,536 Shareholders' equity..................... 340 4,283 (86,490) (85,472) (94,228) - - -------------------------- (1) Reflects $1,321 of expenses associated with the Recapitalization in August 1997. 12 (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 $664 and $308 in 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 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, and of Kentile for $854 in 1996. Capital expenditures include $1,408 in 1998 and $1,380 in 1999 for a replacement information technology system. (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 and $5.5 million for fiscal year ended 1999. 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 13 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 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. 14 RESULTS OF OPERATIONS The following table sets forth certain income statement information for the Company for the fiscal years ended January 2, 1998, January 1, 1999, and December 31, 1999: FISCAL YEAR ENDED ------------------------------------------------------------------------------ PERCENTAGE OF PERCENTAGE OF PERCENTAGE OF 1997 NET SALES 1998 NET SALES 1999 NET SALES -------- ------------- -------- ------------- -------- ------------- (DOLLARS IN THOUSANDS) Net sales: Aerospace and Defense Products..... $31,225 34.6% $ 33,766 31.6% $ 28,867 26.9% Flooring Products.................. 23,475 26.0 41,091 38.4 45,386 42.2 Commercial Products................ 35,528 39.4 32,162 30.0 33,251 30.9 ------- ----- -------- ----- -------- ----- Total net sales.................... 90,228 100.0 107,019 100.0 107,504 100.0 Cost of sales...................... 62,917 69.7 76,145 71.2 78,288 72.8 ------- ----- -------- ----- -------- ----- Gross profit....................... 27,311 30.3 30,874 28.8 29,216 27.2 Selling, general and administrative expenses......................... 12,174 13.6 15,454 14.4 17,831 16.6 Transaction costs.................. 1,321 1.5 -- -- -- -- Stock option purchase.............. 14,105 15.6 -- -- -- -- Amortization of goodwill........... 64 -- 1,411 1.3 2,017 1.9 ------- ----- -------- ----- -------- ----- Income (loss) from operations...... (353) (0.4) 14,009 13.1 9,368 8.7 Interest expense, net.............. 5,408 6.0 13,819 12.9 14,821 13.8 ------- ----- -------- ----- -------- ----- Income (loss) before income tax provision (benefit), extraordinary loss and discontinued operation........... (5,761) (6.4) 190 0.2 (5,453) (5.1) Income tax provision (benefit)..... (1,818) (2.0) 160 0.1 921 0.8 ------- ----- -------- ----- -------- ----- Income (loss) from continuing operations before extraordinary loss and discontinued operation........................ $(3,943) (4.4)% $ 30 -- $ (6,374) (5.9)% ------- ----- -------- ----- -------- ----- Net income (loss).................. $(3,943) (4.4)% $ 30 1% $ (6,374) (5.9)% ======= ===== ======== ===== ======== ===== YEAR ENDED DECEMBER 31, 1999 VERSUS YEAR ENDED JANUARY 1, 1999 NET SALES. Total net sales increased 0.5%, from $107.0 million in 1998 to $107.5 million in 1999. Aerospace and Defense Products sales decreased 14.5%, from $33.8 million in 1998 to $28.9 million in 1999, due to decreases in demand for civil aerospace products, which were partially offset by increases in demand for military products. Flooring Products sales increased 10.5%, from $41.1 million in 1998 to $45.4 million in 1999, due to the inclusion of Mercer for a full 12 months in 1999. Commercial Products sales increased 3.4%, from $32.2 million in 1998 to $33.3 million in 1999, because of increased demand for the Company's organic custom-mixed products and volume associated with new silicone hose products introduced late in the second quarter of 1998. COST OF SALES. Cost of sales increased 2.8%, from $76.1 million in 1998 to $78.3 million in 1999. As a percentage of net sales, gross profit decreased from 28.8% to 27.2%. The decrease in profit percentage was primarily due to the decrease in sales volume of Aerospace and Defense Products beginning in the third quarter of 1999. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased 15.4%, from $15.5 million in 1998 to $17.8 million in 1999. As a percentage of net sales, selling, general 15 and administrative expenses increased from 14.4% to 16.6%. The increase in spending was due to the inclusion of Mercer for a full 12 months in 1999, and the costs associated with the implementation of a new information system. AMORTIZATION OF GOODWILL. Amortization of goodwill increased from $1.4 million in 1998 to $2.0 million in 1999. The increase was due to the inclusion of Mercer for a full 12 months in 1999. INCOME FROM OPERATIONS. As a result of the above factors, income from operations decreased from $14.0 million in 1998 to $9.4 million in 1999. INTEREST EXPENSE. Interest expense increased from $13.8 million in 1998 to $14.8 million in 1999. The increase was due to the issuance of the Floating-Rate Notes on April 21, 1998. NET INCOME. As a result of the above factors, net income decreased from less than $0.1 million in 1998 to a loss of $6.4 million in 1999. 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% from $31.2 million in 1997 to $33.8 million in 1998, due primarily to increased demand for military products. Flooring Products sales increased 75.0%, from $23.5 million in 1997 to $41.1 million in 1998, due primarily to the acquisition of Mercer. Commercial Products sales decreased 9.5%, from $35.5 million in 1997 to $32.2 million in 1998, 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 21.0%, from $62.9 million in 1997 to $76.1 million in 1998. As a percentage of net sales, gross profit decreased from 30.3% to 28.8%. 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 26.9%, from $12.2 million in 1997 to $15.5 million in 1998. The increase in spending was primarily due to the acquisition of Mercer. As a percentage of net sales, selling, general and administrative expenses increased from 13.6% to 14.4%. TRANSACTION EXPENSES AND STOCK OPTION PURCHASE. Transaction expenses and stock option purchase were one-time expenses associated with the leveraged recapitalization in August, 1997. The stock options purchase charge in 1997 represents the compensation component of payments made for the cancellation of stock options in connection with the recapitalization. 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 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. 16 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. 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 In 1999, the Company recorded a tax provision of $921,000 which differed from the federal statutory rate primarily due to a valuation allowance established against deferred tax assets. This valuation allowance is the result of changes in management's assessment of the realization of these deferred tax assets based on operating losses. 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 1997, the Company recorded an income tax benefit of $1.8 million, which differed from the federal statutory rate primarily due to state income taxes (net of federal benefit) and additional provision for federal and state audits. In 1997, the Company settled with the Internal Revenue Service 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. 17 LIQUIDITY AND CAPITAL RESOURCES CASH FLOW. The Company's principal uses of cash are to finance working capital and capital expenditures related to asset acquisitions and internal growth. Burke's net cash used in operating activities was $(1.4) million in 1999. Burke's net cash provided by operating activities was $6.0 million in 1998. CAPITAL REQUIREMENTS. The Company expects to spend approximately $2.0 million during 2000 on capital expenditures not directly related to acquisitions. In 1999, $2.2 million was spent on capital expenditures not directly related to acquisitions, including $1.4 million for a replacement information technology system that was completed in 1999 and financed under capital leases. 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 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 1999, 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. 18 The Company anticipates that its principal use of cash during 2000 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 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 such that 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. Over the past two years, the Company spent $2.8 million on an information technology systems re-engineering effort, approximately 50% of the cost of which is estimated to have been related to modifying or replacing significant portions of the Company's software and certain of its hardware so that those systems would properly utilize dates beyond December 31, 1999. The Company completed its information technology re-engineering effort prior to December 31, 1999 and experienced no material adverse effects related to the Year 2000 Issue, including no material adverse effects related to third party vendors' failure to be prepared. The Company does not possess any information that would lead it to believe that the Year 2000 Issue will have a material adverse effect on its business, financial condition or results of operations in the future. 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. 19 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, 2000. Each director will hold office until the next annual meeting of the shareholders or until his successor has been elected and qualified. Officers will be elected by the Board of Directors and will serve at the discretion of the Board. NAME AGE POSITIONS - - ---- -------- ------------------------------------------------------------ Theodore M. Clark.............. 46 Director, President and Chief Executive Officer Elliot S. Stein................ 51 Chief Operating Officer Stephen G. Geane............... 38 Chief Financial Officer David E. Worthington........... 46 Treasurer, Vice President--Finance Robert F. Pitman............... 45 Senior Vice President and General Manager--San Jose Thomas G. Keup................. 52 Vice President--Operations--Eustis, Florida Craig A. Carnes................ 40 Vice President--Sales and Marketing--Flooring Products Martin J. Suydam, Jr........... 56 President--Silicone Products Group David P. Palermo............... 