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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
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/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
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/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
SECURITIES EXCHANGE ACT OF 1934
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FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 333-36675
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BURKE INDUSTRIES, INC.
(Exact name of Registrant as specified in its charter)
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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)
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(800) 221-0923
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12 (b) of the Act:
None
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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.
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TABLE OF OTHER REGISTRANTS
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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
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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
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BURKE INDUSTRIES, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
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CAPTION PAGE
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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
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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.
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("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
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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.
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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
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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
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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,
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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
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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
<PAGE>
PATENTS, TRADEMARKS, TRADE NAMES AND TRADE SECRETS
The success of the Company's various businesses depends in part on the
Company's ability to exploit certain proprietary patents, trademarks, trade
names and trade secrets on an exclusive basis in reliance upon the protections
afforded by applicable copyright, patent and trademark laws and regulations. The
loss of certain of the Company's rights to such patents, trademarks, trade names
and trade secrets or the inability of the Company effectively to protect or
enforce such rights could adversely affect the Company. The duration of the
Company's intellectual property rights is as follows:
PATENTS
<TABLE>
<CAPTION>
PATENT NO. TITLE GATT EXPIRY
- - ---------- ------------------------------------------------------ -----------
<C> <S> <C>
4,608,792... Roof membrane holdown system 11/12/08
4,603,790... Tensioned reservoir cover, rainwater run-off 3/11/05
enhancement system
</TABLE>
TRADEMARKS
<TABLE>
<CAPTION>
MARK EXPIRATION
- - ---- ----------
<S> <C>
VAC-Q-ROOF.................................................. 12/1/02
ROULEAU..................................................... 12/1/02
BURKEBASE................................................... 6/4/05
SURETITE.................................................... 7/4/01
BURKE INDUSTRIES............................................ 4/19/07
ARGONAUT.................................................... 4/1/09
DOCKSIDERS & DESIGN......................................... 11/26/05
MAXXI-TREAD................................................. 8/20/05
MERCER FRICTION GRIP........................................ 12/03/08
MERCER & DESIGN............................................. 12/14/03
MERCER...................................................... 8/30/04
MIRROR-FINISH............................................... 7/20/03
RUBBERLYTE.................................................. 2/14/09
RUBBERMYTE.................................................. 7/23/01
UNICOLOR.................................................... 4/05/04
</TABLE>
ENVIRONMENTAL LIABILITY
The Company is subject to various evolving federal, state and local
environmental laws and regulations governing, among other things, emissions to
air, discharge to waters and the generation, handling, storage, transportation,
treatment and disposal of hazardous and non-hazardous substances and wastes.
These laws and regulations provide for substantial fees and sanctions for
violations and, in many cases, could require the Company to remediate a site to
meet applicable legal requirements. In 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
<PAGE>
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
<PAGE>
As of March 15, 2000, Burke maintained operations at the following
locations:
<TABLE>
<CAPTION>
SQUARE
LOCATION FOOTAGE OWNERSHIP FUNCTION
- - -------- -------- --------- ----------------------------------------------
<S> <C> <C> <C>
San Jose, CA................... 123,000 Owned Manufacturing, Engineering, Distribution,
Offices
San Jose, CA................... 82,000 Leased Manufacturing, Warehouse
Santa Fe Springs, CA........... 80,000 Leased Manufacturing, Engineering, Distribution,
Offices
Santa Fe Springs, CA........... 56,000 Leased Manufacturing, Engineering, Distribution,
Offices
Santa Fe Springs, CA........... 25,000 Leased Mixing
Santa Fe Springs, CA........... 25,000 Leased Warehouse, Distribution
Taunton, MA.................... 85,000 Leased Manufacturing, Engineering, Distribution,
Offices
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
</TABLE>
In addition to the facilities identified above, the Company leases a 113,000
square foot facility in Modesto, California, which is subleased to the purchaser
of the Company's custom-molded products business in connection with the sale of
that business in 1996.
ITEM 3. LEGAL PROCEEDINGS
The Company is 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
<PAGE>
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.
<TABLE>
<CAPTION>
FISCAL YEAR
-----------------------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
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)
</TABLE>
- - --------------------------
(1) Reflects $1,321 of expenses associated with the Recapitalization in
August 1997.
12
<PAGE>
(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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
------------------------------------------------------------------------------
PERCENTAGE OF PERCENTAGE OF PERCENTAGE OF
1997 NET SALES 1998 NET SALES 1999 NET SALES
-------- ------------- -------- ------------- -------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
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)%
======= ===== ======== ===== ======== =====
</TABLE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
NAME AGE POSITIONS
- - ---- -------- ------------------------------------------------------------
<S> <C> <C>
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
</TABLE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
Company agreed to pay J.F. Lehman & Company an annual management fee equal to
$500,000, as may be adjusted from time to time subject to necessary board
approval, that commenced accruing on October 1, 1998 and which was to be payable
on a quarterly basis in arrears commencing on January 1, 1999. During 1998, the
Board of Directors approved an amendment to the Management Agreement and the
Company concurrently entered into a Management Services Agreement with J.F.
Lehman & Company, the combined effect of which was to further delineate the
management services to be provided by J.F. Lehman & Company and to provide that
J.F. Lehman & Company's management fee would be paid in advance on a quarterly
basis commencing October 1, 1998.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth in this section relates to the Chief Executive
Officer of the Company and the four most highly compensated executive officers
of the Company as of December 31, 1999.
COMPENSATION SUMMARY
The following summary compensation table sets forth for the fiscal years
ended December 31, 1999, January 1, 1999 and January 2, 1998, the historical
compensation for services to the Company of the Chief Executive Officer and the
four most highly compensated executive officers (the "Named Executive Officers")
as of December 31, 1999:
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION(1) COMPENSATION
------------------------------------- ------------
SECURITIES
FISCAL UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($)(2) OTHER($)(3) OPTIONS
- - --------------------------- -------- --------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
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 --
</TABLE>
- - ------------------------
(1) Perquisites and other personal benefits paid in 1999 for the Named Executive
Officers aggregated less than the lesser of $50,000 and 10% of the total
annual salary and bonus set forth in the columns entitled "Salary" and
"Bonus" for each named executive officer and, accordingly, are omitted from
the table.
(2) Annual bonuses are indicated for the year in which they were earned and
accrued. Annual bonuses for any year are generally paid in the following
fiscal year.
25
<PAGE>
(3) Represents the compensation component of the consideration paid to the
executive for his stock options in the Company in connection with the
Recapitalization.
(4) Mr. Genovese resigned his position as President of the Company effective
November 1, 1999 and he resigned his position as Chief Executive Officer of
the Company effective February 1, 2000. Theodore M. Clark was appointed
President and Chief Executive Officer of the Company effective as of those
dates.
AGGREGATE OPTION PURCHASES IN LAST FISCAL YEAR-END AND FISCAL YEAR END OPTION
VALUES
The following table summarizes information with respect to the year-end
values of all options held by Named Executive Officers.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING
UNEXERCISED OPTIONS VALUE OF UNEXERCISED
SHARES AT FISCAL YEAR-END (#) IN-THE-MONEY
ACQUIRED ON EXERCISABLE/ OPTIONS AT FISCAL
NAME EXERCISE VALUE REALIZED UNEXERCISABLE YEAR-END($)(1)
- - ---- ----------- -------------- ---------------------- --------------------
<S> <C> <C> <C> <C>
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
</TABLE>
- - ------------------------
(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
<PAGE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
NAME OF INDIVIDUAL OR ENTITY(1) NUMBER OF SHARES(2) OUTSTANDING(3)
- - ------------------------------- ------------------- --------------------
<S> <C> <C>
JFLEI(4)................................................. 3,134,298 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%
</TABLE>
- - ------------------------
* Less than 1%
(1) The address of JFLEI and Messrs. Lehman, Sawyer, Glickman, Oster and Stroud
is 2001 Jefferson Davis Highway, Suite 607, Arlington, Virginia 22202. The
address of Jackson National and Mr. Gorchow is 225 West Wacker Drive,
Chicago, Illinois 60606. The address of MassMutual is 1295 State Street,
Springfield, Massachusetts 01111.
(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
<PAGE>
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
<PAGE>
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
<PAGE>
(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
<PAGE>
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
<PAGE>
PART IV
ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a)(1) Consolidated Financial Statements:
The following consolidated financial statements of the Company are included
in response to Item 8 of this report.
<TABLE>
<CAPTION>
PAGE REFERENCE
FORM 10-K
--------------
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........... F-2
Consolidated Statements of Operations for the three fiscal
years ended 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
</TABLE>
Schedules other than those listed above have been omitted since they are
either not required, not applicable or the information is otherwise included.
(b) Reports on Form 8-K.
None.
(c) Exhibits
<TABLE>
<C> <S>
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)
</TABLE>
33
<PAGE>
<TABLE>
<C> <S>
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)
</TABLE>
34
<PAGE>
<TABLE>
<C> <S>
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.
</TABLE>
35
<PAGE>
<TABLE>
<C> <S>
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.
</TABLE>
- - ------------------------
(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
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
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
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Burke Industries, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Burke
Industries, Inc. and subsidiaries as of 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
<PAGE>
BURKE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
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)
======== ======== =======
</TABLE>
See accompanying notes.
F-3
<PAGE>
BURKE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
---------------------
1999 1998
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
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
========= =========
</TABLE>
See accompanying notes.
F-4
<PAGE>
BURKE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED CLASS A COMMON
STOCK STOCK TOTAL
------------------- ------------------- ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT DEFICIT EQUITY (DEFICIT)
-------- -------- -------- -------- ----------- ----------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance at fiscal year end 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)
===== ====== ====== ======= ========= ========
</TABLE>
See accompanying notes.
F-5
<PAGE>
BURKE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
-------------------------------
1999 1998 1997
-------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
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
======= ======== =========
</TABLE>
See accompanying notes.
F-6
<PAGE>
BURKE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Burke Industries, Inc. and subsidiaries (the "Company") develop,
manufacture, and market various elastomer products for use in commercial and
military applications. The Company sells its products through a network of
distributors or directly to customers in the construction, defense, and
aerospace industries and other commercial markets, primarily in North America.
The Company performs ongoing credit evaluations of its customers' financial
condition and generally does not require collateral.
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
<PAGE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Current assets.............................................. $ 5,269
Plant and equipment......................................... 4,903
Excess of purchase price over net assets acquired........... 29,681
Amounts payable and accrued expenses........................ (1,379)
-------
Total purchase price...................................... $38,474
=======
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-------------------
1998 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Net Sales............................................... $113,223 $115,127
Net income (loss)....................................... (12) (3,973)
</TABLE>
The pro forma results of operations have been prepared for comparison
purposes only, and do not purport to be indicative of what the results would
have been had the Mercer acquisition occurred at the beginning of each period
presented. The pro forma results for fiscal year ended 1997 include certain
charges related to the Recapitalization (Note 1).
3. INVENTORIES
Inventories consist of the following at the fiscal year ended:
<TABLE>
<CAPTION>
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Raw materials............................................. $ 5,540 $ 5,123
Work-in-process........................................... 1,861 2,085
Finished goods............................................ 8,184 7,366
------- -------
$15,585 $14,574
======= =======
</TABLE>
4. GOODWILL AND LONG-LIVED ASSETS
Goodwill represents the excess of the purchase price of acquired companies
over the estimated fair value of the tangible and specifically identified
intangible net assets acquired. In accordance with Statement of Financial
Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets
and for the Long-Lived Assets to Be Disposed Of" (FAS 121), the carrying value
of long-lived assets and related goodwill is reviewed if the facts and
circumstances suggest that they may be impaired. If this review indicates that
the carrying value of these assets will not be recoverable, as determined based
on the undiscounted net cash flows of the entity acquired over the remaining
amortization period, the Company's carrying value is reduced to its estimated
fair value (based on an estimate of discounted future net cash flows).
Goodwill related to the Mercer acquisition is being amortized on a
straight-line basis over 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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
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
======= ======= ======
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
CAPITAL LEASES OPERATING LEASES
-------------- ----------------
<S> <C> <C>
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
======
</TABLE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
OPTIONS WEIGHTED AVERAGE
OUTSTANDING PRICE PER SHARE
----------- ----------------
(IN THOUSANDS,
EXCEPT PRICE PER SHARE)
<S> <C> <C>
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
======
</TABLE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
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%
</TABLE>
Net periodic pension expense for the fiscal years ended 1999, 1998, and 1997
included the following components:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
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
===== ===== =====
</TABLE>
The Company also maintains a defined contribution 401(k) plan covering
substantially all of its other regular employees. The employees become eligible
for participation after 1,000 hours of service. Participants may elect to
contribute up to 20% of their compensation to this plan, subject to Internal
Revenue
F-19
<PAGE>
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:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
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)
====== ==== =======
</TABLE>
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:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
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)
======= ==== =======
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax
F-20
<PAGE>
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:
<TABLE>
<CAPTION>
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
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)
======= =======
</TABLE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED 1999 ORGANIC PRODUCTS SILICONE PRODUCTS TOTAL
- - ---------------------- ---------------- ----------------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
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
========
</TABLE>
OTHER SIGNIFICANT ITEMS
<TABLE>
<CAPTION>
SEGMENT TOTALS ADJUSTMENTS CONSOLIDATED TOTALS
-------------- ----------- -------------------
<S> <C> <C> <C>
Expenditures for long-lived
assets.......................... $ 850 $ 1,379(1) $2,229
Depreciation expense.............. 2,025 139(1) 2,164
</TABLE>
- - ------------------------
(1) Consists of expenditures for long lived assets not directly related to
either segment.
MAJOR CUSTOMER
Revenue from one customer of the silicone products segment represents
approximately $10 million of the Company's consolidated revenue.
F-22
<PAGE>
BURKE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
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 -- --
</TABLE>
F-23
<PAGE>
INDEX TO FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Report of Ernst & Young, LLP, Independent Auditors.......... S-2
Schedule II--Valuation and Qualifying Accounts.............. S-3
</TABLE>
S-1
<PAGE>
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
<PAGE>
SCHEDULE II
VALUATION & QUALIFYING ACCOUNTS
BURKE INDUSTRIES INC.
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
------------------------
BALANCE AT CHARGED TO ACQUISITION BALANCE AT
BEGINNING COSTS AND OF MERCER (A) END OF
DESCRIPTION OF PERIOD EXPENSES PRODUCTS DEDUCTIONS PERIOD
- - ----------- ---------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
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
</TABLE>
- - ------------------------
(a) Includes write-offs and reversals.
S-3
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized in the City of San
Jose, State of California on the 30th day of March, 2000.
<TABLE>
<S> <C> <C>
BURKE INDUSTRIES, INC.,
A CALIFORNIA CORPORATION
By: /s/ THEODORE M. CLARK
-----------------------------------------
Theodore M. Clark
DIRECTOR, CHIEF EXECUTIVE OFFICER AND
PRESIDENT
</TABLE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
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
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/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
</TABLE>
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized in the City of San
Jose, State of California on the 30th day of March, 2000.
<TABLE>
<S> <C> <C>
BURKE FLOORING PRODUCTS, INC.,
A CALIFORNIA CORPORATION
By: /s/ THEODORE M. CLARK
-----------------------------------------
Theodore M. Clark
PRESIDENT
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/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
</TABLE>
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized in the City of San
Jose, State of California on the 30th day of March, 2000.
<TABLE>
<S> <C> <C>
BURKE RUBBER COMPANY, INC.,
A CALIFORNIA CORPORATION
By: /s/ THEODORE M. CLARK
-----------------------------------------
Theodore M. Clark
PRESIDENT
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/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
</TABLE>
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized in the City of San
Jose, State of California on the 30th day of March, 2000.
<TABLE>
<S> <C> <C>
BURKE CUSTOM PROCESSING, INC.,
A CALIFORNIA CORPORATION
By: /s/ THEODORE M. CLARK
-----------------------------------------
Theodore M. Clark
PRESIDENT
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/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
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<C> <S>
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)
</TABLE>
<PAGE>
<TABLE>
<C> <S>
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)
</TABLE>
<PAGE>
<TABLE>
<C> <S>
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.
</TABLE>
- - ------------------------
(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.
<PAGE>
EXHIBIT 3.2
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
BURKE INDUSTRIES, INC.
Article One: The name of this corporation is:
BURKE INDUSTRIES, INC.