38 Vice President and General Manager--Commercial Silicone Products Anthony E. Lawson.............. 45 Vice President and Operations Manager--Silicone Products Group--Santa Fe Springs Robert P. Harrison............. 64 Vice President and Site Manager--Aerospace and Defense--Haskon Operations George Sawyer.................. 68 Chairman of the Board Rocco C. Genovese.............. 63 Vice Chairman of the Board Oliver C. Boileau, Jr.......... 73 Director Donald Glickman................ 66 Director Bruce D. Gorchow............... 46 Director John F. Lehman................. 57 Director Keith Oster.................... 38 Director Thomas G. Pownall.............. 78 Director Joseph A. Stroud............... 44 Director Sherman Baldwin................ 35 Secretary THEODORE M. CLARK, President and Chief Executive Officer, has been with the Company since November 1999. Prior to joining the Company, Mr. Clark spent 25 years with PRC-DeSoto International, a global manufacturer and distributor of coatings to the aerospace industry and sealants to the aerospace and insulating glass industries. Mr. Clark held a number of key sales, marketing and operating senior management positions during his tenure with PRC-DeSoto International, most recently as President and CEO from 1994 until his departure in November 1999. Mr. Clark is actively involved in all aspects of Burke's business operations. ELLIOT S. STEIN, Chief Operating Officer, has been with the Company since February 2000. Prior to joining the Company, Mr. Stein spent nine years with PRC-DeSoto International, most recently as Vice President and Worldwide Operations Director from July 1997 to February 2000. In this position, Mr. Stein 20 was responsible for PRC-DeSoto International's worldwide manufacturing, engineering quality control, and health and safety operations. Prior to assuming worldwide responsibilities for PRC-DeSoto International, Mr. Stein was its Vice President and Director of Operations for North America Aerospace Coatings and Sealants. Mr. Stein has also held operations management positions with Sherwin-Williams and Arco. STEPHEN G. GEANE, Chief Financial Officer, has been with the Company since March 2000. Prior to joining the Company, Mr. Geane was Vice President and Chief Financial Officer of PRC-DeSoto International, serving in that role from September 1997 to February 2000. Mr. Geane was responsible for PRC-DeSoto International's worldwide financial operations and business planning. Mr. Geane was the Vice President and Senior Financial Officer of Bristol Farms from August 1996 to September 1997 having responsibility for all financial operations. Mr. Geane also held the position of Vice President and Controller of Bristol Farms from November 1995 to August 1996. Prior to his tenure with Bristol Farms, Mr. Geane held financial management positions with Nestle USA, most recently serving as Division Controller for the food and beverage business units of Nestle Brands Foodservice Company. Mr. Geane is a Certified Public Accountant in the state of California. DAVID E. WORTHINGTON, Treasurer and Vice President--Finance, has been with the Company for nine 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, Senior Vice President and General Manager--San Jose, has been with the Company since 1979 and currently oversees all operations 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 Vice President and Director of Technical Services and Material/Process Development Engineer. He has served in his current position since January 2000. 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. 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. 21 DAVID P. PALERMO, Vice President and General Manager--Commercial Silicone Products, has been with the Company since January 2000. Prior to joining the Company, Mr. Palermo spent almost three years with PRC-DeSoto International, most recently as Global Marketing Manager of military aerospace coatings. Mr. Palermo served in that role from January 1999 to December 1999. Prior to that, Mr. Palermo was the Global Technology Manager of aerospace topcoats for PRC-DeSoto International from April 1997 to December 1998. Mr. Palermo also worked for Cytec Industries from April 1994 to April 1997 as a New Product Specialist, focusing on raw materials for the coatings industry. Previous experience includes senior management positions with Coatings Resource Corporation, an industrial coatings manufacturer. ANTHONY E. LAWSON, Vice President and Operations Manager--Silicone Products Group--Santa Fe Springs, 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 and Site Manager--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 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. GEORGE SAWYER, Chairman of the Board of Directors of the Company and a Managing General Partner of Lehman, has been affiliated with J.F. Lehman & Company for the past ten 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 Executive Vice President and Director of General Dynamics, 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 director of Special Devices, Inc. and a director of Elgar Holdings, Inc., a director of McCormick Selph 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. ROCCO C. GENOVESE, Vice Chairman has been with the Company for 44 years. Mr. Genovese joined Burke in 1955 and held a number of operations and sales positions within the Company before being appointed President and Chief Executive Officer in 1989. Mr. Genovese recently retired and will be acting as a consultant to the Company during the next year. 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. 22 Mr. Boileau joined Northrop Grumman Corporation ("Northrop Grumman") in December 1989 as 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, the Massachusetts Institute of Technology-Lincoln Laboratory Advisory Board, a fellow of the Royal Aeronautical Society, a Senior Member of the Institute of Electrical and Electronic Engineers and a Trustee of the University of Wyoming foundation. 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 General Partner of J.F. Lehman & Company. Prior to joining J.F. Lehman & Company, 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 Aluminum Corporation, Special Devices, Inc., McCormick Selph Holdings, Inc. and Monroe Muffler Brake, Inc. He is also a Trustee of MassMutual Participation Investors, MassMutual Corporate 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 J.F. Lehman & Company. In 1999, Mr. Gorchow became the President of PPM America Capital Partners, LLC. Prior to assuming this position, Mr. Gorchow had been Executive Vice President of PPM America, Inc since 1991. Mr. Gorchow is also a director of Global Imaging Systems, Inc., Leiner Health Products, Inc., Examination Management Services, Inc., Applied Process Solutions, Inc., and Elgar Holdings, Inc. and is an investment advisor for several investment limited partnerships. 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 General Partner of J.F. Lehman & Company. Prior to founding J.F. Lehman & Company 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 Chairman of the Board of Directors of Special Devices Incorporated. He is also a member of the Board of Directors of Elgar Holdings, Inc., McCormick Selph Holdings 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 General Partner of J.F. Lehman & Company. Mr. Oster joined J.F. Lehman & Company in 1992 and is principally responsible for financial structuring and analysis. Prior to joining J.F. Lehman & Company, 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., Special Devices, Inc. and McCormick Selph Holdings, 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 J.F. Lehman & Company. 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 23 Vice President of its Aerospace Advanced Planning Unit, became President of Aerospace Operations and, in succession, Vice President, then 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. 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 General Partner of J.F. Lehman & Company. Mr. Stroud has been affiliated with J.F. Lehman & Company 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 J.F. Lehman & Company, Mr. Stroud was the Chief Financial Officer of Sperry Marine, Inc. from 1993 until the company was purchased by Litton Industries, Inc. in 1996. From 1989 to 1993, Mr. Stroud was Chief Financial Officer of the Accudyne and Kilgore Corporations. Mr. Stroud is also a director of Elgar Holdings, Inc., Special Devices, Inc. and McCormick Selph Holdings, Inc. SHERMAN BALDWIN, Corporate Secretary, is a Vice President of J.F. Lehman & Company. Mr. Baldwin joined J.F. Lehman & Company in 1999. Prior to joining the firm, Mr. Baldwin was an Engagement Manager at McKinsey & Company from 1997 to 1999, where he developed growth strategies and improved operational efficiencies for companies in the telecommunications and aerospace industries. From 1987 to 1995, Mr. Baldwin served in the U.S. Navy as an aviator. Between 1993 and 1995, he served in the Strategy and Policy Directorate of the Joint Chiefs of Staff and as a Special Assistant to the Secretary of the Navy. Mr. Baldwin is a trustee of the Children's Pompe Foundation, and a term Member of the Council on Foreign Relations. 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. From January 1, 1999 through October 31, 1999, Mr. Genovese served as the Company's President and from January 1, 1999 through February 16, 2000, Mr. Genovese served as the Company's Chief Executive Officer. Mr. Lehman is a Managing General Partner of J.F. Lehman & Company. J.F. Lehman & Company is an affiliate of the general partner JFLEI, which is a Delaware limited partnership which owns Common Stock of the Company equal to an approximately 80.9% beneficial ownership interest and an approximately 63.2% fully-diluted ownership interest in the Company. Mr. Lehman, either directly (whether through ownership interest or position) or through one or more intermediaries, may be deemed to control J.F. Lehman & Company and such general partner. J.F. Lehman & Company and such general partner, in turn, may be deemed to control the voting and disposition of the shares of the Company Common Stock owned by JFLEI. Accordingly, for certain purposes, Mr. Lehman may be deemed to be the beneficial owner of the shares of the Company's Common Stock owned by JFLEI. Pursuant to the terms of a ten-year Management Agreement (the "Management Agreement") entered into between J.F. Lehman & Company and the Company, (i) upon consummation of the Recapitalization, the Company paid J.F. Lehman & Company certain transaction fees and (ii) the 24 Company agreed to pay J.F. Lehman & Company an annual management fee equal to $500,000, as may be adjusted from time to time subject to necessary board approval, that commenced accruing on October 1, 1998 and which was to be payable on a quarterly basis in arrears commencing on January 1, 1999. During 1998, the Board of Directors approved an amendment to the Management Agreement and the Company concurrently entered into a Management Services Agreement with J.F. Lehman & Company, the combined effect of which was to further delineate the management services to be provided by J.F. Lehman & Company and to provide that J.F. Lehman & Company's management fee would be paid in advance on a quarterly basis commencing October 1, 1998. ITEM 11. EXECUTIVE COMPENSATION The information set forth in this section relates to the Chief Executive Officer of the Company and the four most highly compensated executive officers of the Company as of December 31, 1999. COMPENSATION SUMMARY The following summary compensation table sets forth for the fiscal years ended December 31, 1999, January 1, 1999 and January 2, 1998, the historical compensation for services to the Company of the Chief Executive Officer and the four most highly compensated executive officers (the "Named Executive Officers") as of December 31, 1999: LONG-TERM ANNUAL COMPENSATION(1) COMPENSATION ------------------------------------- ------------ SECURITIES FISCAL UNDERLYING NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($)(2) OTHER($)(3) OPTIONS - - --------------------------- -------- --------- ----------- ----------- ------------ Rocco C. Genovese(4)..................... 1999 $224,738 $ -- $ -- 150,000 President and Chief Executive Officer 1998 233,651 -- -- 150,000 1997 196,925 317,500 5,579,314 150,000 Martin J. Suydam, Jr..................... 1999 185,800 -- -- 40,000 President--Silicone Products Group 1998 17,192 -- 1997 -- -- -- Anthony E. Lawson........................ 1999 138,700 -- -- 20,000 Vice President and Operations 1998 85,093 25,200 -- -- Manager--Silicone Products 1997 -- -- -- -- Group--Santa Fe Springs Craig A. Carnes.......................... 1999 126,911 -- -- 7,500 Vice President--Sales and 1998 114,575 20,000 -- 7,500 Marketing--Flooring Products 1997 94,231 25,000 161,710 7,500 Robert F. Pitman......................... 1999 116,442 -- -- 20,000 Senior Vice President and General 1998 117,329 27,500 -- 20,000 Manager--San Jose 1997 111,596 77,500 584,815 -- - - ------------------------ (1) Perquisites and other personal benefits paid in 1999 for the Named Executive Officers aggregated less than the lesser of $50,000 and 10% of the total annual salary and bonus set forth in the columns entitled "Salary" and "Bonus" for each named executive officer and, accordingly, are omitted from the table. (2) Annual bonuses are indicated for the year in which they were earned and accrued. Annual bonuses for any year are generally paid in the following fiscal year. 25 (3) Represents the compensation component of the consideration paid to the executive for his stock options in the Company in connection with the Recapitalization. (4) Mr. Genovese resigned his position as President of the Company effective November 1, 1999 and he resigned his position as Chief Executive Officer of the Company effective February 1, 2000. Theodore M. Clark was appointed President and Chief Executive Officer of the Company effective as of those dates. AGGREGATE OPTION PURCHASES IN LAST FISCAL YEAR-END AND FISCAL YEAR END OPTION VALUES The following table summarizes information with respect to the year-end values of all options held by Named Executive Officers. NUMBER OF SECURITIES UNDERLYING UNEXERCISED OPTIONS VALUE OF UNEXERCISED SHARES AT FISCAL YEAR-END (#) IN-THE-MONEY ACQUIRED ON EXERCISABLE/ OPTIONS AT FISCAL NAME EXERCISE VALUE REALIZED UNEXERCISABLE YEAR-END($)(1) - - ---- ----------- -------------- ---------------------- -------------------- Rocco C. Genovese............... 37,500 0 37,500/75,000(2) $0 Martin J. Suydam, Jr............ 0 0 10,000/30,000 $0 Anthony E. Lawson............... 0 0 5,000/15,000 $0 Craig A. Carnes................. 0 0 3,750/3,750 $0 Robert F. Pitman................ 0 0 3,750/3,750 $0 - - ------------------------ (1) There is no public market for the Company's Common Stock. The Company estimates that the per share market value for its Common Stock is nominal. (2) Mr. Genovese's unexercisable shares were cancelled as of the date of his resignation effective February 17, 2000. EMPLOYMENT AGREEMENT In connection with the Recapitalization, the Company entered into an employment agreement with Rocco C. Genovese. The employment agreement provided for Mr. Genovese'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 Mr. Genovese immediately before the execution of the Employment agreement. The employment agreement provides that if Mr. Genovese was terminated for Cause (as defined in the employment agreement) or voluntarily terminated his employment prior to the expiration of the then-current term, he would 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 occurred later. If Mr. Genovese's employment was terminated by the Company for any reason other than for Cause or if Mr. Genovese died or was unable to perform his duties due to disability for a period of 90 consecutive days, he would 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. The employment agreement contains provisions prohibiting Mr. Genovese, 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 Mr. Genovese's initial involvement, in competition with the Company in any business then or thereafter conducted by the Company. The employment agreement also contains provisions requiring Mr. Genovese to maintain the confidentiality of certain information related to the Company during the period of his employment with 26 the Company and, under certain circumstances, for two years thereafter. The employment agreement further provides that any proposals or ideas developed by Mr. Genovese or that are submitted by him 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 Mr. Genovese except in compliance with the Company's policy on conflicts of interest. Mr. Genovese resigned his position as President of the Company effective November 1, 1999 and he resigned his position as Chief Executive Officer effective February 1, 2000. Mr. Genovese's employment agreement with the Company terminated effective February 17, 2000 and he has entered into a one year consulting agreement with the Company. In addition, Mr. Genovese remains a director and Vice Chairman of the Board of Directors of the Company. 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 1999 was $0.6 million. STOCK OPTION PLAN The Board of Directors of the Company has adopted the 1997 Stock Option Plan, amended and restated as of November 30, 1999 (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 705,000 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. 27 COMPENSATION OF DIRECTORS None of the directors who are officers of the Company receives compensation directly for their service on the Company's Board of Directors. All other directors receive a monthly retainer fee of $1,250 for their service. The Company also pays non-employee directors $1,500 per meeting for board and committee meetings attended by the non-employee directors. In addition, the Company pays J.F. Lehman & Company 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, 2000 by (i) each director, (ii) each of the Named Executive Officers of the Company, (iii) all executive officers and directors as a group and (iv) each person who is the beneficial owner of more than 5% of the outstanding Common Stock of the Company. PERCENTAGE OF SHARES NAME OF INDIVIDUAL OR ENTITY(1) NUMBER OF SHARES(2) OUTSTANDING(3) - - ------------------------------- ------------------- -------------------- JFLEI(4)................................................. 3,134,298 80.5% John F. Lehman(5)........................................ 3,134,298 80.5 George Sawyer(5)......................................... 3,134,298 80.5 Donald Glickman(5)....................................... 3,134,298 80.5 Keith Oster(5)........................................... 3,134,298 80.5 Joseph A. Stroud(5)...................................... 3,134,298 80.5 Rocco C. Genovese(6)..................................... 316,000 8.0 Robert F. Pitman(7)...................................... 12,350 * Martin J. Suydam, Jr.(8)................................. 10,000 * Craig A. Carnes(9)....................................... 9,050 * Anthony E. Lawson(10).................................... 5,000 * Oliver C. Boileau, Jr.(11)............................... -- -- Thomas G. Pownall(12).................................... -- -- Bruce D. Gorchow(13)..................................... -- -- Jackson National(14)..................................... 428,444 9.9 MassMutual(14)........................................... 428,444 9.9 All directors and executive officers as a group (21 persons)........................................... 