Article Two: The purpose of this corporation is to engage in
any lawful act or activity for which a corporation may be organized under the
General Corporation Law of California other than the banking business, the trust
company business or the practice of a profession permitted to be incorporated by
the California Corporations Code.
Article Three:
3(A) AUTHORIZED CAPITAL STOCK. The corporation is authorized
to issue two classes of capital stock, to be designated Preferred Stock, without
par value, and Common Stock, without par value. The corporation is authorized to
issue 50,000 shares of Preferred Stock and 20,000,000 shares of Common Stock.
3(B) RIGHT, PREFERENCES, PRIVILEGES AND RESTRICTIONS OF
PREFERRED STOCK. The Preferred Stock may be issued in any number of series, as
determined from time to time by the Board of Directors of the Corporation. The
Board of Directors may by resolution fix the designation of, and the rights,
preferences, privileges and restrictions granted to or imposed upon and the
number of shares of any such series of Preferred Stock. The Board of Directors
may thereafter in the same manner increase or decrease the number of shares of
any such series of Preferred Stock (but not below the number of shares of such
series of Preferred Stock then outstanding).
3(C) SERIES A 11.5% CUMULATIVE REDEEMABLE PREFERRED STOCK. The
Board of Directors has designated a series of Preferred Stock and the number of
shares constituting such series and fixes the rights, preferences, privileges
and restrictions relating to such series as follows:
1. DESIGNATION AND AMOUNT. The shares of such series
of Preferred Stock shall be designated as "Series A 11.5% Cumulative
Redeemable Preferred Stock" (the "Series A Preferred Stock"), and the number
of shares constituting such series shall be 30,000. The initial liquidation
preference of the Series A Preferred Stock shall be $1,000 per share (the
"Stated Liquidation Value").
<PAGE>
2. RANK. The Series A Preferred Stock shall, with
respect to dividend rights and rights on liquidation, winding up and
dissolution, rank (i) senior to the Corporation's common stock, without par
value (the "Common Stock"), and to all classes and series of stock of the
Corporation now or hereafter authorized, issued or outstanding which by their
terms expressly provide that they are junior to the Series A Preferred Stock
or which do not specify their rank (collectively with the Common Stock, the
"Junior Securities"), (ii) on a parity with the Series B 11.5% Cumulative
Redeemable Preferred Stock, without par value (the "Series B Preferred
Stock") and with each other class of capital stock or series of Preferred
Stock issued by the Corporation after the date hereof the terms of which
specifically provide that such class or series will rank on a parity with the
Series A Preferred Stock as to dividend distributions and distributions upon
the liquidation, winding up and dissolution of the Corporation (collectively
referred to as "Parity Securities") and (iii) junior to each other class of
capital stock or other series of Preferred Stock issued by the Corporation
after the date hereof the terms of which have been approved by the requisite
number of holders of Series A Preferred Stock as provided in Section 3(C)8(b)
hereof and which specifically provide that such class or series will rank
senior to the Series A Preferred Stock as to dividend distributions or
distributions upon the liquidation, winding up and dissolution of the
Corporation (collectively referred to as "Senior Securities").
3. DIVIDENDS.
(a) The holders of shares of Series A Preferred Stock shall be
entitled to receive, when, as and if declared by the Board of Directors, out of
funds legally available therefor, dividends payable quarterly in arrears on
January 15, April 15, July 15 and October 15 of each year (each such date, a
"Dividend Payment Date"), except that if any Dividend Payment Date is not a
Business Day, then such quarterly dividend shall be payable on the next
succeeding Business Day and such next succeeding Business Day will be the
Dividend Payment Date. Dividends shall be payable to holders of Series A
Preferred Stock at the annual rate of 11.5% times the sum of (i) the Stated
Liquidation Value and (ii) accrued but unpaid dividends as of the immediately
preceding Dividend Payment Date. Dividends shall be payable (A) at the annual
rate of .115 shares of Series A Preferred Stock per share of Series A Preferred
Stock from the Issue Date through the July 15, 2000 Dividend Payment Date and
(B) in cash after the July 15, 2000 Dividend Payment Date, with the first such
cash dividend payable to the holders of Series A Preferred Stock on October 15,
2000. Dividends shall be payable only to holders of record at the close of
business on the date specified by the Board of Directors at the time such
dividend is declared (the "Record Date"), in preference to dividends on the
Junior Securities, commencing on the Dividend Payment Date next succeeding the
Issue Date. Any such Record Date shall be not less than 10 days and not more
than 60 days prior to the relevant Dividend Payment Date. All dividends paid
with respect to shares of Series A Preferred Stock shall be paid PRO RATA to the
holders entitled thereto. Dividends on the Series A Preferred Stock shall accrue
and be cumulative on a quarterly basis (whether or not declared and whether or
not funds are legally available for the payment thereof) from the Issue Date.
(b) Dividends payable on the Series A Preferred Stock for any
period less than a full quarterly dividend period shall be computed on the basis
of a 360-day year of twelve 30-day months.
<PAGE>
(c) Fractional shares of Series A Preferred Stock shall be
issued to the extent necessary to make dividend payments in shares of Series A
Preferred Stock. Each fractional share of Series A Preferred Stock outstanding
shall be entitled to a ratably proportionate amount of all dividends accruing
with respect to each outstanding share of Series A Preferred Stock and all of
such dividends with respect to such outstanding fractional shares shall be fully
cumulative and shall accrue (whether or not declared) and shall be payable in
the same manner and at such times as provided for in Section 3(C)3(a) above with
respect to dividends on each outstanding share of Series A Preferred Stock.
(d) Until the earlier of (i) the date upon which no shares of
Series A Preferred Stock are outstanding and (ii) July 16, 2000, the Corporation
shall reserve and keep available out of its authorized or unissued Series A
Preferred Stock solely for the purpose of paying dividends thereon as provided
for herein, such number of shares of Series A Preferred Stock as shall from time
to time be sufficient for such purpose. The Board of Directors of the
Corporation shall, from time to time, if necessary, propose to the shareholders
of the Corporation amendments to the Corporation's Articles of Incorporation to
increase its authorized capital stock and take such other actions as may be
necessary to permit the issuance from time to time of shares of Series A
Preferred Stock upon the declaration of any dividend payable in additional
shares of Series A Preferred Stock.
(e) So long as any shares of the Series A Preferred Stock are
outstanding, the Corporation shall not, without the prior consent of the holders
of at least two-thirds of the shares of outstanding Series A Preferred Stock and
Series B Preferred Stock, voting together as a single series, (i) make any
payment on account of, or set apart for payment money for a sinking or other
similar fund for, the purchase, redemption or retirement of, any Junior
Securities (other than dividends or distributions payable in additional shares
of Junior Securities to holders of Junior Securities); (ii) permit any
corporation or other entity directly or indirectly controlled by the Corporation
to purchase or redeem any Junior Securities; (iii) declare, pay or set apart for
payment, or permit any corporation or other entity directly or indirectly
controlled by the Corporation to declare, pay or set apart for payment, any
dividend or make any distribution or payment on any Junior Securities or Parity
Securities, whether directly or indirectly and whether in cash, obligations or
shares of the Corporation or other property (other than dividends or
distributions payable in additional shares of Junior Securities to holders of
Junior Securities); or (iv) make any payment on account of, or set apart for
payment money for a sinking or other similar fund for, the purchase, redemption
or retirement of, any Parity Securities, whether directly or indirectly, and
whether in cash, obligations, shares of the Corporation or other property (other
than payments solely of Junior Securities), and shall not permit any corporation
or other entity directly or indirectly controlled by the Corporation to purchase
or redeem any Parity Securities, unless prior to or at the time of such payment
or setting apart for payment, the Corporation shall have repurchased, redeemed
or retired shares of Series A Preferred Stock on a PRO RATA basis, in proportion
to the respective Liquidation Preferences (as defined in these Amended and
Restated Articles of Incorporation or in the applicable Certificate of
Determination) of the Series A Preferred Stock and the Parity Securities as to
which such sinking fund or similar fund payment, or such purchase, redemption or
retirement, is being effected.
<PAGE>
(f) Whenever dividends on the Series A Preferred Stock are in
arrears, the Corporation shall not declare dividends on or make any other
distribution in respect of any Parity Securities, except dividends paid on a PRO
RATA basis on the Series A Preferred Stock and all other capital stock ranking
on a parity as to dividends and on which dividends are payable in arrears, in
proportion to the respective amounts of dividends in arrears upon all such
outstanding shares of Series A Preferred Stock and such other series of capital
stock.
(g) If at any time after October 15, 2000 any cash dividends
payable on the Series A Preferred Stock shall have been in arrears and unpaid
for four (4) or more successive Dividend Payment Dates, then until the date on
which all such dividends in arrears are paid in full, dividends shall accrue and
be payable to the holders of Series A Preferred Stock at the annual rate of
13.5% times the sum of (i) the Stated Liquidation Value and (ii) accrued but
unpaid dividends thereon. Upon payment in full of all such dividends in arrears,
cash dividends will thereafter be payable as set forth in Section 3(C)3(a)
above.
4. LIQUIDATION PREFERENCE.
(a) In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the affairs of the Corporation, the holders of
shares of Series A Preferred Stock then outstanding shall be entitled to be paid
out of the assets of the Corporation available for distribution to its
shareholders an amount in cash equal to 100% of the Stated Liquidation Value for
each share outstanding, plus an amount in cash equal to all accrued but unpaid
dividends thereon, without interest, to the date of liquidation, dissolution or
winding up (such amount the "Liquidation Preference"), before any payment shall
be made or any assets distributed to the holders of any of the Junior
Securities. If the assets of the Corporation are not sufficient to pay in full
the Liquidation Preference payable to the holders of outstanding shares of the
Series A Preferred Stock and any Parity Securities, then the holders of all such
shares shall share ratably in such distribution of assets in accordance with the
amount which would be payable on such distribution if the amounts to which the
holders of outstanding shares of Series A Preferred Stock and the holders of
outstanding shares of such Parity Securities are entitled were paid in full.
(b) For the purposes of this Section 3(C)4, neither the
voluntary sale, conveyance, exchange or transfer (for cash, shares of stock,
securities or other consideration) of all or substantially all of the property
or assets of the Corporation nor the consolidation or merger of the Corporation
with any one or more other corporations shall be deemed to be a voluntary or
involuntary liquidation, dissolution or winding up of the Corporation, unless
such voluntary sale, conveyance, exchange or transfer shall be in connection
with a plan of liquidation, dissolution or winding up of the Corporation.
5. REDEMPTION.
(a) OPTIONAL REDEMPTION. The Corporation may, at its option,
redeem at any time, out of funds legally available therefor, in the manner
provided in Section 3(C)6 hereof, all or any portion of the shares of the Series
A Preferred Stock, at a redemption price per share equal to 100% of the
Liquidation Preference thereof on the date of redemption; PROVIDED, HOWEVER,
that any such optional redemption by the Corporation shall be on a PRO
<PAGE>
RATA basis and for whole shares of Series A Preferred Stock and Series B
Preferred Stock; PROVIDED, FURTHER, HOWEVER, that the Corporation may redeem
fractional shares of Series A Preferred Stock pursuant to this Section
3(C)5(a) in the event that after such redemption a holder of Series A
Preferred Stock would be left with less than one full share of Series A
Preferred Stock.
(b) MANDATORY REDEMPTION. On February 20, 2008, the
Corporation shall redeem any and all outstanding shares of Series A Preferred
Stock, out of funds legally available therefor, at a redemption price per share
equal to 100% of the Liquidation Preference thereof on such date.
(c) REDEMPTION UPON CHANGE OF CONTROL. Upon the occurrence of
a Change of Control, the Series A Preferred Stock shall be redeemable at the
option of the holders thereof, in whole or in part, at a redemption price per
share equal to 100% of the Liquidation Preference on the date of redemption;
PROVIDED, HOWEVER, that the Corporation will not be obligated to redeem, and
will not redeem or call for redemption, any Series A Preferred Stock upon a
Change of Control until it has repurchased or redeemed such of the $110,000,000
original principal amount of 10% Senior Notes Due 2007 of the Corporation (the
"Notes") then outstanding as it is required to repurchase or has called for
redemption in connection with such Change of Control pursuant to the terms of
the Indenture among the Corporation, certain of its subsidiaries and U.S. Trust
Company of New York, N.A. relating to the Notes. Subject to the foregoing
proviso, the Corporation shall redeem, out of funds legally available therefor,
the number of shares specified in the holders' notices of election to redeem
pursuant to Section 3(C)6(b) hereof on the date fixed for redemption.
6. PROCEDURE FOR REDEMPTION.
(a) In the event that the Corporation shall redeem shares of
Series A Preferred Stock pursuant to Sections 3(C)5(a) or 3(C)5(b) hereof,
notice of such redemption shall be mailed by first-class mail, postage prepaid,
and mailed not less than 30 days nor more than 60 days prior to the redemption
date to the holders of record of the shares to be redeemed at their respective
addresses as they shall appear in the records of the Corporation; PROVIDED,
HOWEVER, that failure to give such notice or any defect therein or in the
mailing thereof shall not affect the validity of the proceeding for the
redemption of any shares so to be redeemed except as to the holder to whom the
Corporation has failed to give such notice or except as to the holder to whom
notice was defective. Each such notice shall state: (i) the redemption date;
(ii) the number of shares of Series A Preferred Stock to be redeemed and, if
less than all the shares held by such holders are to be redeemed, the number of
such shares to be redeemed from such holders; (iii) the redemption price and
form of consideration; (iv) the place or places where certificates for such
shares are to be surrendered for payment of the redemption price; and (v) that
dividends on the shares to be redeemed will cease to accrue on such redemption
date. Any redemption of less than all the shares of Series A Preferred Stock
pursuant to Section 3(C)5(a) shall be made on a PRO RATA basis to all holders of
Series A Preferred Stock.
(b) If a Change of Control should occur, then, subject to
Section 3(C)5(c) above, within 30 days of the occurrence of such Change of
Control, the Corporation shall
<PAGE>
give written notice by first-class mail, postage prepaid, to each holder of
Series A Preferred Stock at its address as it appears in the records of the
Corporation, which notice shall set forth (in addition to the information
required by the next succeeding paragraph): (i) each holder's right to
require the Corporation to redeem shares of Series A Preferred Stock held by
such holder as a result of such Change of Control; (ii) the redemption price;
(iii) the redemption date (which date shall be no earlier than 30 days and no
later than 60 days from the date the notice in respect of such Change of
Control is mailed); (iv) the procedures to be followed by such holder in
exercising its right of redemption, including the place or places where
certificates for such shares are to be surrendered for payment of the
redemption price; and (v) that dividends on the shares to be redeemed will
cease to accrue on the redemption date. In the event a holder of shares of
Series A Preferred Stock shall elect to require the Corporation to redeem any
or all of such shares of Series A Preferred Stock, such holder shall deliver,
within 20 days of the mailing to it of the Corporation's notice described in
this Section 3(C)6(b), a written notice stating such holder's election and
specifying the number of shares to be redeemed pursuant to Section 3(C)5(c)
hereof.
(c) Notice by the Corporation having been mailed as provided
in Section 3(C)6(a) hereof, or notice of election having been mailed by the
holders as provided in Section 3(C)6(b) hereof, and provided that on or before
the applicable redemption date funds necessary for such redemption shall have
been set aside by the Corporation, separate and apart from its other funds, in
trust for the PRO RATA benefit of the holders of the shares of Series A
Preferred Stock and Series B Preferred Stock so called for or entitled to
redemption, so as to be and to continue to be available therefor, then, from and
after the redemption date, dividends on the shares of Series A Preferred Stock
so called for or entitled to redemption shall cease to accrue, and said shares
shall no longer be deemed to be outstanding and shall not have the status of
shares of Series A Preferred Stock, and all rights of the holders thereof as
shareholders of the Corporation (except the right to receive the applicable
redemption price and any accrued and unpaid dividends from the Corporation to
the date of redemption) shall cease, unless the Corporation defaults in the
payment of the redemption price, in which case all rights of the holders of
Series A Preferred Stock shall continue until the redemption price is paid. Upon
surrender of the certificates for any shares so redeemed (properly endorsed or
assigned for transfer, if the Board of Directors of the Corporation shall so
require and a notice by the Corporation shall so state), such shares shall be
redeemed by the Corporation at the applicable redemption price as aforesaid. In
case fewer than all the shares represented by any such certificate are redeemed,
a new certificate or certificates shall be issued representing the unredeemed
shares without cost to the holder thereof. Any funds set aside in trust for the
holders of Series A Preferred Stock pursuant to this Section 3(C)6(c) which
remain unclaimed on the second anniversary of the applicable redemption date
shall be released or repaid to the Company, after which the holders of shares
called for redemption shall be entitled to receive payment of the redemption
price only from the Corporation.