3,517,023 88.6% - - ------------------------ * 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. (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, 2000. In accordance with Rule 13(d)-3 of the Exchange Act, any Common Stock that will not be outstanding as of March 15, 2000, 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 28 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, 2000, JFLEI and its affiliates would own approximately 63.2% of the Company's Common Stock, the executive officers and directors as a group would own approximately 71.0% of the Company's Common Stock and the warrantholders (including Jackson National, MassMutual) would have the right to purchase approximately 17.3% of the Company's Common Stock. (4) JFLEI is a Delaware limited partnership managed by J.F. Lehman & Company, 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 J.F. Lehman & Company and such general partner. J.F. Lehman & Company 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, and 37,500 shares of Common Stock issued under the Company's 1997 Stock Option Plan. (7) Includes options to purchase 3,750 shares of Common Stock issued under the Company's 1997 Stock Option Plan, which are currently exercisable. (8) Includes options to purchase 10,000 shares of Common Stock issued under the Company's 1997 Stock Option Plan, which are currently exercisable. (9) Includes options to purchase 3,750 shares of Common Stock issued under the Company's 1997 Stock Option Plan, which are currently exercisable. (10) Includes options to purchase 5,000 shares of Common Stock issued under the Company's 1997 Stock Option Plan, which are currently exercisable. (11) Mr. Boileau is a limited partner of JFLEI. (12) Mr. Pownall is a limited partner of JFLEI and is on the investment advisory board of J.F. Lehman & Company. (13) Mr. Gorchow is on the investment advisory board of J.F. Lehman & Company. (14) 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 entered into between J.F. Lehman & Company and the Company, (i) upon consummation of the Recapitalization, the Company paid J.F. Lehman & Company certain transaction fees and (ii) the Company agreed to pay J.F. Lehman & Company an annual 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 J.F. Lehman & Company, the combined effect of which was to further delineate 29 the management services to be provided by J.F. Lehman & Company and to provide that J.F. Lehman & Company'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. 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, 30 (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. 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. 31 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. 32 PART IV ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(1) Consolidated Financial Statements: The following consolidated financial statements of the Company are included in response to Item 8 of this report. PAGE REFERENCE FORM 10-K -------------- Report of Ernst & Young LLP, Independent Auditors........... F-2 Consolidated Statements of Operations for the three fiscal years ended December 31, 1999............................. F-3 Consolidated Balance Sheets at January 1, 1999 and December 31, 1999.................................................. F-4 Consolidated Statements of Shareholders' Equity (Deficit) for the three fiscal years ended December 31, 1999........ F-5 Consolidated Statements of Cash Flows for the three years ended December 31, 1999................................... F-6 Notes to Consolidated Financial Statements.................. F-7 (a)(2) Consolidated Financial Statement Schedules: Report of Ernst & Young LLP, Independent Auditors........... S-2 Schedule II--Valuation and Qualifying Accounts.............. S-3 Schedules other than those listed above have been omitted since they are either not required, not applicable or the information is otherwise included. (b) Reports on Form 8-K. None. (c) Exhibits 1.1 Purchase Agreement, dated April 17, 1998 between the Company and the Initial Purchaser.(1) 2.1 Stock Purchase Agreement, dated as of March 5, 1998 among Burke, Sovereign and Mercer.(2) 3.1 Articles of Incorporation of the Company.(3) 3.2 Amended and Restated Articles of Incorporation of the Company. 3.3 Certificate of Determination of Series C Cumulative Convertible Preferred Stock of the Company. (4) 3.4 Bylaws of the Company.(3) 3.5 Articles of Incorporation of Burke Flooring Products, Inc.(3) 3.6 Bylaws of Burke Flooring Products, Inc.(3) 3.7 Articles of Incorporation of Burke Rubber Company, Inc.(3) 3.8 Bylaws of Burke Rubber Company, Inc.(3) 3.9 Articles of Incorporation of Burke Custom Processing, Inc.(3) 3.10 Bylaws of Burke Custom Processing, Inc.(3) 33 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) 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) 34 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 October 20, 1995, between the Company and Lincoln Property Company for the premises at 13767 Freeway Drive, Santa Fe Springs, CA.(3) 10.26 Lease Agreement, dated April 25, 1983, between the Company and Donald M. Hypes for the premises at 14910 Carmenita Boulevard, Norwalk, CA.(3) 10.27 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) 10.28 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) 10.29 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) 10.30 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) 10.31 Sublease Agreement, dated February 20, 1992, between Burke Rubber Company for the premises at 107 South Riverside Drive, Modesto, CA.(3) 10.32 Servicing Agreement, dated April 26, 1996, between the Company and Westland Technologies.(3) 10.33 Amendment No. 1 to the Stock Purchase Agreement, dated April 21, 1998, among Burke, Sovereign and Mercer.(5) 10.34 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.(5) 10.35 Management Services Agreement, dated as of June 18, 1998, between the Company and J.F. Lehman & Company.(5) 10.36 Amendment No. 1 to Management Agreement between the Company and J.F. Lehman & Company, dated as of June 18, 1998.(5) 10.37 Burke Industries, Inc. Executive Deferred Compensation Agreement.(5) 10.38 Burke Industries, Inc. 1997 Stock Option Plan.(5) 10.39 Form of Incentive Stock Option Agreement under the Burke Industries, Inc. 1997 Stock Option Plan 10.40 Burke Industries, Inc. 1997 Stock Option Plan Amended and Restated as of November 30, 1999. 10.41 Form of Incentive Stock Option Agreement under the Burke Industries, Inc. Amended and Restated 1997 Stock Option Plan. 10.42 Employment Agreement, dated as of September 16, 1999, by and between Theodore M. Clark and Burke Industries, Inc. 35 10.43 Letter Agreement, dated February 4, 2000, by and between Burke Industries, Inc. and Theodore M. Clark, amending Mr. Clark's employment agreement dated as of September 16, 1999. 10.44 Extension and First Amendment of Lease, dated as of January 13, 1994, by and between RTC Properties, Inc. and Mercer Products Company, Inc. 10.45 Extension and Second Amendment of Lease, dated as of January 23, 1995, by and between RTC Properties, Inc. and Mercer Products Company, Inc. 10.46 Third Amendment and Extension of Agreement of Lease, dated as of March 26, 1997, by and between RTC Properties, Inc. and Mercer Products Company, Inc. 10.47 Fourth Amendment of Lease, dated as of April 21, 1998, by and between RTC Properties, Inc. and Mercer Products Co., Inc. 10.48 Lease Agreement, dated June 22, 1999, by and between ProLogis Trust and Burke Industries, Inc. 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. (4) Incorporated by reference to the Company's current report on Form 8-K, File No. 333-36675, as filed with the Securities and Exchange Commission on May 5, 1998. (5) Incorporated by reference to the Company's 1998 annual report on Form 10-K, File No. 333-36675, as filed with the Securities and Exchange Commission on March 31, 1999. 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. 36 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE -------- BURKE INDUSTRIES, INC. AND SUBSIDIARIES Report of Ernst & Young LLP, Independent Auditors........... F-2 Consolidated Statements of Operations for the three fiscal years ended December 31, 1999............................. F-3 Consolidated Balance Sheets at January 1, 1999 and December 31, 1999......................................... F-4 Consolidated Statements of Shareholders' Equity (Deficit) for the three fiscal years ended December 31, 1999........ F-5 Consolidated Statements of Cash Flows for the three fiscal years ended December 31, 1999............................. F-6 Notes to Consolidated Financial Statements.................. F-7 F-1 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors and Shareholders Burke Industries, Inc. and Subsidiaries We have audited the accompanying consolidated balance sheets of Burke Industries, Inc. and subsidiaries as of December 31, 1999 and January 1, 1999, and the related consolidated statements of operations, shareholders' equity (deficit), and cash flows for each of the three fiscal years in the period ended December 31, 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 auditing standards generally accepted in the United States. 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 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Burke Industries, Inc. and subsidiaries at December 31, 1999 and January 1, 1999, and the consolidated results of their operations and their cash flows for each of the three fiscal years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. /s/ ERNST & YOUNG LLP San Jose, California March 10, 2000 F-2 BURKE INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FISCAL YEARS ENDED ------------------------------ 1999 1998 1997 -------- -------- -------- (IN THOUSANDS) Net sales................................................... $107,504 $107,019 $90,228 Costs and expenses: Cost of sales............................................. 78,288 76,145 62,917 Selling, general and administrative....................... 17,831 15,454 12,174 Amortization of goodwill.................................. 2,017 1,411 64 Transaction expenses...................................... -- -- 1,321 Stock option purchase..................................... -- -- 14,105 -------- -------- ------- Income (loss) from operations............................... 9,368 14,009 (353) Interest expense, net....................................... 14,821 13,819 5,408 -------- -------- ------- Income (loss) before income tax provision (benefit)......... (5,453) 190 (5,761) Income tax provision (benefit).............................. 921 160 (1,818) -------- -------- ------- Net income (loss)........................................... $ (6,374) $ 30 $(3,943) ======== ======== ======= See accompanying notes. F-3 BURKE INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS FISCAL YEARS ENDED --------------------- 1999 1998 --------- --------- (IN THOUSANDS) ASSETS Current assets: Cash and cash equivalents................................. $ 348 $ 2,981 Trade accounts receivable, less allowance of $658 in 1999 and $812 in 1998........................................ 13,627 13,109 Inventories............................................... 15,585 14,574 Prepaid expenses and other current assets................. 1,510 1,731 Deferred income tax assets................................ 503 3,108 Refundable income taxes................................... -- 174 --------- --------- Total current assets.................................... 31,573 35,677 Property, plant, and equipment: Land and improvements..................................... 2,107 2,107 Buildings and improvements................................ 11,210 11,210 Equipment................................................. 19,543 17,277 Leasehold improvements.................................... 1,040 721 Assets under capital leases............................... 1,589 -- --------- --------- 35,489 31,315 Accumulated depreciation and amortization................. 14,464 12,300 --------- --------- 21,025 19,015 Construction in process................................... 419 2,364 --------- --------- 21,444 21,379 Other Assets: Prepaid pension cost...................................... 442 498 Goodwill, net............................................. 27,718 29,735 Deferred financing costs, net............................. 5,718 6,542 Other assets.............................................. 139 114 --------- --------- 34,017 36,889 --------- --------- $ 87,034 $ 93,945 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Current liabilities: Trade accounts payable and accrued expenses............... $ 8,174 $ 6,934 Accrued compensation and related liabilities.............. 1,743 2,715 Accrued interest.......................................... 5,528 5,434 Payable to shareholders................................... 785 953 Capital lease obligations, current........................ 514 -- Income taxes payable...................................... 481 695 --------- --------- Total current liabilities............................... 17,225 16,731 Senior notes................................................ 110,000 110,000 Floating rate notes......................................... 30,000 30,000 Other noncurrent liabilities................................ 444 444 Capital lease obligations, non-current...................... 669 -- Deferred income tax liabilities............................. 2,388 4,082 Preferred stock, no par value; 50,000 shares authorized; 30,000 Series A Redeemable shares designated; 18,611 Series A shares issued and outstanding; 5,000 Series B Redeemable shares designated; 2,326 Series B shares issued and outstanding (aggregate liquidation and redemption preference $18,000)....................................... 20,536 18,160 Shareholders' equity (deficit): Convertible preferred stock, no par value: 3,000 Series C shares designated, issued and outstanding (liquidation preference $3,000)...................................... 3,000 3,000 Class A common stock, no par value: Authorized shares--20,000,000 Issued and outstanding shares-- 3,895,000 in 1999 and 3,857,000 in 1998................. 25,708 25,464 Accumulated deficit....................................... (122,936) (113,936) --------- --------- Total shareholders' equity (deficit).................... (94,228) (85,472) --------- --------- $ 87,034 $ 93,945 ========= ========= See accompanying notes. F-4 BURKE INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) CONVERTIBLE PREFERRED CLASS A COMMON STOCK STOCK TOTAL ------------------- ------------------- ACCUMULATED SHAREHOLDERS' SHARES AMOUNT SHARES AMOUNT DEFICIT EQUITY (DEFICIT) -------- -------- -------- -------- ----------- ---------------- (IN THOUSANDS) 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) Net loss........................... -- -- -- -- (6,374) (6,374) Exercise of stock options.......... -- -- 38 244 -- 244 Additional shareholder payment related to recapitalization of company.......................... -- -- -- -- (250) (250) Accretion of preferred stock discount......................... -- -- -- -- (241) (241) Preferred stock dividend in kind... -- -- -- -- (2,135) (2,135) ----- ------ ------ ------- --------- -------- Balance at fiscal year end 1999.... 3,000 $3,000 3,895 $25,708 $(122,936) $(94,228) ===== ====== ====== ======= ========= ======== See accompanying notes. F-5 BURKE INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FISCAL YEARS ENDED ------------------------------- 1999 1998 1997 -------- -------- --------- (IN THOUSANDS) OPERATING ACTIVITIES Net income (loss)........................................... $(6,374) $ 30 $ (3,943) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization: Property, plant, and equipment............................ 2,164 1,764 1,435 Goodwill.................................................. 2,017 1,411 64 Debt discounts arising from warrants........................ -- -- 93 Interest on shareholder note................................ -- -- (240) Deferred financing costs.................................... 824 752 229 Changes in operating assets and liabilities: Trade accounts receivable................................. (518) 408 (2,031) Inventories............................................... (1,011) (506) (2,571) Prepaid expenses and other current assets................. 221 (619) (436) Refundable income taxes................................... 174 1,465 -- Prepaid pension cost...................................... 56 3 41 Other assets.............................................. (25) (52) 25 Trade accounts payable and accrued expenses............... 1,334 1,559 3,382 Accrued compensation and related liabilities.............. (972) 223 149 Deferred income taxes..................................... 911 (72) (1,397) Income taxes payable...................................... (214) (369) (3,043) Other noncurrent liabilities.............................. -- 24 (300) ------- -------- --------- Net cash provided by (used in) operating activities......... (1,413) 6,021 (8,543) INVESTING ACTIVITIES Acquisition of Mercer Products Company; net of cash acquired.................................................. -- (38,440) -- Purchases of property, plant, and equipment................. (639) (3,220) (1,454) Repayment of note receivable from affiliate of the principal shareholders.............................................. -- -- 4,306 ------- -------- --------- Net cash (used in) provided by investing activities......... (639) (41,660) 2,852 FINANCING ACTIVITIES Restricted cash............................................. -- 1,070 (1,070) Checks outstanding in excess of funds deposited............. -- -- (828) Repayments and settlement of long-term debt and capital lease obligations......................................... (407) -- (18,869) Payments to shareholders.................................... (418) (4,929) 5,882 Exercise of stock options................................... 244 -- -- Proceeds from sales of shares through employee stock plans..................................................... -- -- 10 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......... (581) 27,057 17,254 ------- -------- --------- Net increase (decrease) in cash and cash equivalents........ (2,633) (8,582) 11,563 Cash and cash equivalents at beginning of year.............. 2,981 11,563 -- ------- -------- --------- Cash and cash equivalents at end of year.................... $ 348 $ 2,981 $ 11,563 ======= ======== ========= See accompanying notes. F-6 BURKE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION Burke Industries, Inc. and subsidiaries (the "Company") develop, manufacture, and market various elastomer products for use in commercial and military applications. The Company sells its products through a network of distributors or directly to customers in the construction, defense, and aerospace industries and other commercial markets, primarily in North America. The Company performs ongoing credit evaluations of its customers' financial condition and generally does not require collateral. There were no customers that accounted for more than 10% of net sales in fiscal year 1999. One customer accounted for approximately 10% of net sales in fiscal year 1998 and 13% of net sales in fiscal year 1997. No other customers constituted 10% or more of net sales in any of the three fiscal years ended in 1999. 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, 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 F-7 BURKE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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 $785,000 remains at fiscal year end 1999. In 1999, the Company made additional payments related to the repurchase of a former shareholder's shares prior to the Recapitalization and these additional payments represent the amount received by other shareholders at the time of the Recapitalization. Accordingly, the Company has recorded these payments as additional consideration for the Recapitalization in the accompanying consolidated statement of shareholders' equity (deficit). 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 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-two week year in fiscal 1997, 1998 and 1999. For convenience, the accompanying financial statements have been referred to as fiscal years ended 1997, 1998, and 1999 for the periods ended January 2, 1998, January 1, 1999 and December 31, 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. CASH AND CASH EQUIVALENTS Cash and cash equivalents consist of bank demand deposit accounts. F-8 BURKE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) REVENUE RECOGNITION Revenue from sales of products is recognized upon shipment to customers. WARRANTY The Company generally warrants its roofing products for two years, for which the related costs are not significant. In addition, the Company sells extended warranties for ten to twenty years. Revenues received for extended warranties are deferred and amortized over the period in which warranty costs are expected to be incurred. Warranty reserves and deferred warranty revenues are included in accrued expenses and other noncurrent liabilities on the accompanying consolidated balance sheets. INVENTORIES Inventories are stated at the lower of cost (first-in, first-out method) or market. 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. Accumulated amortization at December 31, 1999 for assets under capital leases is $79,000. 