7. REACQUIRED SHARES. Shares of Series A Preferred Stock that
have been issued and reacquired in any manner, including shares reacquired by
purchase or redemption, shall (upon compliance with any applicable provisions of
the laws of the State of California) have the status of authorized and unissued
shares of the class of Preferred Stock undesignated as to series and, subject to
the approval of the holders of the Series A Preferred
<PAGE>
Stock as provided in Section 3(C)8(b) hereof, may be redesignated and
reissued as part of any series of Preferred Stock other than the Series A
Preferred Stock.
8. VOTING RIGHTS.
In addition to any voting rights provided by law, the holders
of Series A Preferred Stock shall have the following voting rights:
(a) VOTING UPON AMENDMENT TO ARTICLES OF INCORPORATION. The
Articles of Incorporation of the Corporation shall not be amended in any manner
that would adversely alter or change the powers, preferences, special rights or
economics of the Series A Preferred Stock as set forth herein without the
affirmative vote of the holders of at least two-thirds of the outstanding shares
of Series A Preferred Stock and of Series B Preferred Stock, voting together as
a single series.
(b) OTHER VOTING RIGHTS. Without the affirmative vote or
consent of the holders of at least two-thirds of the outstanding shares of
Series A Preferred Shares and Series B Preferred Stock, voting together as a
single series, the Corporation shall not after the Issue Date (i) create,
authorize or issue any Senior Securities or Parity Securities or (ii) create,
authorize or issue any Junior Securities, unless such Junior Securities are
expressly subordinate in right of payment (of liquidation preference and
dividends) to the Series A Preferred Stock, the Series B Preferred Stock and
such Junior Securities have no additional rights (directly or indirectly) upon
the Corporation's failure to redeem such Junior Securities or to pay or declare
a dividend or make a distribution with respect thereto.
(c) CONSENT WITH RESPECT TO CERTAIN AGREEMENTS. Without the
affirmative vote or consent of the holders of at least two-thirds of the
outstanding shares of Series A Preferred Stock, the Corporation shall not after
the Issue Date enter into any agreement which will limit or otherwise adversely
affect the Corporation's ability to comply with its redemption obligations under
Section 3(C)5(b) hereof, including, without limitation, any such agreement or
plan entered into with respect to (i) the sale of all or substantially all of
the assets of the Corporation, (ii) the voluntary liquidation, dissolution or
winding up of the Corporation or (iii) the consolidation or merger of the
Corporation with any one or more other corporations, other than a consolidation
or merger in which the shareholders of the Corporation immediately prior to such
transaction will hold more than 50% of the equity securities of the surviving
entity immediately after the consummation of such transaction.
(d) VOTING SHIFT UPON CERTAIN EVENTS:
(i) CASH DIVIDENDS IN ARREARS. If at any time after
October 15, 2000 any cash dividends payable on the Series A Preferred
Stock shall have been in arrears and unpaid for four (4) or more
successive Dividend Payment Dates, then the holders of the outstanding
shares of Series A Preferred Stock, voting separately as a class and to
the exclusion of the holders of all other classes and series of stock
of the Corporation, shall have the right, in addition to any other
rights to elect directors which the holders of Series A Preferred Stock
may have, to elect the smallest number of directors constituting
one-third of the authorized number of directors, and the
<PAGE>
holders of the shares of Common Stock shall have the right
to elect the remaining directors.
(ii) DEFAULT IN MANDATORY REDEMPTION. If the
Corporation shall fail to redeem shares of Series A Preferred Stock in
accordance with the mandatory redemption provisions of Section 3(C)5(b)
hereof, then the holders of the outstanding shares of Series A
Preferred Stock, voting separately as a class and to the exclusion of
the holders of all other classes and series of stock of the
Corporation, shall have the right, in addition to any other rights to
elect directors which the holders of Series A Preferred Stock may have,
to elect the smallest number of directors constituting a majority of
the authorized number of directors, and the holders of the shares of
Common Stock shall have the right to elect the remaining directors.
(iii) TERMINATION OF RIGHT OF SERIES A PREFERRED
STOCK TO ELECT DIRECTORS. The right of the holders of Series A
Preferred Stock to elected directors of the Corporation shall continue
until, (A) in the case of a voting right arising pursuant to Section
3(C)8(d)(i), until the date on which all such dividends in arrears are
paid in full, and (B) in the case of a voting right arising pursuant to
Section 3(C)8(d)(ii), such time as the Liquidation Preference owing to
holders of Series A Preferred Stock shall have been paid in full, at
which time such special voting right of the holders of Series A
Preferred Stock shall terminate, subject to revesting (with respect to
the voting right set forth in Section 3(C)8(d)(i)) in the event of each
and every recurrence of any event triggering such shift in voting
rights.
(iv) MECHANICS FOR ELECTION OF DIRECTORS; NOTICE.
Whenever such voting right set forth in Section 3(C)8(d)(i) or
3(C)8(d)(ii) shall have vested as aforesaid, such right may be
exercised initially either at a special meeting of the holders of
Series A Preferred Stock, at any annual meeting of shareholders held
for the purpose of electing directors or by the written consent of the
holders of Series A Preferred Stock without a meeting, and thereafter
at such annual meeting or by written consent. At any time after such
voting power referred to in this Section 3(C)8(d)(i) or 3(C)8(d)(ii)
shall have been so vested in shares of Series A Preferred Stock and
such right shall not already have been exercised by written consent as
aforesaid, the Secretary of the Corporation may, and upon the written
request of the holders of record of at least 10% of the outstanding
shares of Series A Preferred Stock entitled to vote thereon (addressed
to the Secretary of the Corporation at the principal office of the
Corporation) shall, call a special meeting of the shareholders of the
Corporation for the purpose of electing all of the members of the board
of directors. Such call shall be made by notice to each holder by
first-class mail, postage prepaid at its address as it appears in the
records of the Corporation, and such notice shall be mailed at least 10
days but no more than 20 days before the date of the special meeting,
or as required by law. Such meeting shall be held at the earliest
practicable date upon the notice required for special meetings of
shareholders at the place designated by the Secretary of the
Corporation. If such meeting shall not be called by a proper officer of
the Corporation within 15 days after receipt of such written request by
the Secretary of the Corporation, then the holders of record of at
least 10% of the shares of Series A Preferred Stock then outstanding
and entitled to
<PAGE>
vote thereon may call such meeting at the expense of the
Corporation, and such meeting may be called by such holders upon the
notice required for special meetings of shareholders and shall be
held at the place designated in such notice.
(v) QUORUM. At any meeting held for the purpose of
electing directors at which the holders of Series A Preferred Stock
shall have the right to elect directors as provided in this Section
3(C)8(d), the presence in person or by proxy of the holders of a
majority of the then outstanding shares of Series A Preferred Stock
entitled to vote thereon shall be required and be sufficient to
constitute a quorum of such series for the election of directors by
such series. At any such meeting or adjournment thereof, (A) the
absence of a quorum of the holders of Series A Preferred Stock shall
not prevent the election of directors other than the directors to be
elected by the holders of Series A Preferred Stock, and the absence of
a quorum or quorums of the holders of capital stock entitled to elect
such other directors shall not prevent the election of the directors to
be elected by the holders of Series A Preferred Stock, and (B) in the
absence of a quorum of the holders of Series A Preferred Stock, a
majority of the holders of Series A Preferred Stock present in person
or by proxy shall have the power to adjourn the meeting for the
election of directors which such holders are entitled to elect, from
time to time, without notice (except as required by law) other than
announcement at the meeting, until a quorum shall be present.
(vi) TERM; TERMINATION. Upon any termination of the
aforesaid voting rights in accordance with Section 3(C)8(d)(iii)
hereof, provided such right shall not already have been exercised by
written consent, the Secretary of the Corporation may, and upon the
written request of the holders of record of at least 10% of the
outstanding shares of capital stock of the Corporation entitled to vote
thereon (addressed to the Secretary of the Corporation at the principal
office of the Corporation) shall, call a special meeting of the
shareholders of the Corporation for the purpose of electing all of the
members of the board of directors. Such call shall be made by notice to
each holder by first-class mail, postage prepaid at its address as it
appears in the records of the Corporation, and such notice shall be
mailed at least 10 days but no more than 20 days before the date of the
special meeting, or as required by law. Such meeting shall be held at
the earliest practicable date upon the notice required for special
meetings of shareholders at the place designated by the Secretary of
the Corporation. If such meeting shall not be called by a proper
officer of the Corporation within 15 days after receipt of such written
request by the Secretary of the Corporation, then the holders of record
of at least 10% of the shares of capital stock then outstanding and
entitled to vote thereon may call such meeting at the expense of the
Corporation, and such meeting may be called by such holders upon the
notice required for special meetings of shareholders and shall be held
at the place designated in such notice.
(vii) VACANCY. In case of a vacancy occurring in the
office of any director so elected pursuant to Section 3(C)8(d)(i) or
3(C)8(d)(ii) hereof, the holders of a majority of the Series A
Preferred Stock then outstanding and entitled to vote may, at a special
meeting of the holders or by written consent as provided above, elect a
successor to hold office for the unexpired term of such director.
<PAGE>
Except as set forth herein, holders of shares of Series A Preferred Stock shall
have no special voting rights and their consent shall not be required (except to
the extent they are otherwise entitled to vote as set forth in these Amended and
Restated Articles of Incorporation or by law) for taking any corporate action.
To extent permissible under applicable law, each vote of the holders of Series A
Preferred Stock shall be a vote of the holders of Series A Preferred Stock and
Series B Preferred Stock, voting together as a single series, if and to the
extent that the holders of Series B Preferred Stock are permitted to so vote.
9. REMEDIES. Any holder of Series A Preferred Stock may
proceed to protect and enforce its rights and the rights of other holders by any
available remedy by proceeding at law or in equity to protect and enforce any
such rights, whether for the specific enforcement of any provision in these
Amended and Restated Articles of Incorporation or in aid of the exercise of any
power granted herein, or to enforce any other proper remedy.
10. DEFINITIONS. For the purposes of this Section 3(C) of
these Amended and Restated Articles of Incorporation, the following terms shall
have the meanings indicated:
"Affiliate" shall mean, with respect to any specified person,
(a) any other person directly or indirectly controlling or controlled by or
under direct or indirect common control with such specified person or (b) any
other person that owns, directly or indirectly, 10% or more of such specified
person's capital stock or any executive officer or director of any such
specified person or other person or, with respect to any natural person, any
person having a relationship with such person by blood, marriage or adoption not
more remote than first cousin. For the purposes of this definition, "control,"
when used with respect to any specified person, means the power to direct the
management and policies of such person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing.
"Beneficial Owner" shall have the meaning ascribed to such
term or the term "beneficial ownership" in Rule 13d-3 and Rule 13d-5 under the
Exchange Act, except that a person shall be deemed have "beneficial ownership"
of all securities that such person has the right to acquire, whether such right
is currently exercisable or is exercisable only upon the occurrence of a
subsequent condition.
"Business Day" shall mean any day other than a Saturday,
Sunday or a day on which banking institutions in New York, New York are
authorized or obligated by law or executive order to close.
"Change of Control" shall mean such time after the Issue Date
as either:
(i) prior to the initial public offering by the
Corporation of any class of its common stock, the consummation
of any transaction the result of which is that the Principals
and their Related Parties become the Beneficial Owners, in the
aggregate, of less than 50% of the Common Stock of the
Corporation;
<PAGE>
(ii) after the initial public offering by the
Corporation of any class of its common stock, any "person" (as
such term is used in Section 13(d)(3) of the Exchange Act),
other than the Principals and their Related Parties, becomes,
directly or indirectly, the Beneficial Owner, by way of
merger, consolidation or otherwise, of 35% or more of the
Common Stock of the Corporation and such person is or becomes,
directly or indirectly, the Beneficial Owner of a greater
percentage of the voting power of the Common Stock of the
Corporation, calculated on a fully diluted basis, than the
percentage Beneficially Owned by the Principals and their
Related Parties; or
(iii) the Corporation effects the sale, lease or
transfer of all or substantially all of the assets of the
Corporation to any person or group.
"Issue Date" shall mean the first date on which shares of
Series A Preferred Stock are issued.
"Junior Securities" shall have the meaning set forth in
Section 3(C)2 hereof.
"Liquidation Preference" shall have the meaning set forth in
Section 3(C)4 hereof.
"Parity Securities" shall have the meaning set forth in
Section 3(C)2 hereof.
"Person" shall mean any individual, firm, corporation or other
entity, and shall include any successor (by merger or otherwise) of such entity.
"Principals" shall mean (i) J.F. Lehman & Company ("Lehman"),
(ii) each Affiliate of Lehman as of the Issue Date, (iii) J.F. Lehman Equity
Investors I, L.P. and (iv) each officer or employee (including their respective
immediate family members) of Lehman as of the Issue Date.
"Related Party" shall mean with respect to any Principal (A)
any controlling shareholder or 80% (or more) owned subsidiary of such Principal
or (B) any trust, corporation, partnership or other entity, the beneficiaries,
shareholders, partners, owners or Persons beneficially holding an 80% or more
controlling interest of which consist of such Principal and/or such other
Persons referred to in the immediately preceding clause (A).
3(D) SERIES B 11.5% CUMULATIVE REDEEMABLE PREFERRED STOCK. The
Board of Directors has designated a series of Preferred Stock and the number of
shares constituting such series and fixes the rights, preferences, privileges
and restrictions relating to such series as follows:
1. DESIGNATION AND AMOUNT. The shares of such series
of Preferred Stock shall be designated as "Series B 11.5% Cumulative
Redeemable Preferred Stock" (the "Series B Preferred Stock"), and the number
of shares constituting such series shall be 5,000. The initial liquidation
preference of the Series B Preferred Stock shall be $1,000 per share (the
"Stated Liquidation Value").
<PAGE>
2. RANK. The Series B Preferred Stock shall, with
respect to dividend rights and rights on liquidation, winding up and
dissolution, rank (i) senior to the Corporation's common stock, without par
value (the "Common Stock"), and to all classes and series of stock of the
Corporation now or hereafter authorized, issued or outstanding which by their
terms expressly provide that they are junior to the Series B Preferred Stock
or which do not specify their rank (collectively with the Common Stock, the
"Junior Securities"), (ii) on a parity with the Series A Preferred Stock and
with each other class of capital stock or series of Preferred Stock issued by
the Corporation after the date hereof the terms of which specifically provide
that such class or series will rank on a parity with the Series B Preferred
Stock as to dividend distributions and distributions upon the liquidation,
winding up and dissolution of the Corporation (collectively referred to as
"Parity Securities") and (iii) junior to each other class of capital stock or
other series of Preferred Stock issued by the Corporation after the date
hereof the terms of which have been approved by the requisite number of
holders of Series B Preferred Stock as provided in Section 3(D)8(b) hereof
and which specifically provide that such class or series will rank senior to
the Series B Preferred Stock as to dividend distributions or distributions
upon the liquidation, winding up and dissolution of the Corporation
(collectively referred to as "Senior Securities").
3. DIVIDENDS.
(a) The holders of shares of Series B Preferred Stock shall be
entitled to receive, when, as and if declared by the Board of Directors, out of
funds legally available therefor, dividends payable quarterly in arrears on
January 15, April 15, July 15 and October 15 of each year (each such date, a
"Dividend Payment Date"), except that if any Dividend Payment Date is not a
Business Day, then such quarterly dividend shall be payable on the next
succeeding Business Day and such next succeeding Business Day will be the
Dividend Payment Date. Dividends shall be payable to holders of Series B
Preferred Stock at the annual rate of 11.5% times the sum of (i) the Stated
Liquidation Value and (ii) accrued but unpaid dividends as of the immediately
preceding Dividend Payment Date. Dividends shall be payable (A) at the annual
rate of .115 shares of Series B Preferred Stock per share of Series B Preferred
Stock from the Issue Date through the July 15, 2000 Dividend Payment Date and
(B) in cash after the July 15, 2000 Dividend Payment Date, with the first such
cash dividend payable to the holders of Series B Preferred Stock on October 15,
2000. Dividends shall be payable only to holders of record at the close of
business on the date specified by the Board of Directors at the time such
dividend is declared (the "Record Date"), in preference to dividends on the
Junior Securities, commencing on the Dividend Payment Date next succeeding the
Issue Date. Any such Record Date shall be not less than 10 days and not more
than 60 days prior to the relevant Dividend Payment Date. All dividends paid
with respect to shares of Series B Preferred Stock shall be paid PRO RATA to the
holders entitled thereto. Dividends on the Series B Preferred Stock shall accrue
and be cumulative on a quarterly basis (whether or not declared and whether or
not funds are legally available for the payment thereof) from the Issue Date.
(b) Dividends payable on the Series B Preferred Stock for any
period less than a full quarterly dividend period shall be computed on the basis
of a 360-day year of twelve 30-day months.
<PAGE>
(c) Fractional shares of Series B Preferred Stock shall be
issued to the extent necessary to make dividend payments in shares of Series B
Preferred Stock. Each fractional share of Series B Preferred Stock outstanding
shall be entitled to a ratably proportionate amount of all dividends accruing
with respect to each outstanding share of Series B Preferred Stock and all of
such dividends with respect to such outstanding fractional shares shall be fully
cumulative and shall accrue (whether or not declared) and shall be payable in
the same manner and at such times as provided for in Section 3(D)3(a) above with
respect to dividends on each outstanding share of Series B Preferred Stock.
(d) Until the earlier of (i) the date upon which no shares of
Series B Preferred Stock are outstanding and (ii) July 16, 2000, the Corporation
shall reserve and keep available out of its authorized or unissued Series B
Preferred Stock solely for the purpose of paying dividends thereon as provided
for herein, such number of shares of Series B Preferred Stock as shall from time
to time be sufficient for such purpose. The Board of Directors of the
Corporation shall, from time to time, if necessary, propose to the shareholders
of the Corporation amendments to the Corporation's Articles of Incorporation to
increase its authorized capital stock and take such other actions as may be
necessary to permit the issuance from time to time of shares of Series B
Preferred Stock upon the declaration of any dividend payable in additional
shares of Series B Preferred Stock.
(e) So long as any shares of the Series B Preferred Stock are
outstanding, the Corporation shall not, without the prior consent of the holders
of at least two-thirds of the shares of outstanding Series A Preferred Stock and
the Series B Preferred Stock, voting together as a single series, (i) make any
payment on account of, or set apart for payment money for a sinking or other
similar fund for, the purchase, redemption or retirement of, any Junior
Securities (other than dividends or distributions payable in additional shares
of Junior Securities to holders of Junior Securities); (ii) permit any
corporation or other entity directly or indirectly controlled by the Corporation
to purchase or redeem any Junior Securities; (iii) declare, pay or set apart for
payment, or permit any corporation or other entity directly or indirectly
controlled by the Corporation to declare, pay or set apart for payment, any
dividend or make any distribution or payment on any Junior Securities or Parity
Securities, whether directly or indirectly and whether in cash, obligations or
shares of the Corporation or other property (other than dividends or
distributions payable in additional shares of Junior Securities to holders of
Junior Securities); or (iv) make any payment on account of, or set apart for
payment money for a sinking or other similar fund for, the purchase, redemption
or retirement of, any Parity Securities, whether directly or indirectly, and
whether in cash, obligations, shares of the Corporation or other property (other
than payments solely of Junior Securities), and shall not permit any corporation
or other entity directly or indirectly controlled by the Corporation to purchase
or redeem any Parity Securities, unless prior to or at the time of such payment
or setting apart for payment, the Corporation shall have repurchased, redeemed
or retired shares of Series B Preferred Stock on a PRO RATA basis, in proportion
to the respective Liquidation Preferences (as defined in these Amended and
Restated Articles of Incorporation or in the applicable Certificate of
Determination) of the Series B Preferred Stock and the Parity Securities as to
which such sinking fund or similar fund payment, or such purchase, redemption or
retirement, is being effected.
<PAGE>
(f) Whenever dividends on the Series B Preferred Stock are in
arrears, the Corporation shall not declare dividends on or make any other
distribution in respect of any Parity Securities, except dividends paid on a PRO
RATA basis on the Series B Preferred Stock and all other capital stock ranking
on a parity as to dividends and on which dividends are payable in arrears, in
proportion to the respective amounts of dividends in arrears upon all such
outstanding shares of Series B Preferred Stock and such other series of capital
stock.
(g) If at any time after October 15, 2000 any cash dividends
payable on the Series B Preferred Stock shall have been in arrears and unpaid
for four (4) or more successive Dividend Payment Dates, then until the date on
which all such dividends in arrears are paid in full, dividends shall accrue and
be payable to the holders of Series B Preferred Stock at the annual rate of
13.5% times the sum of (i) the Stated Liquidation Value and (ii) accrued but
unpaid dividends thereon. Upon payment in full of all such dividends in arrears,
cash dividends will thereafter be payable as set forth in Section 3(D)3(a)
above.
4. LIQUIDATION PREFERENCE.
(a) In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the affairs of the Corporation, the holders of
shares of Series B Preferred Stock then outstanding shall be entitled to be paid
out of the assets of the Corporation available for distribution to its
shareholders an amount in cash equal to 100% of the Stated Liquidation Value for
each share outstanding, plus an amount in cash equal to all accrued but unpaid
dividends thereon, without interest, to the date of liquidation, dissolution or
winding up (such amount the "Liquidation Preference"), before any payment shall
be made or any assets distributed to the holders of any of the Junior
Securities. If the assets of the Corporation are not sufficient to pay in full
the Liquidation Preference payable to the holders of outstanding shares of the
Series B Preferred Stock and any Parity Securities, then the holders of all such
shares shall share ratably in such distribution of assets in accordance with the
amount which would be payable on such distribution if the amounts to which the
holders of outstanding shares of Series B Preferred Stock and the holders of
outstanding shares of such Parity Securities are entitled were paid in full.
(b) For the purposes of this Section 3(D)4, neither the
voluntary sale, conveyance, exchange or transfer (for cash, shares of stock,
securities or other consideration) of all or substantially all of the property
or assets of the Corporation nor the consolidation or merger of the Corporation
with any one or more other corporations shall be deemed to be a voluntary or
involuntary liquidation, dissolution or winding up of the Corporation, unless
such voluntary sale, conveyance, exchange or transfer shall be in connection
with a plan of liquidation, dissolution or winding up of the Corporation.
5. REDEMPTION.
(a) OPTIONAL REDEMPTION. The Corporation may, at its option,
redeem at any time, out of funds legally available therefor, in the manner
provided in Section 3(D)6 hereof, all or any portion of the shares of the Series
B Preferred Stock, at a redemption price per share equal to 100% of the
Liquidation Preference thereof on the date of redemption; PROVIDED, HOWEVER,
that any such optional redemption by the Corporation shall be on a PRO
<PAGE>
RATA basis and for whole shares of Series A Preferred Stock and Series B
Preferred Stock; PROVIDED, FURTHER, HOWEVER, that the Corporation may redeem
fractional shares of Series B Preferred Stock pursuant to this Section
3(D)5(a) in the event that after such redemption a holder of Series B
Preferred Stock would be left with less than one full share of Series B
Preferred Stock.
(b) MANDATORY REDEMPTION. On February 20, 2008, the
Corporation shall redeem any and all outstanding shares of Series B Preferred
Stock, out of funds legally available therefor, at a redemption price per share
equal to 100% of the Liquidation Preference thereof on such date.
(c) REDEMPTION UPON CHANGE OF CONTROL. Upon the occurrence of
a Change of Control, the Series B Preferred Stock shall be redeemable at the
option of the holders thereof, in whole or in part, at a redemption price per
share equal to 100% of the Liquidation Preference on the date of redemption;
PROVIDED, HOWEVER, that the Corporation will not be obligated to redeem, and
will not redeem or call for redemption, any Series B Preferred Stock upon a
Change of Control until it has repurchased or redeemed such of the $110,000,000
original principal amount of 10% Senior Notes Due 2007 of the Corporation (the
"Notes") then outstanding as it is required to repurchase or has called for
redemption in connection with such Change of Control pursuant to the terms of
the Indenture among the Corporation, certain of its subsidiaries and U.S. Trust
Company of New York, N.A. relating to the Notes. Subject to the foregoing
proviso, the Corporation shall redeem, out of funds legally available therefor,
the number of shares specified in the holders' notices of election to redeem
pursuant to Section 3(D)6(b) hereof on the date fixed for redemption.
6. PROCEDURE FOR REDEMPTION.
(a) In the event that the Corporation shall redeem shares of
Series B Preferred Stock pursuant to Sections 3(D)5(a) or 3(D)5(b) hereof,
notice of such redemption shall be mailed by first-class mail, postage prepaid,
and mailed not less than 30 days nor more than 60 days prior to the redemption
date to the holders of record of the shares to be redeemed at their respective
addresses as they shall appear in the records of the Corporation; PROVIDED,
HOWEVER, that failure to give such notice or any defect therein or in the
mailing thereof shall not affect the validity of the proceeding for the
redemption of any shares so to be redeemed except as to the holder to whom the
Corporation has failed to give such notice or except as to the holder to whom
notice was defective. Each such notice shall state: (i) the redemption date;
(ii) the number of shares of Series B Preferred Stock to be redeemed and, if
less than all the shares held by such holders are to be redeemed, the number of
such shares to be redeemed from such holders; (iii) the redemption price and
form of consideration; (iv) the place or places where certificates for such
shares are to be surrendered for payment of the redemption price; and (v) that
dividends on the shares to be redeemed will cease to accrue on such redemption
date. Any redemption of less than all the shares of Series B Preferred Stock
pursuant to Section 3(D)5(a) shall be made on a PRO RATA basis to all holders of
Series B Preferred Stock.
(b) If a Change of Control should occur, then, subject to
Section 3(D)5(c) above, within 30 days of the occurrence of such Change of
Control, the Corporation shall
<PAGE>
give written notice by first-class mail, postage prepaid, to each holder of
Series B Preferred Stock at its address as it appears in the records of the
Corporation, which notice shall set forth (in addition to the information
required by the next succeeding paragraph): (i) each holder's right to
require the Corporation to redeem shares of Series B Preferred Stock held by
such holder as a result of such Change of Control; (ii) the redemption price;
(iii) the redemption date (which date shall be no earlier than 30 days and no
later than 60 days from the date the notice in respect of such Change of
Control is mailed); (iv) the procedures to be followed by such holder in
exercising its right of redemption, including the place or places where
certificates for such shares are to be surrendered for payment of the
redemption price; and (v) that dividends on the shares to be redeemed will
cease to accrue on the redemption date. In the event a holder of shares of
Series B Preferred Stock shall elect to require the Corporation to redeem any
or all of such shares of Series B Preferred Stock, such holder shall deliver,
within 20 days of the mailing to it of the Corporation's notice described in
this Section 3(D)6(b), a written notice stating such holder's election and
specifying the number of shares to be redeemed pursuant to Section 3(D)5(c)
hereof.
(c) Notice by the Corporation having been mailed as provided
in Section 3(D)6(a) hereof, or notice of election having been mailed by the
holders as provided in Section 3(D)6(b) hereof, and provided that on or before
the applicable redemption date funds necessary for such redemption shall have
been set aside by the Corporation, separate and apart from its other funds, in
trust for the PRO RATA benefit of the holders of the shares of Series B
Preferred Stock and Series B Preferred Stock so called for or entitled to
redemption, so as to be and to continue to be available therefor, then, from and
after the redemption date, dividends on the shares of Series B Preferred Stock
so called for or entitled to redemption shall cease to accrue, and said shares
shall no longer be deemed to be outstanding and shall not have the status of
shares of Series B Preferred Stock, and all rights of the holders thereof as
shareholders of the Corporation (except the right to receive the applicable
redemption price and any accrued and unpaid dividends from the Corporation to
the date of redemption) shall cease, unless the Corporation defaults in the
payment of the redemption price, in which case all rights of the holders of
Series B Preferred Stock shall continue until the redemption price is paid. Upon
surrender of the certificates for any shares so redeemed (properly endorsed or
assigned for transfer, if the Board of Directors of the Corporation shall so
require and a notice by the Corporation shall so state), such shares shall be
redeemed by the Corporation at the applicable redemption price as aforesaid. In
case fewer than all the shares represented by any such certificate are redeemed,
a new certificate or certificates shall be issued representing the unredeemed
shares without cost to the holder thereof. Any funds set aside in trust for the
holders of Series B Preferred Stock pursuant to this Section 3(D)6(c) which
remain unclaimed on the second anniversary of the applicable redemption date
shall be released or repaid to the Corporation, after which the holders of
shares called for redemption shall be entitled to receive payment of the
redemption price only from the Corporation.
7. REACQUIRED SHARES. Shares of Series B Preferred
Stock that have been issued and reacquired in any manner, including shares
reacquired by purchase or redemption, shall (upon compliance with any
applicable provisions of the laws of the State of California) have the status
of authorized and unissued shares of the class of Preferred Stock
undesignated as to series and, subject to the approval of the holders of the
Series B Preferred
<PAGE>
Stock as provided in Section 3(D)8(b) hereof, may be redesignated and
reissued as part of any series of Preferred Stock other than the Series B
Preferred Stock.
8. VOTING RIGHTS.
In addition to any voting rights provided by law, the holders
of Series B Preferred Stock shall have the following voting rights:
(a) VOTING UPON AMENDMENT TO ARTICLES OF INCORPORATION. The
Articles of Incorporation of the Corporation shall not be amended in any manner
that would adversely alter or change the powers, preferences, special rights or
economics of the Series B Preferred Stock as set forth herein without the
affirmative vote of the holders of at least two-thirds of the outstanding shares
of Series A Preferred Stock and of Series B Preferred Stock, voting together as
a single series.
(b) OTHER VOTING RIGHTS. Without the affirmative vote or
consent of the holders of at least two-thirds of the outstanding shares of
Series A Preferred Shares and Series B Preferred Stock, voting together as a
single series, the Corporation shall not after the Issue Date (i) create,
authorize or issue any Senior Securities or Parity Securities or (ii) create,
authorize or issue any Junior Securities, unless such Junior Securities are
expressly subordinate in right of payment (of liquidation preference and
dividends) to the Series A Preferred Stock, the Series B Preferred Stock and
such Junior Securities have no additional rights (directly or indirectly) upon
the Corporation's failure to redeem such Junior Securities or to pay or declare
a dividend or make a distribution with respect thereto.
Except as set forth herein, holders of shares of Series B Preferred Stock
shall have no special voting rights and their consent shall not be required
(except to the extent they are otherwise entitled to vote as set forth in
these Amended and Restated Articles of Incorporation or by law) for taking
any corporate action. To the extent permissible under applicable law, each
vote of the holders of Series B Preferred Stock shall be a vote of the
holders of Series A Preferred Stock and Series B Preferred Stock, voting
together as a single series.
9. REMEDIES. Any holder of Series B Preferred Stock
may proceed to protect and enforce its rights and the rights of other holders
by any available remedy by proceeding at law or in equity to protect and
enforce any such rights, whether for the specific enforcement of any
provision in these Amended and Restated Articles of Incorporation or in aid
of the exercise of any power granted herein, or to enforce any other proper
remedy.
10. DEFINITIONS. For the purposes of this Section 3(D)
of these Amended and Restated Articles of Incorporation, the following terms
shall have the meanings indicated:
"Affiliate" shall have the meaning ascribed to such term in
Section 3(C)10.
"Beneficial Owner" shall have the meaning ascribed to such
term or the term "beneficial ownership" in Section 3(C)10.
<PAGE>
"Business Day" shall have the meaning ascribed to such term in
Section 3(C)10.
"Change of Control" shall have the meaning ascribed to such
term in Section 3(C)10.
"Issue Date" shall mean the first date on which shares of
Series B Preferred Stock are issued.
"Junior Securities" shall have the meaning set forth in
Section 3(D)2 hereof.
"Liquidation Preference" shall have the meaning set forth in
Section 3(D)4 hereof.
"Parity Securities" shall have the meaning set forth in
Section 3(C)2 hereof.