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. INCOME TAXES The Company accounts for income taxes in accordance with the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109") which requires the use of the liability method in accounting for income taxes. Under this method, deferred tax liabilities and assets are measured based upon differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes using expected tax rates and laws that will be in effect when the differences are expected to reverse RECENT PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (FAS 133"). FAS 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designed as part of a hedge transaction, and, if so, the type of hedge transaction. In June 1999, the FASB issued FAS 137, "Accounting for Derivative Instruments and Hedging Activities--Deferral of the Effective Date of FASB Statement No. 133" (FAS 137"), which amends F-9 BURKE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) FAS 133 to be effective for all fiscal quarters or all fiscal years beginning after June 15, 2000 or January 1, 2001 for the Company. Management does not currently expect that adoption of FAS 137 will have a material impact on the Company's financial position or results of operations. RECLASSIFICATIONS Certain prior year reclassifications have been made in order to conform to current year presentation. SEGMENT INFORMATION The Company operates in two reportable segments--organic products and silicone products, under FASB Statement No. 131 "Disclosure About Segments of an Enterprise and Related Information" ("FASB 131"). The Company's management has determined the operating segments based upon how the business is managed and operated. The reportable segments are each managed separately as they manufacture and distribute distinct products with different production processes. 2. ACQUISITION OF MERCER PRODUCTS COMPANY, INC. On April 21, 1998, the Company acquired all of the issued and outstanding capital stock of Mercer Products Company, Inc. ("Mercer"), from Sovereign Specialty Chemicals, Inc., for an aggregate purchase price of $38,474,000 (including acquisition costs of $2,280,000). The acquisition was accounted for under the purchase method of accounting. The Company's consolidated results of operations include Mercer's results from the date of acquisition. The total purchase price was allocated to the assets acquired and liabilities assumed based on their estimated fair values as follows: (IN THOUSANDS) Current assets.............................................. $ 5,269 Plant and equipment......................................... 4,903 Excess of purchase price over net assets acquired........... 29,681 Amounts payable and accrued expenses........................ (1,379) ------- Total purchase price...................................... $38,474 ======= 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. F-10 BURKE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. ACQUISITION OF MERCER PRODUCTS COMPANY, INC. (CONTINUED) The following pro forma data was prepared to illustrate the estimated effect of the Mercer acquisition and the financing related thereto, as if the Mercer acquisition had occurred as of the beginning of each period presented: FISCAL YEAR ENDED ------------------- 1998 1997 -------- -------- (IN THOUSANDS) Net Sales............................................... $113,223 $115,127 Net income (loss)....................................... (12) (3,973) 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: 1999 1998 -------- -------- (IN THOUSANDS) Raw materials............................................. $ 5,540 $ 5,123 Work-in-process........................................... 1,861 2,085 Finished goods............................................ 8,184 7,366 ------- ------- $15,585 $14,574 ======= ======= 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 15 years. Goodwill related to prior transactions is being amortized on a straight-line basis over forty years. Accumulated amortization totaled $3,796,000 and $1,779,000 at fiscal years ended 1999 and 1998, respectively. F-11 BURKE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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. 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 1999 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 (9.8% at fiscal year end 1999). 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 1999 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 1999 or 1998. F-12 BURKE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. LONG-TERM DEBT AND LEASE OBLIGATIONS (CONTINUED) 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. 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. During 1999, the Company was in default of certain financial covenants and other provisions of the loan agreement. As of November 11, 1999 the lender waived the existing defaults, modified certain financial covenants and amended certain other provisions of the loan agreement such that, at December 31, 1999, the Company is in compliance with the amended covenants. INTEREST EXPENSE, NET Interest expense, net consists of the following: FISCAL YEAR ENDED ------------------------------ 1999 1998 1997 -------- -------- -------- (IN THOUSANDS) Interest incurred................................. $14,888 $14,062 $5,900 Capitalized interest.............................. (2) (13) (29) Interest income................................... (65) (230) (463) ------- ------- ------ Interest expense, net............................. $14,821 $13,819 $5,408 ======= ======= ====== Included in interest expense is $142,000 of interest incurred on subordinated shareholder notes in fiscal year 1997. There was no such interest expense in fiscal years ended 1998 and 1999. 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 1999 and 1998 was $1,795,000 and $971,000, respectively. F-13 BURKE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. LONG-TERM DEBT AND LEASE OBLIGATIONS (CONTINUED) LEASE OBLIGATIONS At fiscal year ended 1999, minimum payments under all noncancelable lease agreements were as follows: CAPITAL LEASES OPERATING LEASES -------------- ---------------- 2000............................................ $ 669 $2,202 2001............................................ 568 1,450 2002............................................ 50 1,199 2003............................................ -- 936 2004............................................ -- 743 Beyond 2004..................................... -- 2,803 ------ ------ Total minimum lease payments.................... 1,287 $9,333 ====== Less amount representing interest............. (104) ------ Present value of minimum lease payments......... 1,183 Less current portion.......................... (514) ------ Long-term capital lease obligations............. $ 669 ====== Rental expense was $2,739,000, $2,082,000, and $1,404,000 in fiscal years 1999, 1998, and 1997, respectively. Rental expense is before sublease income of $335,000 in 1999, $325,000 in 1998 and $316,000 in 1997. Future sublease rental income commitments aggregated $640,000 at fiscal year ended 1999. 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 1999. F-14 BURKE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. REDEEMABLE PREFERRED STOCK (CONTINUED) Holders of shares of redeemable preferred stock shall be entitled to receive the stated liquidation value of $1,000 per share, plus an amount per share equal to any dividends accrued but unpaid, in the event of any liquidation, dissolution or winding up of the Company. After payment of the full amount of the liquidation preference, holders of shares of redeemable preferred stock will not be entitled to any further participation in any distribution of assets of the Company. The Company may, at its option, redeem at any time, all or any portion of the shares of the redeemable preferred stock, at a redemption price per share equal to 100% of the liquidation preference on the date of redemption. On February 20, 2008, the Company shall redeem any and all outstanding shares of redeemable preferred stock, at a redemption price per share equal to 100% of the liquidation preference. Upon the occurrence of a change of control (as defined), the redeemable preferred stock shall be redeemable at the option of the holders, at a redemption price per share equal to 100% of the liquidation preference. The holders of shares of redeemable preferred stock shall not be entitled to any voting rights. However, without the consent of the holders of at least two-thirds of the outstanding shares of redeemable preferred stock, the Company may not change the powers or preferences of the redeemable preferred stock, create, authorize or issue any shares of capital stock ranking senior or on a parity with the redeemable preferred stock or create, authorize or issue any shares of capital stock constituting junior securities, unless such junior securities are subordinate in right of payment to the redeemable preferred stock. If at any time after October 15, 2000, any amount of cash dividends payable on the Series A Redeemable Preferred Stock shall have been in arrears and unpaid for four or more successive dividend payment dates, then the holders of the Series A Redeemable Preferred Stock, shall have the right to elect the smallest number of directors constituting one-third of the authorized number of directors, and the holders of the common stock shall have the right to elect the remaining directors. If the Company fails to redeem shares of Series A Redeemable Preferred Stock in accordance with the mandatory redemption provisions described above, then the holders of the Series A Redeemable Preferred Stock shall have the right to elect the smallest number of directors constituting a majority of the authorized number of directors, and the holders of the common stock shall have the right to elect the remaining directors. 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 F-15 BURKE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. SHAREHOLDERS' EQUITY (CONTINUED) 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 At fiscal year ended 1999 a total of 964,000 shares of Class A common stock are reserved for the exercise of warrants and 705,000 shares are reserved under the 1997 Stock Option Plan. 