"Person" shall have the meaning ascribed to such term in
Section 3(C)10.
"Principals" shall have the meaning ascribed to such term in
Section 3(C)10.
"Related Party" shall have the meaning ascribed to such term
in Section 3(C)10.
Article Four: The liability of the directors of the
corporation for monetary damages shall be eliminated to the fullest extent
permissible under California law.
Article Five: The corporation is authorized to provide
indemnification of its agents (as such term is defined in Section 317 of the
California General Corporation Law) to the fullest extent permissible under
California law.
<PAGE>
EXHIBIT 10.39
BURKE INDUSTRIES, INC.
INCENTIVE STOCK OPTION AGREEMENT
No. of Shares subject to Option.: ______. Option No.: __.
This Agreement dated as of __________ between Burke Industries, Inc., a
California corporation (the "Company"), and ______________ (the "Optionee").
W I T N E S S E T H :
1. GRANT OF OPTION.
Pursuant to the provisions of the Burke Industries, Inc. Stock Option
Plan (the "Plan"), the Company hereby grants to the Optionee, subject to the
terms and conditions of the Plan and subject further to the terms and conditions
herein set forth, the right and option to purchase from the Company all or any
part of an aggregate of ___________________ (_________) shares of Common Stock,
no par value, of the Company (the "Shares"), at the purchase price of
_________________ ($______) per Share, such Option to be exercised as
hereinafter provided. This is an Incentive Stock Option, and shall be so
construed. All terms defined in the Plan are used herein as so defined.
2. TERMS AND CONDITIONS.
It is understood and agreed that the Option evidenced hereby is subject
to the following terms and conditions:
2.1 TIME OF EXERCISE OF OPTION.
2.1.1 INSTALLMENT SCHEDULE. This Option may be exercised as
to
(a) twenty-five percent (25%) of the Shares
beginning one (1) year from the Commencement Date;
(b) an additional twenty-five percent (25%) of
the Shares beginning two (2) years from the Commencement Date;
(c) an additional twenty-five percent (25%) of
the Shares beginning three (3) years from the Commencement
Date; and
(d) in full, to the extent not theretofore
exercised, beginning on the earlier of the Change in Control
Date or four (4) years from the Commencement Date.
For purposes of this Option, the Commencement Date is agreed to be
________________.
<PAGE>
BURKE INDUSTRIES, INC.
INCENTIVE STOCK OPTION AGREEMENT
PAGE 2
2.1.2 EXPIRATION DATE. This Option shall expire absolutely
ten (10) years from the date hereof.
2.1.3 EXERCISE UPON TERMINATION OF EMPLOYMENT. If the
Optionee shall cease to be employed by the Company or a Parent or Subsidiary for
any reason other than the Optionee's death or disability (within the meaning of
Section 105(d)(4) of the Code), this Option, to the extent not then exercisable
in accordance with its terms, shall terminate and be without further effect. To
the extent this Option is exercisable on the date of termination of employment,
it may be exercised at any time within thirty (30) days after such date by the
Optionee or, in case of the subsequent death of the Optionee, then by the
executors or administrators of the Optionee's estate or by any person or persons
who shall have acquired the Option directly from the Optionee by bequest or
inheritance, and this Option, to the extent not exercised, shall in all events
terminate upon the expiration of such thirty (30) day period or, if earlier, ten
(10) years from the date hereof, PROVIDED, HOWEVER, that no option may be
exercised upon termination of employment if such termination results from the
voluntary resignation by the Optionee from his or her employment. For the
purposes of this Agreement, the term "resignation" shall not be construed to
include retirement.
2.1.4 EXERCISE UPON LOSS OF PARENT OR SUBSIDIARY STATUS. If
the Optionee ceases to be employed by the Company or a Parent or Subsidiary by
reason of the employer of the Optionee ceasing to be a Parent or Subsidiary of
the Company, then this Option, to the extent not then exercisable in accordance
with its terms, shall terminate and be without further effect. Within a
reasonable time after such event (not to exceed thirty (30) days), the Company
shall provide written notice to the Optionee of such event (including specific
reference to the provisions of this section). To the extent this Option is
exercisable on the date of such event, it may be exercised at any time within
thirty (30) days after the later of the date of such event or the date of the
notice required by the preceding sentence by the Optionee, or, in case of the
subsequent death of the Optionee, then by the executors or administrators of the
Optionee's estate or by any person or persons who shall have acquired the Option
directly from the Optionee by bequest or inheritance, and this Option, to the
extent not exercised, shall in all events terminate upon the expiration of such
thirty (30) day period, or, if earlier, ten (10) years from the date hereof.
2.1.5 EXERCISE UPON DEATH OR DISABILITY. If the Optionee
shall cease to be employed by the Company or a Parent or Subsidiary by reason of
the Optionee's death or disability, this Option, to the extent not then
exercisable in accordance with its terms, shall terminate and be without further
effect. To the extent this Option is exercisable on the date of death or
disability, it may be exercised at any time within twelve (12) months after the
date of death or disability by the Optionee in case of disability, or in case of
the death of the Optionee, then by the executors or administrators of the
Optionee's estate or by any person or persons who shall have acquired the Option
directly from the Optionee by bequest or inheritance, and
<PAGE>
PAGE 3
this Option, to the extent not exercised, shall in all events terminate upon the
expiration of such twelve (12) month period or, if earlier, ten (10) years from
the date hereof.
2.1.6 ACCELERATION OF EXERCISE DATE. In its sole
discretion, the Board of Directors may accelerate the date or dates on which
this Option may be exercised in whole or in part.
2.2 METHOD OF EXERCISE. This Option may be exercised as follows:
2.2.1 NOTICE OF EXERCISE. The Optionee shall deliver
written notice to the Company specifying the number of Shares as to which the
Option is being exercised.
2.2.2 PAYMENT OF PURCHASE PRICE. At the time of any
exercise the purchase price of the shares as to which this Option is being
exercised shall be paid to the Company in cash or good check, or if approved by
the Board of Directors, by the delivery of Shares previously owned by the
Employee, duly endorsed for transfer to the Company, with a fair market value
(as determined by the Board of Directors) on the date of delivery equal to the
aggregate purchase price of the Shares with respect to which the Option is being
exercised, or by the delivery of a recourse promissory note bearing interest at
such rate, or on such other terms and in form and with security satisfactory to
the Company, or any combination of the foregoing approved by the Board of
Directors, in its sole discretion. Notation of any partial exercise shall be
made by the Company on Schedule I hereto.
2.2.3 RESTRICTIONS ON TRANSFER/RIGHT OF REPURCHASE;
INVESTMENT REPRESENTATION. Prior to the issuance of any shares upon the exercise
of all or any part of this Option, the Company may require the person exercising
the Option to (a) execute, become a party to, and subject such shares to
restrictions in accordance with the terms of a Shareholders Agreement dated as
of August 20, 1997 among the Company and all or substantially all the persons
who are stockholders owning shares of Common Stock of the Company as of the date
of this Option, as such agreement may be amended and/or restated and in effect
at the time of each exercise of this Option, and/or (b) execute, become a party
to, and subject such shares to restrictions in accordance with a stock purchase
agreement in a form acceptable to the Company, which stock purchase agreement
may grant to the Company the right to repurchase all or any of the shares issued
upon exercise of the option, at the purchase price per share provided for
herein, in the event that the Optionee ceases to be employed by the Company or a
Parent or Subsidiary by reason of the voluntary resignation by the Optionee from
his or her employment. If the Company so requires, the certificate or
certificates evidencing the shares issued upon the exercise of all or any part
of this Option shall be legended in accordance with said agreement(s).
2.3 NONTRANSFERABILITY. This Option shall not be transferable
except by will or by the laws of descent and distribution. During the lifetime
of the Optionee, this Option shall be exercisable only by the Optionee.
<PAGE>
PAGE 4
2.4 ADJUSTMENTS. In the event of any change in the Stock of the
Company by reason of any stock dividend, recapitalization, reorganization,
merger, consolidation, split-up, combination or exchange of shares, or any
similar change affecting the Stock, then in any such event the number and kind
of shares subject to this Option and their purchase price per share may be
adjusted pursuant to Section 5.12 of the Plan, in such manner as the Board of
Directors may in its sole discretion deem equitable. Any adjustment so made
shall be final and binding upon the Optionee.
2.5 NO RIGHTS AS STOCKHOLDER. The Optionee shall have no rights as
a stockholder with respect to any shares of Stock subject to this Option prior
to the date of issuance to the Optionee of a certificate or certificates for
such shares.
2.6 COMPLIANCE WITH LAW AND REGULATIONS. This Option and the
obligation of the Company to sell and deliver shares hereunder shall be subject
to all applicable federal and state laws, rules and regulations and to such
approvals by any government or regulatory agency as may be required. The Company
shall not be required to issue or deliver any certificates for shares of Stock
if the Company determines that such issue or delivery would (a) require any
registration or qualification of such shares under any federal or state law, or
any rule or regulation of any government body which the Company shall, in its
sole discretion, determine to be applicable; (b) require the commencement of the
filing by the Company of periodic reports pursuant to the Securities Exchange
Act of 1934, or (c) violate any law or governmental regulation. If at any time
the Board of Directors in its discretion determines that the listing,
registration of qualification of the shares subject to this Option upon any
securities exchange or under any law or regulation, or the consent or approval
of any government regulatory body is necessary or desirable as a condition of,
or in connection with, the issue or purchase of shares hereunder, this Option
may not be exercised in whole or in part unless such listing, registration,
qualification, consent or approval shall have been effected or obtained free of
any conditions not acceptable to the Board of Directors.
2.7 WITHHOLDING TAXES. Whenever under this Option shares are to be
issued or cash is to be paid, the Company shall have the right to require the
recipient to remit to the Company an amount sufficient to satisfy federal, state
and local withholding tax requirements prior to the delivery of any certificate
or certificates for such shares or payment of such cash.
2.8 MODIFICATION, EXTENSION AND RENEWAL. Subject to the terms and
conditions and within the limitations of the Plan, the Board of Directors may
modify, extend or renew this Option, or accept the surrender hereof (to the
extent not theretofore exercised) and authorize the granting of a new Option or
Options in substitution therefor (to the extent not theretofore exercised).
Notwithstanding the foregoing, no modification of this Option shall, without the
consent of the Optionee, alter or impair any rights or obligations under any
Option theretofore granted under the Plan.
<PAGE>
PAGE 5
2.9 TERMINATION. The Company hereby reserves the right to
terminate this Option in connection with any Change in Control for a payment in
cash equal to the difference between the Exercise Price for the shares of Stock
subject to the Option and the Change in Control Price of such Stock.
2.10 PARACHUTE PAYMENTS. In the event that the aggregate present
value of the payments to the Employee under this Agreement, and any other plan,
program, or arrangement maintained by the Company or a Subsidiary, constitutes
an "excess parachute payment" (within the meaning of Section 280G(b)(1) of the
Code) and the excise tax on such payment would cause the net parachute payments
(after taking into account federal, state and local income and excise taxes) to
which the Employee otherwise would be entitled to be less than what the Employee
would have netted (after taking into account federal, state and local income
taxes) had the present value of the Employee's total parachute payments equaled
One Dollar ($1.00) less than three (3) times the Employee's "base amount"
(within the meaning of Code Section 280(G)(b)(3)(A)), the Employee's total
"parachute payments" (within the meaning of Code Section 280G(b)(2)(A)) shall be
reduced (by the minimum possible amount) so that their aggregate present value
equals One Dollar ($1.00) less than three (3) times such base amount. For
purposes of this calculation, it shall be assumed that the Employee's tax rate
will be the maximum marginal federal, state and local income tax rate on earned
income, with such maximum federal rate to be computed with regard to Code
Section 1(g), if applicable. In the event that the Employee and the Company are
unable to agree as to the amount of the reduction described above, if any, the
Employee shall select a law firm or accounting firm from among those regularly
consulted (during the twelve (12) month period immediately prior to the change
in control that resulted in the characterization of the payments as parachute
payments) by the Company regarding federal income tax or employee benefit
matters, and such law firm or accounting firm shall determine the amount of such
reduction and such determination shall be final and binding upon the Employee
and the Company.
3. REPRESENTATIONS AND OBLIGATIONS OF OPTIONEE.
In consideration of the grant of this Option, the Optionee hereby
represents and agrees as follows:
3.1 OPTIONEE BOUND BY PLAN. Optionee hereby acknowledges receipt
of a copy of the Plan and agrees to be bound by all the terms and provisions
thereof. Any term used herein with the first letter of such term capitalized
shall have the same meaning as in the Plan.
3.2 INVESTMENT REPRESENTATION. Optionee hereby represents that any
shares purchased pursuant to this Option will be acquired for the Optionee's own
account for investment and not with a view to, or for the offer or sale in
connection with, the distribution of any such shares.
<PAGE>
PAGE 6
3.3 BEST EFFORTS. Optionee agrees to use his or her best efforts
for the benefit of the Company during his or her employment or other
relationship with the Company.
3.4 RESTRICTIONS. The Optionee agrees that any shares of Stock
acquired pursuant to exercise of this Option shall be subject to rights of
repurchase and other restrictions as contemplated by Section 2.2.3 of this
Agreement.
3.5 NO RIGHTS TO CONTINUED EMPLOYMENT. The Optionee acknowledges
that neither any of the terms and provisions of the Plan or this Agreement nor
the grant of this option to the Optionee shall be construed to give to the
Optionee any rights to continued employment with the Company or a Parent or
Subsidiary thereof, or to give to the Optionee any rights whatsoever in
connection with such employment, except as expressly provided in the Plan or
this Agreement. Except as may otherwise be provided in a written agreement
between the Optionee and the Company or a Parent or Subsidiary, the Optionee is
an employee at will, and each party to the employment relation has a right to
terminate such employment at any time and for any reason, or for no reason at
all.
4. NOTICES.
Notices delivered pursuant to this Agreement shall be in writing, and
shall be deemed to have been duly given when (a) delivered by hand; (b) sent by
facsimile (with receipt confirmed), provided that a copy is promptly thereafter
mailed by first-class prepaid certified mail, return receipt requested; (c)
received by the addressee, if sent with delivery receipt requested by Express
Mail, Federal Express, other express delivery service or first-class prepaid
certified mail, in each case to the appropriate addresses and facsimile numbers
set forth below, or to such other address(es) or facsimile number(s) as a party
may designate as to itself by notice to the other party:
(a) If to the Company:
George A. Sawyer
c/o J.F. Lehman & Company
2001 Jefferson Davis Highway, Suite 607
Arlington, VA 22202
Facsimile: (703) 418-6099
(b) If to the Optionee:
To the latest home address as shown on the Company's
personnel records
subject to the right of either party to designate at any time hereafter in
writing some other address.
<PAGE>
PAGE 7
5. COUNTERPARTS.
This Agreement has been executed in two counterparts each of which
shall constitute one and the same instrument.
IN WITNESS WHEREOF, Burke Industries, Inc. has caused this Agreement to
be executed by its authorized officer and Optionee has executed this Agreement,
both as of the day and year first above written.
BURKE INDUSTRIES, INC.
By: ______________________________
OPTIONEE
___________________________________
<PAGE>
CONSENT OF SPOUSE
The undersigned spouse of _________________ has read and hereby
approves the terms and conditions of this Incentive Stock Option Agreement No.
__ (the "Option Agreement") by and between Burke Industries, Inc. (the
"Company") and the said ________________, dated as of ____________ __, 1999. In
consideration of the Company's granting his/her spouse the right to purchase
Shares as set forth in the Option Agreement, the undersigned hereby agrees to be
irrevocably bound by the terms and conditions of the Option Agreement and
further agrees that any community property interest shall be similarly bound.
The undersigned hereby appoints the undersigned's spouse as attorney-in-fact for
the undersigned with respect to any amendment or exercise of rights under the
Option Agreement and agrees to be bound by the provisions of the Option
Agreement insofar as the undersigned may have any rights thereunder or in any
shares issued pursuant thereto under the community property laws of the State of
California or similar laws relating to marital property in effect in the state
of our residence as of the date of the signing of the Option Agreement.
___________________________
Print Name: ___________________________
<PAGE>
SCHEDULE I
TO
BURKE INDUSTRIES, INC.
INCENTIVE STOCK OPTION AGREEMENT DATED ____________ ___, 1999 (THE "AGREEMENT")
BY AND BETWEEN
BURKE INDUSTRIES, INC. (THE "COMPANY")
AND
_____________________ (THE "OPTIONEE")
WHEREAS, the Optionee has this day delivered to the Company written
notice of partial exercise of the Option granted by the Agreement; and
WHEREAS, in accordance with Section 2.2.1 of the Agreement, said
written notice specified that the number of Shares as to which the Option is
being exercised is _______________ Shares; and
WHEREAS, Section 2.2.1 of the Agreement requires that notation of any
partial exercise of the Option be made on this Schedule I to the Agreement;
NOW, THEREFORE, it is hereby acknowledged and agreed that the Option
granted by the Agreement has this day been exercised as to ____________ Shares.
IN WITNESS WHEREOF, Burke Industries, Inc. has caused this Schedule to
be executed by its President or a Vice President and Optionee has executed this
Schedule, both as of the _____day of ______________, _____.
BURKE INDUSTRIES, INC.
By: ______________________________
Its:
OPTIONEE
___________________________________
<PAGE>
EXHIBIT 10.40
BURKE INDUSTRIES, INC.
1997 STOCK OPTION PLAN
AMENDED AND RESTATED AS OF NOVEMBER 30, 1999
1. PURPOSE. This Stock Option Plan (the "Plan") is intended as an
incentive to encourage stock ownership by officers and directors and executive
and professional employees of Burke Industries, Inc. (the "Company") and its
Parent and Subsidiary corporations so that they may acquire or increase their
equity interest in the success of the Company and its Parents and Subsidiaries,
and to encourage them to remain in the service of the Company or of its Parents
or Subsidiaries. Each option granted under this Plan will be designated as
either an "Incentive Stock Option" or a "Nonqualified Stock Option." It is
intended that each option designated as an Incentive Stock Option granted under
this Plan will qualify as an incentive stock option within the meaning of
Section 422(b) of the Code.
2. DEFINITIONS
2.1 "BOARD OF DIRECTORS" means the board of directors of the
Company.
2.2 "CHANGE IN CONTROL" shall mean the happening of any of the
following:
2.2.1 any person who is not a stockholder of the Company or
of any Parent on the date of adoption of this Plan (or group of such persons
acting in concert) acquires, during any period of twelve consecutive calendar
months, stock of the Company or of a Parent representing a majority of the
voting power of all stock of the Company or any Parent having the right to vote
for the election of directors;
2.2.2 the stockholders of the Company approve a merger or
consolidation of the Company with any other corporation, other than (i) a merger
or consolidation which would result in the voting securities of the Company
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) more than eighty percent (80%) of the combined voting power of
the voting securities of the Company or such surviving entity outstanding
immediately after such merger or consolidation or (ii) a merger or consolidation
effected to implement a Recapitalization of the Company;
2.2.3 the stockholders of the Company approve a plan of
complete liquidation of the Company or an agreement for the sale or disposition
by the Company of all or substantially all of the Company's assets or any
transaction having a similar effect; or
2.2.4 if the Company enters into an agreement with an
unrelated party for the sale of all or substantially all of the assets or
outstanding stock of a Subsidiary (or a transaction having a similar effect), or
any other event occurs by reason of which a Subsidiary ceases to be a Subsidiary
of the Company, a Change in Control shall be deemed to have occurred with
respect to those Employees who are then employed by such Subsidiary.
2.3 "CHANGE IN CONTROL DATE" shall mean the earliest date on which
one of the events described in the definition of "Change in Control" occurs, as
determined by the Board
<PAGE>
BURKE INDUSTRIES, INC.
1997 STOCK OPTION PLAN
PAGE 2
of Directors, in its sole discretion, provided that, if Section 2.2.4 of the
definition of "Change of Control" applies, the Change in Control Date shall be
deemed to be the date of the agreement, provided that the transaction does
close.
2.4 "CHANGE IN CONTROL PRICE" shall mean the highest fair market
value, or the highest price paid or offered in any bona fide transaction related
to a Change in Control of the Company, at any time during the sixty (60) days
preceding the Change in Control Date.
2.5 "CODE" means the Internal Revenue Code of 1986, as amended.
2.6 "COMPANY" means Burke Industries, Inc., a California
corporation.
2.7 "EMPLOYEE" means any bona fide full or part time common law
employee of the Company or of any Parent or Subsidiary of the Company.
2.8 "INCENTIVE STOCK OPTION" means an Option granted pursuant to
this Plan intended to qualify and designated as an incentive stock option within
the meaning of Section 422 of the Code.
2.9 "NONQUALIFIED STOCK OPTION" means any Option granted pursuant
to this Plan other than an Incentive Stock Option.
2.10 "OPTION" or "STOCK OPTION" means any stock option granted
pursuant to this Plan.
2.11 "OPTIONEE" means any individual to whom an Option is granted
pursuant to this Plan.
2.12 "PARENT" means, at the time of granting any Option, any
corporation (other than the Company) in an unbroken chain of corporations ending
with the Company if each of the corporations other than the Company owns stock
possessing fifty percent (50%) or more of the total combined voting power of all
classes of stock in one of the other corporations in such chain.
2.13 "PLAN" means the Burke Industries, Inc. 1997 Stock Option
Plan, as amended or restated from time to time.
2.14 "RECAPITALIZATION" means any reorganization, merger or other
subdivision, consolidation, recapitalization, reclassification, stock split,
combination of shares, issuance of warrants, stock dividend or similar event
with respect to or affecting the common stock of the Company, no par value per
share.
<PAGE>
PAGE 3
2.15 "STOCK OPTION COMMITTEE" means the committee appointed to
administer the Plan pursuant to Article 7 herein, if such committee is
appointed.
2.16 "SUBSIDIARY" means, at the time of granting any Option, any
corporation (other than the Company) in an unbroken chain of corporations
beginning with the Company if each of the corporations other than the last
corporation in the unbroken chain owns stock possessing fifty percent (50%) or
more of the total combined voting power of all classes of stock in one of the
other corporations in such chain.
2.17 "TEN PERCENT SHAREHOLDER" means any person who owns (or is
considered by reason of Section 425(d) of the Code to own) stock possessing more
than ten percent (10%) of the total combined voting power of all classes of
stock of the Company or of any Parent or Subsidiary of the Company.
3. ELIGIBILITY. The persons who shall be eligible to receive Options shall
be such officers, directors and executive and professional employees of the
Company or its Parent or Subsidiary corporations as the Board of Directors shall
select from time to time. An Optionee may hold more than one Option, but only on
the terms and subject to the restrictions hereafter set forth.
4. STOCK. The stock subject to the Options shall be shares of the
Company's authorized but unissued or reacquired no par value common stock,
hereafter sometimes called Stock. The aggregate number of shares which may be
issued under Options shall not exceed seven hundred five thousand (705,000)
shares of Stock. The limitation established by the preceding sentence shall be
subject to adjustment as provided in Section 5.12 of the Plan. If any
outstanding Option for any reason expires or is terminated, the shares of Stock
allocable to the unexercised portion of such Option may again be subjected to an
Option under the Plan.
5. TERMS AND CONDITIONS
5.1 OPTION AGREEMENT. Stock Options granted pursuant to the Plan
shall be authorized by the Board of Directors and shall be evidenced by
agreements in such form as the Board of Directors shall from time to time
approve, which agreements shall comply with and be subject to the terms and
conditions set forth in this Article 5. The agreements shall not impose upon the
Company or its Parents or Subsidiaries any obligation to retain the Optionee in
their employ for any period.
5.2 NUMBER OF SHARES. Each Option shall state the number of shares
of Stock to which it pertains.
5.3 OPTION PRICE. Each Option shall state the option price, which
in the case of an Incentive Stock Option shall be not less than (i) one hundred
percent (100%) of the fair market
<PAGE>
PAGE 4
value of the shares of Stock on the date of the granting of the Option if the
Optionee is not a Ten Percent Shareholder, or (ii) one hundred ten percent
(110%) of the fair market value of the shares of Stock on the date of the
granting of the Option if the Optionee is a Ten Percent Shareholder. The fair
market value of the shares of Stock shall be determined pursuant to Section 7.2.
5.4 MEDIUM AND TIME OF PAYMENT. The option price shall be payable
upon the exercise of the Option and may be paid in cash or by good check. At the
sole option of the Company, if approved by the Board of Directors, a portion of
the purchase price may be paid by delivery of shares of Stock previously owned
by the Optionee, duly endorsed for transfer to the Company, with a fair market
value (as determined by the Board of Directors) on the date of delivery equal to
the option price, or by delivery of a recourse promissory note bearing interest
at such rate, on such other terms and in form and with security satisfactory to
the Company, or any combination of the foregoing approved by the Board of
Directors. Exercise of an Option shall not be effective until the Company has
received written notice of exercise, specifying the number of whole and
fractional shares of Stock to be purchased, accompanied by payment in full of
the aggregate option price of the number of shares purchased.
5.5 TERM OF OPTIONS. Each Option, by its terms, shall not be
exercisable after the expiration of ten years from the date the Option is
granted, provided, however, that any Incentive Stock Option granted to a Ten
Percent Shareholder, by its terms, shall not be exercisable after the expiration
of five years from the date the Option is granted. Any Option may provide that
it will expire within a shorter period than the maximum permitted hereby.
5.6 INSTALLMENTS. Each Option shall be exercisable on such dates
and in such amounts (subject to the other provisions hereof) as shall be
determined by the Board of Directors. It is not required that each Option have
the same installment provisions. In its sole discretion, the Board of Directors
may accelerate the exercise date of part or all of any Option.
5.7 TRANSFERABILITY. Each Option, by its terms, shall not be
transferable by the individual to whom granted otherwise than by will or the
laws of descent and distribution, and shall be exercisable, during the
Optionee's lifetime, only by the Optionee.
5.8 LIMITS ON EXERCISE. Each Option shall be subject to the
requirement that, if at any time the Board of Directors, in its discretion,
shall determine that the listing, registration, or qualification of the shares
subject to such Option upon any securities exchange or under any state or
federal law, or the consent or approval of any government regulatory body, is
necessary or desirable as a condition of, or in connection with, the granting of
such Option, or the issue or purchase of shares thereunder, such Option may not
be exercised in whole or in part unless such listing, registration,
qualification, consent or approval shall have been effected or obtained free of
any conditions not acceptable to the Board of Directors.
<PAGE>
PAGE 5
5.9 LIMIT ON OPTIONS. An Option shall not be an Incentive Stock
Option to the extent that the aggregate fair market value of stock with respect
to which such Option is exercisable for the first time by any individual during
any calendar year (taking into account all Incentive Stock Options
simultaneously or previously granted under all stock option plans of the Company
and its Parents and Subsidiaries) exceeds One Hundred Thousand Dollars
($100,000).
5.10 TERMINATION OF EMPLOYMENT. Each Option by its terms shall not
be exercisable after thirty (30) days after the termination of employment of the
individual to whom the Option was granted, unless such termination was a result
of the death or disability of the employee, and may provide that it shall not be
exercisable after the date of termination of employment of the individual to
whom the Option was granted.
5.11 EXPIRATION OF PLAN. No Option shall be granted under this Plan
more than ten years from the date on which this Plan was adopted or approved by
the stockholders of the Company, whichever is earlier. No Option granted under
this Plan shall be valid unless the Plan is approved by the stockholders of the
Company within twelve (12) months before or after its adoption by the Board of
Directors.
5.12 RECAPITALIZATION. Upon any Recapitalization, the Board of
Directors shall make an appropriate and equitable adjustment in the number and
kind of securities with respect to which rights may be granted under this Plan
and the price at which such securities may be purchased, and an appropriate and
equitable adjustment in the number and kind of securities that may be purchased
under each outstanding Option and the price at which shares may be purchased
under each such Option. The grant of an Option pursuant to the Plan shall not
affect in any way the right or power of the Company to make or authorize any
adjustments, recapitalizations, reorganizations, or other changes in the
Company's capital structure or business, any merger or consolidation, any
issuance of bonds, debentures, preferred shares or common shares, the
dissolution or liquidation of the Company, any sale or transfer of all or any
part of the Company's assets or business, or any other act, whether or not
similar to the events described above.
5.13 RIGHTS AS A STOCKHOLDER. An Optionee or a transferee of an
Option shall have no rights as a stockholder with respect to any shares covered
by the Option until the date of the issuance of a stock certificate for such
shares. No adjustment shall be made for dividends (ordinary or extraordinary,
whether in cash, securities or other property) or distributions or other rights
for which the record date is prior to the date such stock certificate is issued,
except as provided in Section 5.12 hereof.
5.14 MODIFICATION, EXTENSION AND RENEWAL OF OPTIONS. Subject to the
terms and conditions and within the limitations of the Plan, the Board of
Directors may modify, extend or renew outstanding
<PAGE>
PAGE 6
Options granted under the Plan, or accept the surrender of outstanding Options
(to the extent not theretofore exercised) and authorize the granting of new
Options in substitution therefor (to the extent not theretofore exercised).
Notwithstanding the foregoing, no modification of an Option shall, without the
consent of the Optionee, alter or impair any rights or obligations under any
Option theretofore granted under the Plan.
5.15 INVESTMENT PURPOSE. Each Option under the Plan shall be
granted on the condition that the purchases of stock thereunder shall be for
investment purposes, and not with a view to resale or distribution unless the
stock subject to such Option is registered under the Securities Act of 1933, as
amended, and any applicable state securities laws, or a resale of such stock
without such registration would otherwise be permissible. Each person exercising
an Option must represent that such condition is fulfilled, unless in the opinion
of counsel for the Company such condition is not required under the Securities
Act of 1933 or any other applicable law, regulation, or rule of any governmental
agency.
5.16 WITHHOLDING TAXES. Whenever under the Plan shares are to be
issued or cash is to be paid in satisfaction of Options, the Company shall have
the right to require the recipient to remit to the Company an amount sufficient
to satisfy federal, state and local withholding tax requirements prior to the
delivery of any certificate or certificates for such shares or payment of such
cash.
5.17 TERMINATION OF OPTIONS. Each Option, by its terms, shall
reserve to the Company the right to terminate the Option, in connection with a
Change in Control for a payment in cash equal to the difference between the
exercise price for the shares of Stock subject to the Option and the Change in
Control Price of such Stock.
5.18 OTHER PROVISIONS. The Option agreements authorized under the
Plan shall contain such other provisions, including, without limitation, such
rights of redemption, purchase and first refusal, and such other restrictions
upon the exercise of Options or the transfer of the Stock issued upon exercise,
as the Board of Directors of the Company shall deem advisable. Any Incentive
Stock Option agreement shall contain such limitations and restrictions upon the
exercise of the Option as shall be necessary in order that such Option will be
an "Incentive Stock Option" as defined in Section 422 of the Code.
6. EXERCISE OF OPTIONS
6.1 STOCK TRANSFER BOOKS. Notwithstanding any other provision of
this Plan or of any Option, no stock shall be issued by the Company while its
stock transfer books are closed.
6.2 SECURITIES LAWS. Notwithstanding any other provision of this
Plan or of any Option, no Option shall be exercisable, and no stock shall be
issued upon the exercise of any Option, if such exercise or such issuance of
stock would result in any violation of law or the
<PAGE>
PAGE 7
imposition on the Company of a requirement that it commence filing periodic
reports under the Securities Exchange Act of 1934 or any similar provision of
law.
7. ADMINISTRATION
7.1 ADMINISTRATION BY BOARD OF DIRECTORS. The Plan shall be
administered by the Board of Directors. The interpretation and construction by
the Board of Directors of any provisions of the Plan or of any Option granted
under it shall be final. The Board of Directors shall have the authority to
appoint a Stock Option Committee to assume the duties and responsibilities of
administering the Plan. The Stock Option Committee, if such be established by
the Board of Directors, shall be composed of no less than three (3) persons (who
shall be members of the Board of Directors), each of whom shall be a
"disinterested person" as defined herein, and such Stock Option Committee shall
have the same power, authority and rights in the administration of the Plan as
the Board of Directors. No director shall be liable for any action or
determination made in good faith with respect to the Plan or any Option granted
under it. The Board of Directors shall determine from time to time the persons
who shall receive Options hereunder; provided, however, Options may be granted
hereunder only to persons who, at the time of the grant thereof, are officers,
directors or key employees of the Company and its Parents and Subsidiaries,
except as otherwise provided in this Plan; provided, further, that any decision
to award Options hereunder to any person or the determination of the maximum
number of shares of Stock (as hereinafter defined) which may be subject to
Options granted to any such director, employee or officer shall be made by
either (i) the Board of Directors, all of the directors of which and all of the
directors acting in such matter shall be disinterested persons as defined
herein, or (ii) the Stock Option Committee appointed by the Board of Directors
pursuant to this section. For purposes of this Plan, "disinterested person"
shall mean a director who is not, during the one year prior to service as an
administrator of the Plan, or during such service, granted or awarded equity
securities pursuant to the Plan or any other plan of the Company or any of its
Parents or Subsidiaries entitling the participants therein to acquire stock,
stock options or stock appreciation rights of the Company or any of its Parents
or Subsidiaries.