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 as amended and restated as of November 30, 1999), incentive stock options to purchase up to a total of 705,000 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. F-16 BURKE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. SHAREHOLDERS' EQUITY (CONTINUED) A summary of all stock option activity is as follows: OPTIONS WEIGHTED AVERAGE OUTSTANDING PRICE PER SHARE ----------- ---------------- (IN THOUSANDS, EXCEPT PRICE PER SHARE) 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 Granted........................................... 222 $6.69 Exercised......................................... (38) $6.50 Canceled.......................................... (117) $6.50 ------ Balance at fiscal year ended 1999................. 505 $7.05 ====== At fiscal year end 1999, options to purchase 105,625 shares of common stock are exercisable and the weighted average remaining contractual life is 9 years (1998 - 9 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 income (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 6.34%; 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 $1.78 per share for 1999. Outstanding options have exercise prices that range from $6.50 to $12.00 per share. The Minimum Value option valuation method may be used by companies without publicly traded equity securities 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 F-17 BURKE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. SHAREHOLDERS' EQUITY (CONTINUED) 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 those plans consistent with the method of FAS 123, the Company's pro forma net loss would have been $6.5 million for the fiscal year end 1999 (1998 $64,000 proforma net loss). The effect of applying the FAS 123 minimum value method to the stock options granted in fiscal year ended 1997 would not have resulted in a pro forma net loss 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 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. 8. PENSION AND RETIREMENT PLANS The Company maintains a defined benefit pension plan covering substantially all of its hourly employees in San Jose, California. The benefits are based on years of service and the benefit credit rates stated in the provisions of the plan. The Company funds the plan at the minimum amount required to be paid under the provisions of the Employee Retirement and Income Security Act of 1976 (ERISA). Contributions are intended to provide for benefits attributed to service to date as well as for those expected to be earned in the future. F-18 BURKE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. PENSION AND RETIREMENT PLANS (CONTINUED) The following tables set forth the plan's funded status and amounts recognized in the Company's consolidated balance sheets at fiscal year end: 1999 1998 -------- -------- (IN THOUSANDS) CHANGE IN BENEFIT OBLIGATION Benefit obligation at beginning of year................... $3,400 $3,018 Service cost.............................................. 75 67 Interest cost............................................. 265 252 Actuarial loss............................................ 5 204 Benefits paid............................................. (160) (141) ------ ------ Benefit obligation at end of year......................... $3,585 $3,400 ====== ====== CHANGE IN PLAN ASSETS Fair value of plan assets at beginning of year............ $3,491 $3,066 Actual return on plan assets.............................. 736 463 Employer contribution..................................... 35 103 Benefits paid............................................. (160) (141) ------ ------ Fair value of plan assets at end of year.................. $4,102 $3,491 ====== ====== Funded status............................................. $ 517 $ 91 Unrecognized net actuarial loss (gain).................... (288) 132 Unrecognized prior service cost........................... 213 275 ------ ------ Prepaid benefit cost...................................... $ 442 $ 498 ====== ====== WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER 31 Discount Rate............................................. 8.00% 8.00% Expected return on plan assets............................ 9.00% 9.00% Net periodic pension expense for the fiscal years ended 1999, 1998, and 1997 included the following components: 1999 1998 1997 -------- -------- -------- (IN THOUSANDS) COMPONENTS OF NET PERIODIC BENEFIT COST: Service cost--benefits earned during the year......... $ 75 $ 67 $ 58 Interest cost on projected benefit obligation......... 265 252 220 Expected return on plan assets........................ (311) (275) (254) Amortization of prior service cost.................... 62 62 44 ----- ----- ----- Net periodic pension cost............................. $ 91 $ 106 $ 68 ===== ===== ===== 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 F-19 BURKE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. PENSION AND RETIREMENT PLANS (CONTINUED) Service (IRS) limits. The Company matches a portion of the employees' contribution. The Company contributed approximately $178,000, $164,000, and $156,000, to this plan in 1999, 1998, and 1997, respectively. The Company also sponsors a defined contribution plan (an IRS qualified 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 $81,000, to this plan in 1999 and $93,000 to the plan subsequent to the Mercer acquisition in 1998. 9. INCOME TAXES The income tax provision (benefit) recognized in the consolidated statements of operations consists of the following: 1999 1998 1997 -------- -------- -------- (IN THOUSANDS) Current: Federal.............................................. $ -- $ 38 $ (383) State................................................ 10 194 (38) ------ ---- ------- 10 232 (421) Deferred: Federal.............................................. (1,467) 26 (1,211) State................................................ (510) (98) (186) Valuation allowance.................................. 2,888 -- -- ------ ---- ------- 911 (72) (1,397) ------ ---- ------- $ 921 $160 $(1,818) ====== ==== ======= 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: 1999 1998 1997 -------- -------- -------- (IN THOUSANDS) Income taxes computed at the U.S. federal statutory rate.............................................. $(1,854) $ 65 $(1,958) State taxes (net of federal effect)................. (315) 110 (148) Tax benefit from state credit utilization........... -- (47) -- Federal and state audit provision................... -- -- 200 Valuation allowance................................. 2,888 -- -- Other individually immaterial items................. 202 32 88 ------- ---- ------- Income tax provision (benefit)...................... $ 921 $160 $(1,818) ======= ==== ======= Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax F-20 BURKE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. INCOME TAXES (CONTINUED) purposes. Significant components of the Company's deferred tax assets and liabilities at fiscal years ended 1999 and 1998 are as follows: 1999 1998 -------- -------- (IN THOUSANDS) Deferred tax liabilities: Basis differences between financial reporting and tax basis................................................... $(3,035) $(3,108) Depreciation.............................................. (919) (958) Other..................................................... (151) (122) ------- ------- Total deferred tax liabilities............................ (4,105) (4,188) Deferred tax assets: Net operating loss carryforwards and credit carryforwards........................................... 3,616 888 Receivable allowances and inventory reserves.............. 766 1,064 State taxes............................................... 3 188 Warranty reserve and other accruals....................... 290 585 Accrued vacation and employee benefits.................... 351 373 Other..................................................... 82 116 ------- ------- Total deferred tax assets................................. 5,108 3,214 Valuation Allowance....................................... (2,888) -- ------- ------- Net deferred tax liability................................ $(1,885) $ (974) ======= ======= As of the end of fiscal 1999, the Company has federal and state net operating loss carryforwards of approximately $8 million and $5 million, respectively. The net operating loss carryforwards will expire in the years 2002 through 2019, if not utilized. Due to the "change of ownership" provisions of the Tax Return Act of 1986, the availability of the Company's net operating loss and credit carryforwards will be subject to an annual limitation in future periods if a change of ownership of more than 50% should occur over a three year period. Such a change could substantially limit the eventual tax utilization of these carryforwards. During the fiscal year ended 1999, a valuation allowance of $2,888,000 has been established for these deferred tax assets which may not be realized due to the Company's operating losses. The Company will continue to evaluate the realizability of the deferred tax assets on a quarterly basis. 10. 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 F-21 BURKE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 10. SEGMENT INFORMATION (CONTINUED) those described in the summary of significant accounting policies. There are no intersegment sales or transfers. The Company's reportable segments are business units that offer different products. The reportable segments are each managed separately because they manufacture and distribute distinct products with different production processes. FISCAL YEAR ENDED 1999 ORGANIC PRODUCTS SILICONE PRODUCTS TOTAL - - ---------------------- ---------------- ----------------- -------- (IN THOUSANDS) Revenues from external customers.... $61,447 $46,057 $107,504 Depreciation expense................ 1,321 704 2,025 Segment profit...................... 10,476 2,993 13,469 Segment assets...................... 31,612 18,418 50,030 Expenditures for long-lived assets............................ 261 589 850 Profit Total profit for reportable segments.......................... $ 13,469 Unallocated items: Corporate general and administrative expenses......... 2,084 Amortization of goodwill related to the Mercer acquisition....... 2,017 Interest expense, net............. 14,821 -------- Loss before income taxes............ $ (5,453) -------- ASSETS Total assets for reportable segments.......................... $ 50,030 Other assets, primarily goodwill and other intangibles................. 37,004 -------- Total consolidated assets........... $ 87,034 ======== OTHER SIGNIFICANT ITEMS SEGMENT TOTALS ADJUSTMENTS CONSOLIDATED TOTALS -------------- ----------- ------------------- Expenditures for long-lived assets.......................... $ 850 $ 1,379(1) $2,229 Depreciation expense.............. 2,025 139(1) 2,164 - - ------------------------ (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. F-22 BURKE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 11. SUPPLEMENTAL CASH FLOW INFORMATION FISCAL YEARS ENDED ------------------------------ 1999 1998 1997 -------- -------- -------- (IN THOUSANDS) Cash paid for interest............................ $13,848 $12,223 $2,059 Cash paid for income taxes........................ 530 484 3,047 Equipment financed under capital lease obligations..................................... 1,590 -- -- F-23 INDEX TO FINANCIAL STATEMENT SCHEDULES PAGE -------- Report of Ernst & Young, LLP, Independent Auditors.......... S-2 Schedule II--Valuation and Qualifying Accounts.............. S-3 S-1 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We have audited the consolidated financial statements of Burke Industries, Inc. as of December 31, 1999 and January 1, 1999 and for each of the three years in the period ended December 31, 1999, and have issued our report thereon dated March 10, 2000. 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, Californiae March 10, 2000 S-2 SCHEDULE II VALUATION & QUALIFYING ACCOUNTS BURKE INDUSTRIES INC. (IN THOUSANDS) ADDITIONS ------------------------ BALANCE AT CHARGED TO ACQUISITION BALANCE AT BEGINNING COSTS AND OF MERCER (A) END OF DESCRIPTION OF PERIOD EXPENSES PRODUCTS DEDUCTIONS PERIOD - - ----------- ---------- ---------- ----------- ---------- ---------- Allowance for doubtful accounts (deducted from accounts receivable) Year ended December 31, 1999.......... $812 $232 -- $386 $658 Year ended January 1, 1999............ 334 196 $300 18 812 Year ended January 2, 1998............ 189 240 -- 95 334 Year ended January 3, 1997............ 336 225 -- 372 189 - - ------------------------ (a) Includes write-offs and reversals. S-3 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized in the City of San Jose, State of California on the 30th day of March, 2000. BURKE INDUSTRIES, INC., A CALIFORNIA CORPORATION By: /s/ THEODORE M. CLARK ----------------------------------------- Theodore M. Clark DIRECTOR, CHIEF EXECUTIVE OFFICER AND PRESIDENT SIGNATURE TITLE DATE --------- ----- ---- Director, Chief Executive /s/ THEODORE M. CLARK Officer and President ------------------------------------------- (Principal Executive March 30, 2000 Theodore M. Clark Officer) /s/ STEPHEN G. GEANE ------------------------------------------- Chief Financial Officer March 30, 2000 Stephen G. Geane /s/ JOHN F. LEHMAN ------------------------------------------- Director March 30, 2000 John F. Lehman /s/ ROCCO C. GENOVESE ------------------------------------------- Director March 30, 2000 Rocco C. Genovese /s/ DONALD GLICKMAN ------------------------------------------- Director March 30, 2000 Donald Glickman /s/ GEORGE SAWYER ------------------------------------------- Chairman of the Board March 30, 2000 George Sawyer /s/ KEITH OSTER ------------------------------------------- Director March 30, 2000 Keith Oster /s/ OLIVER C. BOILEAU ------------------------------------------- Director March 30, 2000 Oliver C. Boileau II-1 SIGNATURE TITLE DATE --------- ----- ---- /s/ THOMAS G. POWNALL ------------------------------------------- Director March 30, 2000 Thomas G. Pownall /s/ BRUCE D. GORCHOW ------------------------------------------- Director March 30, 2000 Bruce D. Gorchow /s/ JOSEPH A. STROUD ------------------------------------------- Director March 30, 2000 Joseph A. Stroud II-2 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized in the City of San Jose, State of California on the 30th day of March, 2000. BURKE FLOORING PRODUCTS, INC., A CALIFORNIA CORPORATION By: /s/ THEODORE M. CLARK ----------------------------------------- Theodore M. Clark PRESIDENT Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons in the capacities and on the dates indicated. SIGNATURE TITLE DATE --------- ----- ---- /s/ THEODORE M. CLARK ------------------------------------------- President (Principal March 30, 2000 Theodore M. Clark Executive Officer) /s/ STEPHEN G. GEANE Chief Financial Officer ------------------------------------------- (Principal Financial and March 30, 2000 Stephen G. Geane Accounting Officer) /s/ KEITH OSTER ------------------------------------------- Director March 30, 2000 Keith Oster II-3 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized in the City of San Jose, State of California on the 30th day of March, 2000. BURKE RUBBER COMPANY, INC., A CALIFORNIA CORPORATION By: /s/ THEODORE M. CLARK ----------------------------------------- Theodore M. Clark PRESIDENT Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons in the capacities and on the dates indicated. SIGNATURE TITLE DATE --------- ----- ---- /s/ THEODORE M. CLARK ------------------------------------------- President (Principal March 30, 2000 Theodore M. Clark Executive Officer) /s/ STEPHEN G. GEANE Chief Financial Officer ------------------------------------------- (Principal Financial and March 30, 2000 Stephen G. Geane Accounting Officer) /s/ KEITH OSTER ------------------------------------------- Director March 30, 2000 Keith Oster II-4 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized in the City of San Jose, State of California on the 30th day of March, 2000. BURKE CUSTOM PROCESSING, INC., A CALIFORNIA CORPORATION By: /s/ THEODORE M. CLARK ----------------------------------------- Theodore M. Clark PRESIDENT Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons in the capacities and on the dates indicated. SIGNATURE TITLE DATE --------- ----- ---- /s/ THEODORE M. CLARK ------------------------------------------- President (Principal March 30, 2000 Theodore M. Clark Executive Officer) /s/ STEPHEN G. GEANE Chief Financial Officer ------------------------------------------- (Principal Financial and March 30, 2000 Stephen G. Geane Accounting Officer) /s/ KEITH OSTER ------------------------------------------- Director March 30, 2000 Keith Oster II-5 EXHIBIT INDEX 1.1 Purchase Agreement, dated April 17, 1998 between the Company and the Initial Purchaser.(1) 2.1 Stock Purchase Agreement, dated as of March 5, 1998 among Burke, Sovereign and Mercer.(2) 3.1 Articles of Incorporation of the Company.(3) 3.2 Amended and Restated Articles of Incorporation of the Company. 3.3 Certificate of Determination of Series C Cumulative Convertible Preferred Stock of the Company.(4) 3.4 Bylaws of the Company.(3) 3.5 Articles of Incorporation of Burke Flooring Products, Inc.(3) 3.6 Bylaws of Burke Flooring Products, Inc.(3) 3.7 Articles of Incorporation of Burke Rubber Company, Inc.(3) 3.8 Bylaws of Burke Rubber Company, Inc.(3) 3.9 Articles of Incorporation of Burke Custom Processing, Inc.(3) 3.10 Bylaws of Burke Custom Processing, Inc.(3) 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) 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 October 20, 1995, between the Company and Lincoln Property Company for the premises at 13767 Freeway Drive, Santa Fe Springs, CA.(3) 10.26 Lease Agreement, dated April 25, 1983, between the Company and Donald M. Hypes for the premises at 14910 Carmenita Boulevard, Norwalk, CA.(3) 10.27 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) 10.28 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) 10.29 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) 10.30 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) 10.31 Sublease Agreement, dated February 20, 1992, between Burke Rubber Company for the premises at 107 South Riverside Drive, Modesto, CA.(3) 10.32 Servicing Agreement, dated April 26, 1996, between the Company and Westland Technologies.(3) 10.33 Amendment No. 1 to the Stock Purchase Agreement, dated April 21, 1998, among Burke, Sovereign and Mercer.(5) 10.34 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.(5) 10.35 Management Services Agreement, dated as of June 18, 1998, between the Company and J.F. Lehman & Company.(5) 10.36 Amendment No. 1 to Management Agreement between the Company and J.F. Lehman & Company, dated as of June 18, 1998.(5) 10.37 Burke Industries, Inc. Executive Deferred Compensation Agreement.(5) 10.38 Burke Industries, Inc. 1997 Stock Option Plan.(5) 10.39 Form of Incentive Stock Option Agreement under the Burke Industries, Inc. 1997 Stock Option Plan 10.40 Burke Industries, Inc. 1997 Stock Option Plan Amended and Restated as of November 30, 1999. 10.41 Form of Incentive Stock Option Agreement under the Burke Industries, Inc. Amended and Restated 1997 Stock Option Plan. 10.42 Employment Agreement, dated as of September 16, 1999, by and between Theodore M. Clark and Burke Industries, Inc. 10.43 Letter Agreement, dated February 4, 2000, by and between Burke Industries, Inc. and Theodore M. Clark, amending Mr. Clark's employment agreement dated as of September 16, 1999. 10.44 Extension and First Amendment of Lease, dated as of January 13, 1994, by and between RTC Properties, Inc. and Mercer Products Company, Inc. 10.45 Extension and Second Amendment of Lease, dated as of January 23, 1995, by and between RTC Properties, Inc. and Mercer Products Company, Inc. 10.46 Third Amendment and Extension of Agreement of Lease, dated as of March 26, 1997, by and between RTC Properties, Inc. and Mercer Products Company, Inc. 10.47 Fourth Amendment of Lease, dated as of April 21, 1998, by and between RTC Properties, Inc. and Mercer Products Co., Inc. 10.48 Lease Agreement, dated June 22, 1999, by and between ProLogis Trust and Burke Industries, Inc. 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. (4) Incorporated by reference to the Company's current report on Form 8-K, File No. 333-36675, as filed with the Securities and Exchange Commission on May 5, 1998. (5) Incorporated by reference to the Company's 1998 annual report on Form 10-K, File No. 333-36675, as filed with the Securities and Exchange Commission on March 31, 1999.