7.2 DETERMINATION OF FAIR MARKET VALUE. For the purpose of
granting Incentive Stock Options, the Board of Directors shall determine the
fair market value of the Stock of the Company as follows:
7.2.1 If the Company's Stock is traded on any recognized
stock exchange or exchanges, such fair market value shall be deemed to be the
highest closing price of the Stock on such stock exchange or exchanges on the
day the Option is granted or if no sale of the Company's Stock shall have been
made on any stock exchange on that day, on the next preceding day on which there
was a sale of such stock.
<PAGE>
PAGE 8
7.2.2 During such time as the Stock is not listed on an
established exchange, but is actively traded on the over-the-counter market, the
fair market value per share shall be the mean between dealer "bid" and "ask"
prices of the Stock in the over-the-counter market on the day the Option is
granted, as reported by the National Association of Securities Dealers, Inc.
7.2.3 During such time as the Company's Stock is neither
listed on any recognized exchange nor actively traded over-thecounter, the fair
market value shall be determined in good faith by the Board of Directors. In
making such determination, the Board of Directors may (but shall not be required
to) rely on the opinions of one or more qualified, independent appraisers.
7.3 INDEMNIFICATION. In addition to such other rights of
indemnification as they may have as directors or as members of the Stock Option
Committee, the members of the Board of Directors shall be indemnified by the
Company against the reasonable expenses, including attorneys' fees actually and
necessarily incurred in connection with the defense of any action, suit or
proceeding, or in connection with any appeal therein, to which they or any of
them may be a party by reason of any action taken or failure to act under or in
connection with the Plan or any Option granted hereunder, and against all
amounts paid by them in settlement thereof (provided such settlement is approved
by independent legal counsel selected by the Company) or paid by them in
satisfaction of a judgment in any such action, suit or proceeding, except in
relation to matters as to which it shall be adjudged in such action, suit or
proceeding that such Board or Stock Option Committee member is liable for
negligence or misconduct in the performance of his duties; provided that within
sixty (60) days after institution of any such action, suit or proceeding a Board
or Stock Option Committee member shall in writing offer the Company the
opportunity, at its own expense, to handle and defend the same.
8. AMENDMENT AND TERMINATION
8.1 AMENDMENT. The Board of Directors of the Company may, insofar
as permitted by law, from time to time, with respect to any shares at the time
not subject to Options, suspend or discontinue the Plan or revise or amend it in
any respect whatsoever except that, without approval of the stockholders, no
such revision or amendment shall change the number of shares subject to the
Plan, change the designation of the class of employees eligible to receive
Options or decrease the price at which Incentive Stock Options may be granted,
materially increase the benefits accruing to participants under the Plan,
materially increase the number of securities which may be issued under the Plan,
or materially modify the requirements as to eligibility for participation in the
Plan.
<PAGE>
PAGE 9
9. MISCELLANEOUS
9.1 GOVERNING LAW. This Plan shall be governed by, and construed
in accordance with, the laws of the State of California.
9.2 CONSTRUCTION. In the event any parts of this Plan are found to
be void, the remaining provisions of this Plan shall nevertheless be binding
with the same effect as though the void parts were deleted.
9.3 APPLICATION OF FUNDS. The proceeds received by the Company
from the sale of Stock pursuant to Options will be used for general corporate
purposes.
9.4 NO OBLIGATION TO EXERCISE OPTION. The grant of an Option shall
impose no obligation upon the Optionee to exercise such Option.
9.5 APPROVAL OF STOCKHOLDERS. The Plan shall take effect
immediately upon adoption by the Board of Directors; PROVIDED, HOWEVER, that:
(a) no option shall be issued under the Plan unless and until the subscription
rights provided for in Section 6(a) of the Shareholders Agreement shall have
been waived in accordance with Section 12(h) of the Shareholders Agreement; and
(b) if this Plan is not approved by the stockholders of the Company within the
period beginning twelve (12) months before and ending twelve (12) months after
the date the Plan is adopted by the Board of Directors, no Options granted
hereunder shall constitute Incentive Stock Options. As used herein, the term
"Shareholders Agreement" shall mean that certain Shareholders Agreement, dated
as of August 20, 1997, by and among the Company and its Shareholders (as therein
defined).
BURKE INDUSTRIES, INC.
By: /s/ George A. Sawyer
---------------------
Chairman of the Board
ATTEST:
/s/ Keith E. Oster
- - -------------------
Secretary
<PAGE>
EXHIBIT 10.41
BURKE INDUSTRIES, INC.
INCENTIVE STOCK OPTION AGREEMENT
No. of Shares subject to Option.:_____ . Option No.:_____.
This Agreement dated as of between Burke Industries, Inc., a California
corporation (the "Company"), and (the "Optionee").
W I T N E S S E T H :
1. GRANT OF OPTION.
Pursuant to the provisions of the Burke Industries, Inc. Stock Option
Plan (the "Plan"), the Company hereby grants to the Optionee, subject to the
terms and conditions of the Plan and subject further to the terms and conditions
herein set forth, the right and option to purchase from the Company all or any
part of an aggregate of _________ (____) shares of Common Stock, no par value,
of the Company (the "Shares"), at the purchase price of ________ Dollars
($_______) per Share, such Option to be exercised as hereinafter provided. This
is an Incentive Stock Option, and shall be so construed. All terms defined in
the Plan are used herein as so defined.
2. TERMS AND CONDITIONS.
It is understood and agreed that the Option evidenced hereby is subject
to the following terms and conditions:
2.1 TIME OF EXERCISE OF OPTION.
2.1.1 INSTALLMENT SCHEDULE. This Option may be exercised as
to
(a) twenty-five percent (25%) of the Shares
beginning one (1) year from the Commencement Date;
(b) an additional twenty-five percent (25%) of
the Shares beginning two (2) years from the Commencement Date;
(c) an additional twenty-five percent (25%) of
the Shares beginning three (3) years from the Commencement
Date; and
(d) in full, to the extent not theretofore exercised,
beginning on the earlier of the Change in Control Date or four
(4) years from the Commencement Date.
<PAGE>
BURKE INDUSTRIES, INC.
INCENTIVE STOCK OPTION AGREEMENT
PAGE 2
For purposes of this Option, the Commencement Date is agreed to be
__________________.
2.1.2 EXPIRATION DATE. This Option shall expire absolutely
ten (10) years from the date hereof.
2.1.3 EXERCISE UPON TERMINATION OF EMPLOYMENT. If the
Optionee shall cease to be employed by the Company or a Parent or Subsidiary for
any reason other than the Optionee's death or disability (within the meaning of
Section 105(d)(4) of the Code), this Option, to the extent not then exercisable
in accordance with its terms, shall terminate and be without further effect. To
the extent this Option is exercisable on the date of termination of employment,
it may be exercised at any time within thirty (30) days after such date by the
Optionee or, in case of the subsequent death of the Optionee, then by the
executors or administrators of the Optionee's estate or by any person or persons
who shall have acquired the Option directly from the Optionee by bequest or
inheritance, and this Option, to the extent not exercised, shall in all events
terminate upon the expiration of such thirty (30) day period or, if earlier, ten
(10) years from the date hereof.
2.1.4 EXERCISE UPON LOSS OF PARENT OR SUBSIDIARY STATUS. If
the Optionee ceases to be employed by the Company or a Parent or Subsidiary by
reason of the employer of the Optionee ceasing to be a Parent or Subsidiary of
the Company, then this Option, to the extent not then exercisable in accordance
with its terms, shall terminate and be without further effect. Within a
reasonable time after such event (not to exceed thirty (30) days), the Company
shall provide written notice to the Optionee of such event (including specific
reference to the provisions of this section). To the extent this Option is
exercisable on the date of such event, it may be exercised at any time within
thirty (30) days after the later of the date of such event or the date of the
notice required by the preceding sentence by the Optionee, or, in case of the
subsequent death of the Optionee, then by the executors or administrators of the
Optionee's estate or by any person or persons who shall have acquired the Option
directly from the Optionee by bequest or inheritance, and this Option, to the
extent not exercised, shall in all events terminate upon the expiration of such
thirty (30) day period, or, if earlier, ten (10) years from the date hereof.
2.1.5 EXERCISE UPON DEATH OR DISABILITY. If the Optionee
shall cease to be employed by the Company or a Parent or Subsidiary by reason of
the Optionee's death or disability, this
<PAGE>
PAGE 3
Option, to the extent not then exercisable in accordance with its terms, shall
terminate and be without further effect. To the extent this Option is
exercisable on the date of death or disability, it may be exercised at any time
within twelve (12) months after the date of death or disability by the Optionee
in case of disability, or in case of the death of the Optionee, then by the
executors or administrators of the Optionee's estate or by any person or persons
who shall have acquired the Option directly from the Optionee by bequest or
inheritance, and this Option, to the extent not exercised, shall in all events
terminate upon the expiration of such twelve (12) month period or, if earlier,
ten (10) years from the date hereof.
2.1.6 ACCELERATION OF EXERCISE DATE. In its sole
discretion, the Board of Directors may accelerate the date or dates on which
this Option may be exercised in whole or in part.
2.2 METHOD OF EXERCISE. This Option may be exercised as follows:
2.2.1 NOTICE OF EXERCISE. The Optionee shall deliver
written notice to the Company specifying the number of Shares as to which the
Option is being exercised.
2.2.2 PAYMENT OF PURCHASE PRICE. At the time of any
exercise the purchase price of the shares as to which this Option is being
exercised shall be paid to the Company in cash or good check, or if approved by
the Board of Directors, by the delivery of Shares previously owned by the
Employee, duly endorsed for transfer to the Company, with a fair market value
(as determined by the Board of Directors) on the date of delivery equal to the
aggregate purchase price of the Shares with respect to which the Option is being
exercised, or by the delivery of a recourse promissory note bearing interest at
such rate, or on such other terms and in form and with security satisfactory to
the Company, or any combination of the foregoing approved by the Board of
Directors, in its sole discretion. Notation of any partial exercise shall be
made by the Company on Schedule I hereto.
2.2.3 RESTRICTIONS ON TRANSFER/RIGHT OF REPURCHASE;
INVESTMENT REPRESENTATION. Prior to the issuance of any shares upon the exercise
of all or any part of this Option, the Company may require the person exercising
the Option to execute, become a party to, and subject such shares to
restrictions in accordance with the terms of a Stockholders' Agreement dated as
of August 20, 1997 among the Company and all or substantially all the persons
who
<PAGE>
PAGE 4
are stockholders owning shares of Common Stock of the Company as of the date of
this Option, as such agreement may be amended and/or restated and in effect at
the time of each exercise of this Option. If the Company so requires, the
certificate or certificates evidencing the shares issued upon the exercise of
all or any part of this Option shall be legended in accordance with said
agreement.
2.3 NONTRANSFERABILITY. This Option shall not be transferable
except by will or by the laws of descent and distribution. During the lifetime
of the Optionee, this Option shall be exercisable only by the Optionee.
2.4 ADJUSTMENTS. In the event of any change in the Stock of the
Company by reason of any stock dividend, recapitalization, reorganization,
merger, consolidation, split-up, combination or exchange of shares, or any
similar change affecting the Stock, then in any such event the number and kind
of shares subject to this Option and their purchase price per share may be
adjusted pursuant to Section 5.12 of the Plan, in such manner as the Board of
Directors may in its sole discretion deem equitable. Any adjustment so made
shall be final and binding upon the Optionee.
2.5 NO RIGHTS AS STOCKHOLDER. The Optionee shall have no rights as
a stockholder with respect to any shares of Stock subject to this Option prior
to the date of issuance to the Optionee of a certificate or certificates for
such shares.
2.6 COMPLIANCE WITH LAW AND REGULATIONS. This Option and the
obligation of the Company to sell and deliver shares hereunder shall be subject
to all applicable federal and state laws, rules and regulations and to such
approvals by any government or regulatory agency as may be required. The Company
shall not be required to issue or deliver any certificates for shares of Stock
if the Company determines that such issue or delivery would (a) require any
registration or qualification of such shares under any federal or state law, or
any rule or regulation of any government body which the Company shall, in its
sole discretion, determine to be applicable; (b) require the commencement of the
filing by the Company of periodic reports pursuant to the Securities Exchange
Act of 1934, or (c) violate any law or governmental regulation. If at any time
the Board of Directors in its discretion determines that the listing,
registration of qualification of the shares subject to this Option upon any
securities exchange or under any law or regulation, or the consent or approval
of any government regulatory body is necessary or desirable as a condition of,
or in connection with, the issue or purchase of shares hereunder, this Option
may not be exercised in whole or in part
<PAGE>
PAGE 5
unless such listing, registration, qualification, consent or approval shall have
been effected or obtained free of any conditions not acceptable to the Board of
Directors.
2.7 WITHHOLDING TAXES. Whenever under this Option shares are to be
issued or cash is to be paid, the Company shall have the right to require the
recipient to remit to the Company an amount sufficient to satisfy federal, state
and local withholding tax requirements prior to the delivery of any certificate
or certificates for such shares or payment of such cash.
2.8 MODIFICATION, EXTENSION AND RENEWAL. Subject to the terms and
conditions and within the limitations of the Plan, the Board of Directors may
modify, extend or renew this Option, or accept the surrender hereof (to the
extent not theretofore exercised) and authorize the granting of a new Option or
Options in substitution therefor (to the extent not theretofore exercised).
Notwithstanding the foregoing, no modification of this Option shall, without the
consent of the Optionee, alter or impair any rights or obligations under any
Option theretofore granted under the Plan.
2.9 TERMINATION. The Company hereby reserves the right to
terminate this Option in connection with any Change in Control for a payment in
cash equal to the difference between the Exercise Price for the shares of Stock
subject to the Option and the Change in Control Price of such Stock.
2.10 PARACHUTE PAYMENTS. In the event that the aggregate present
value of the payments to the Employee under this Agreement, and any other plan,
program, or arrangement maintained by the Company or a Subsidiary, constitutes
an "excess parachute payment" (within the meaning of Section 280G(b)(1) of the
Code) and the excise tax on such payment would cause the net parachute payments
(after taking into account federal, state and local income and excise taxes) to
which the Employee otherwise would be entitled to be less than what the Employee
would have netted (after taking into account federal, state and local income
taxes) had the present value of the Employee's total parachute payments equaled
One Dollar ($1.00) less than three (3) times the Employee's "base amount"
(within the meaning of Code Section 280(G)(b)(3)(A)), the Employee's total
"parachute payments" (within the meaning of Code Section 280G(b)(2)(A)) shall be
reduced (by the minimum possible amount) so that their aggregate present value
equals One Dollar ($1.00) less than three (3) times such base amount. For
purposes of this calculation, it shall be assumed that the Employee's tax rate
will be the maximum marginal federal, state and local income tax rate on
<PAGE>
PAGE 6
earned income, with such maximum federal rate to be computed with regard to Code
Section 1(g), if applicable. In the event that the Employee and the Company are
unable to agree as to the amount of the reduction described above, if any, the
Employee shall select a law firm or accounting firm from among those regularly
consulted (during the twelve (12) month period immediately prior to the change
in control that resulted in the characterization of the payments as parachute
payments) by the Company regarding federal income tax or employee benefit
matters, and such law firm or accounting firm shall determine the amount of such
reduction and such determination shall be final and binding upon the Employee
and the Company.
3. REPRESENTATIONS AND OBLIGATIONS OF OPTIONEE.
In consideration of the grant of this Option, the Optionee hereby
represents and agrees as follows:
3.1 OPTIONEE BOUND BY PLAN. Optionee hereby acknowledges receipt
of a copy of the Plan and agrees to be bound by all the terms and provisions
thereof. Any term used herein with the first letter of such term capitalized
shall have the same meaning as in the Plan.
3.2 INVESTMENT REPRESENTATION. Optionee hereby represents that any
shares purchased pursuant to this Option will be acquired for the Optionee's own
account for investment and not with a view to, or for the offer or sale in
connection with, the distribution of any such shares.
3.3 BEST EFFORTS. Optionee agrees to use his or her best efforts
for the benefit of the Company during his or her employment or other
relationship with the Company.
3.4 RESTRICTIONS. The Optionee agrees that any shares of Stock
acquired pursuant to exercise of this Option shall be subject to rights of
repurchase and other restrictions as contemplated by Section 2.2.3 of this
Agreement.
3.5 NO RIGHTS TO CONTINUED EMPLOYMENT. The Optionee acknowledges
that neither any of the terms and provisions of the Plan or this Agreement nor
the grant of this option to the Optionee shall be construed to give to the
Optionee any rights to continued employment with the Company or a Parent or
Subsidiary thereof, or to give to the Optionee any rights whatsoever in
connection with such employment, except as expressly provided in the Plan or
this
<PAGE>
PAGE 7
Agreement. Except as may otherwise be provided in a written agreement
between the Optionee and the Company or a Parent or Subsidiary, the Optionee is
an employee at will, and each party to the employment relation has a right to
terminate such employment at any time and for any reason, or for no reason at
all.
4. NOTICES.
Notices delivered pursuant to this Agreement shall be in writing, and
shall be deemed to have been duly given when (a) delivered by hand; (b) sent by
facsimile (with receipt confirmed), provided that a copy is promptly thereafter
mailed by first-class prepaid certified mail, return receipt requested; (c)
received by the addressee, if sent with delivery receipt requested by Express
Mail, Federal Express, other express delivery service or first-class prepaid
certified mail, in each case to the appropriate addresses and facsimile numbers
set forth below, or to such other address(es) or facsimile number(s) as a party
may designate as to itself by notice to the other party.
(a) If to the Company:
Burke Industries, Inc.
2250 South Tenth Street
San Jose, CA 95112
Facsimile: (408) 280-0699
Attention: Mr. Rocco C. Genovese
with a copy sent by any of the foregoing methods
simultaneously to:
George A. Sawyer
c/o J.F. Lehman & Company
2001 Jefferson Davis Highway, Suite 607
Arlington, VA 22202
Facsimile: (703) 418-6099
(b) If to the Optionee:
To the latest home address as shown on the Company's
personnel records
subject to the right of either party to designate at any time hereafter in
writing some other address.
5. COUNTERPARTS.
<PAGE>
PAGE 8
This Agreement has been executed in two counterparts each of which
shall constitute one and the same instrument.
IN WITNESS WHEREOF, Burke Industries, Inc. has caused this Agreement to
be executed by its President or a Senior Vice President or a Vice President and
Optionee has executed this Agreement, both as of the day and year first above
written.
BURKE INDUSTRIES, INC.
By: ______________________________
OPTIONEE
___________________________________
<PAGE>
PAGE 9
SCHEDULE I
TO
BURKE INDUSTRIES, INC.
INCENTIVE STOCK OPTION AGREEMENT DATED ____________ ___, 1999 (THE "AGREEMENT")
BY AND BETWEEN
BURKE INDUSTRIES, INC. (THE "COMPANY")
AND
_____________________ (THE "OPTIONEE")
WHEREAS, the Optionee has this day delivered to the Company written
notice of partial exercise of the Option granted by the Agreement; and
WHEREAS, in accordance with Section 2.2.1 of the Agreement, said
written notice specified that the number of Shares as to which the Option is
being exercised is _______________ Shares; and
WHEREAS, Section 2.2.1 of the Agreement requires that notation of any
partial exercise of the Option be made on this Schedule I to the Agreement;
NOW, THEREFORE, it is hereby acknowledged and agreed that the Option
granted by the Agreement has this day been exercised as to ____________ Shares.
IN WITNESS WHEREOF, Burke Industries, Inc. has caused this Schedule to
be executed by its President or a Vice President and Optionee has executed this
Schedule, both as of the _____day of ______________, _____.
BURKE INDUSTRIES, INC.
By: ______________________________
Its:
OPTIONEE
___________________________________
<PAGE>
EXHIBIT 10.42
EMPLOYMENT AGREEMENT
This Employment Agreement, by and between Theodore M. Clark (Clark) and
Burke Industries, Inc. (Burke) is made and entered into as of the last date
that this Agreement is executed by the parties.
RECITALS
WHEREAS, Burke is a California corporation, with offices and business
operations in the state of California; and
WHEREAS, Burke desires to employ and utilize the services of Clark,
subject to the terms and conditions stated herein; and
WHEREAS, Clark desires to be employed by Burke subject to the terms and
conditions stated herein;
NOW THEREFORE, it is hereby agreed by and between the parties as follows:
1. TERM: This Agreement shall have a term of two (2) years beginning
on January 1, 2000, and ending on December 31, 2001, subject to annual
extensions as hereinafter provided unless earlier terminated in accordance
with the provisions of this Agreement. After December 31, 2001, this
Agreement shall be extended for additional successive one-year terms unless
terminated by either party with not less than 90 days notice.
2. DUTIES OF CLARK: Clark shall be employed as the President and Chief
Executive Officer of Burke. Clark shall assume such duties as are assigned
to him by the Board of Directors of Burke, and shall devote his exclusive and
full-time services, energy and attention to the business of Burke. The scope
of Clark's duties hereunder may be modified from time to time at the
discretion of the Board of Directors of Burke, provided that such modified
duties shall be of the nature customarily performed by a chief executive
officer in a position similar to that held by Clark. Clark shall not be
required to perform the duties required of him under this Agreement at a
location more than fifty (50) miles from the current place of business of
Burke located in Sante Fe Springs, California.
3. COMPENSATION:
A. Burke shall pay Clark a base salary of $300,000 annually. This
base salary may be increased by the Board of Directors of Burke. This salary
shall be paid to Clark in installments on the dates customarily set for the
payment of executive salaries at Burke.
B. Clark shall also receive an annual bonus of up to 100 percent of
his base salary, which annual bonus shall be based upon performance criteria
as agreed by the Board of Directors of Burke and Clark. Clark shall also
participate in any performance based or profit participation programs as may
be established for Burke executives.
<PAGE>
C. Clark shall also be selected by the Board of Directors to
receive options to acquire not less than four (4) percent of the stock of
Burke pursuant to the Burke Industries, Inc. 1997 Stock Option Plan ("The
Plan") that was approved by the shareholders of Burke, which options will be
exercisable within thirty (30) days after the termination of Clark's
employment in accordance with Section 5.10 of The Plan.
4. EMPLOYMENT BENEFITS: Clark shall also be entitled to participate in
any and all employee benefit plans or programs of any nature or kind
whatsoever now existing or that may hereafter be adopted by Burke for its
employees and executives when and as Clark becomes eligible for such
benefits, including, but not limited to, vacations, retirement plans, thrift
plans, medical plans, life insurance plans, disability insurance plans, and
any other employee benefit plans or programs. Notwithstanding the foregoing,
Clark shall be eligible to participate in the medical and disability plan
benefits beginning on January 1, 2000. A copy of the schedule of the current
employee benefit plans is attached to this Agreement. In addition to such
plans, Burke will pay to Clark a monthly automobile allowance for an
automobile of his choosing.
5. COMPENSATION DURING DISABILITY: In the event that Clark shall fail
or be unable to perform his services by reason of illness, or if he should
become incapacitated for a period of more than one (1) month, the
compensation payable to Clark under this Agreement during such illness or
incapacity shall be suspended, this Agreement shall remain in effect and
Clark shall be compensated in accordance with Burke policies then in effect
for exempt employees who become disabled to the extent that Clark has elected
to participate in the programs available under such policies. Full
compensation shall be restored to Clark upon his return to full time
employment, and this Agreement shall not otherwise be affected by such
disability provided, however, that nothing in this Section shall affect
Burke's right to terminate this agreement in accordance with Section 9.B.
6. BUSINESS EXPENSES: Clark shall be authorized to incur reasonable
and customary business expenses, including expenses for entertainment and
travel, in accordance with Burke policies. Clark shall be reimbursed for
itemized accounts of business expenditures presented in accordance with Burke
policies and procedures.
7. SALE, MERGER OR DISSOLUTION: For the purposes of this agreement, a
"Change in Control" of Burke, shall be defined as follows:
A. Any event by which an individual, entity, or group (a "Person"),
other than J.F. Lehman Group which now owns 65% of all shares of Burke,
acquires direct or indirect ownership or control of at least a majority of
the combined voting power of the then outstanding voting shares of Burke; or
B. The consummation of a reorganization, merger or consolidation,
or such other disposition or transfer of a majority of the assets of Burke,
whether in one or more separate transactions, to any Person or Persons not
controlled by J.F. Lehman & Company.
This Agreement shall not be terminated by a Change in Control or by the
voluntary or involuntary dissolution of Burke. In the event of any such
Change in Control or dissolution, the provisions of this Agreement shall be
binding on and inure to the benefit of the surviving or
2
<PAGE>
purchasing business, entity or Person to which such assets or voting
securities shall be transferred.
8. CONFIDENTIAL INFORMATION: Clark agrees not to use or disclose,
either directly or indirectly, any confidential information of Burke, except
as required in the course of his employment with Burke. For the purposes of
this Section 8, the term "Confidential Information" includes information
relating to the processes, products, manufacturing techniques, methodology,
practices, policies, technical plans, computer programs, reports, customer or
employee lists, marketing plans, distribution channels and financial
information which may have been developed by, derived from or obtained in the
course of the business of Burke.
9. TERMINATION:
A. TERMINATION FOR CAUSE: This Agreement may be terminated by
Burke for cause if Clark willfully breaches, grossly neglects, fails or
refuses to perform the duties that he is required to perform hereunder, or
willfully and knowingly discloses confidential information, or fails to
perform the material covenants of this Agreement.
B. TERMINATION ON DISABILITY: If Clark is unable to perform the
essential functions of his position with reasonable accommodation due to any
mental or physical disability, then Burke shall have the right to declare
this Agreement terminated if such disability continues for six (6)
consecutive full calendar months following the expiration of any sick leave
and medical leave available pursuant to any Burke policy.
10. COMPENSATION UPON TERMINATION:
A. TERMINATION FOR CAUSE: If Clark's employment is terminated for
cause, Burke shall pay to Clark his full base salary through the date of
termination at the rate in effect at the time of the termination, and any
unpaid expenses, and any unused earned vacation to the extent required by
law, as well as any life insurance, disability payments or other benefits
then owed to Clark under any benefit plans or programs then maintained by
Burke (the "Accrued Benefits"). Burke shall, thereafter, have no further
obligations to Clark under this Agreement.
B. TERMINATION UPON DEATH OR DISABILITY: If Clark's employment is
terminated by Clark's death or disability (as defined above), Burke shall
(i) continue coverage of Clark's dependents (if any) under all benefit plans
or programs under Section 4 hereof for a period of six (6) months, and (ii) pay
to Clark's estate the accrued portion of any salary and bonus through the
date of termination. Burke shall, thereafter, have no further obligations to
Clark under this Agreement.
C. TERMINATION UPON NOTICE: If Clark's employment is terminated
after December 31, 2001 pursuant to 90 days notice in accordance with
Section 1, Burke shall pay to Clark the salary, expenses and benefits due to
him pursuant to this Agreement through the end of the then current one-year
term, and shall also pay to Clark his full base salary for an additional
twelve (12) months thereafter at the rate in effect at the time of
termination.
11. CONSTRUCTION: This Agreement shall be construed in accordance with
the laws of the State of California. If any provision of this Agreement is
held invalid or unenforceable, the
3
<PAGE>
remainder of this Agreement shall remain in full force and-effect. If any
provision is held invalid or unenforceable with respect to particular
circumstances, it shall nevertheless remain in full force and effect in all
other circumstances. This Agreement shall also be construed according to its
fair meaning and not for or against Clark or Burke regardless of who is
responsible for its preparation in whole or in part.
12. INTEGRATED COMPLETE AGREEMENT: This agreement integrates and
supersedes all other prior and contemporaneous written and oral agreements
and understandings of every character between Clark and Burke and comprises
the entire agreement between Clark and Burke regarding the terms of Clark's
employment. This Agreement may be amended only by a further express written
agreement between Clark and Burke and cannot be amended by informal
discussions or written communications from either party to the other. No
waiver of any rights or obligations under this Agreement shall be deemed to
have occurred unless made in writing signed by the party against whom such
waiver is asserted, and no waiver shall be deemed a waiver of any other or
subsequent rights or obligations. Nothing in this Agreement shall be
construed to limit any amount that Clark is entitled to receive under any
applicable federal or state law or any other written agreement, policy,
program or plan.
13. ARBITRATION: Any controversy or claim arising out of or relating
to this Agreement, or the breach, termination or invalidity thereof, and all
other related claims shall be exclusively and finally settled by arbitration
in accordance with the Labor Arbitration Rules of the American Arbitration
Association, and judgment upon the award rendered by the arbitrator may be
rendered in any court having jurisdiction thereof. Such arbitration shall be
held in Los Angeles or the principal city of the federal judicial district in
which Clark resides as of the date of termination.
14. NOTICES: Any notices to be given hereunder by either party to the
other may be effected either by personal delivery in writing or by mail,
registered or certified, postage prepaid with return receipt requested.
Mailed notices shall be addressed to the parties at the addresses set forth
below, but each party may change his address by written notice in accordance
with this paragraph. Notices delivered personally shall be deemed
communicated as of actual receipt. Mailed notices shall be deemed
communicated as of three (3) days after mailing, as follows:
If to Burke: Burke Industries, Inc.
2250 South Tenth Street
San Jose, CA 95112
If to Clark: Theodore M. Clark
177 Oak Meadow Rd.
Sierra Madre, CA 91024
15. ATTORNEYS' FEES AND COSTS: If any arbitration proceeding or action
at law or in equity is instituted in order to enforce or interpret the terms
of this Agreement or any dispute with respect thereto, then the prevailing
party shall be entitled to an award of reasonable attorneys' fees, costs and
disbursements in addition to any other costs to which he might otherwise be
entitled. An arbitrator shall have the authority to determine the
appropriate amount of attorneys' fees and costs for all arbitration
proceedings.
4
<PAGE>
16. ASSIGNMENT: The rights and obligations of Burke under this
Agreement shall inure to the benefit of, and shall be binding upon, its
successors and assigns. Any successor or assignee of Burke shall be deemed
substituted for Burke under the terms of this Agreement for all purposes.
Successors and assigns shall include, but not be limited to, any Person
acquiring Burke or its assets in a Change in Control. Burke warrants and
represents that any Change in Control to which it is a party shall be
conditioned upon and will not be executed without an agreement by the Person
acquiring Burke or its assets to assume its obligations under this Agreement
and that Burke will use its best efforts to assure that any agreement
involving a Change in Control to which Burke is not a party shall also be so
conditioned.
17. COUNTERPARTS: This agreement may be signed in one or more
counterparts, each of which shall be deemed to be an original.
EXECUTED and made effective this 16th day of September, 1999 at
Glendale, California.
Theodore M. Clark Burke Industries, Inc.
/s/ Theodore M. Clark By: /s/ John Lehman
- - ------------------------------- -----------------------
Its: Chairman
-------------------------
H.R. Committee
5
<PAGE>
EXHIBIT 10.43
[LOGO]
BURKE INDUSTRIES
February 4, 2000
Theodore M. Clark
177 Oak Meadow Road
Sierra Madre, CA 91024
Dear Ted:
This will confirm certain amendments to your Employment Agreement (the
"Agreement"), which was made and entered into as of September 16, 1999. The
purpose of these amendments, which it is agreed shall be effective
retroactively as of November 1, 1999, is to reflect the accelerated pace of
the transition pursuant to which you became President of Burke. Any
capitalized term used herein shall have the meaning assigned to such term in
the Agreement.
In Section 1 of the Agreement, the date "November 1, 1999" shall be
substituted for the date "January 1, 2000" and the date "October 31, 2001"
shall be substituted for the date "December 31, 2000."
In Section 2 of the Agreement, the first sentence shall be deleted and the
following substituted therefor: "Clark shall be employed as the President of
Burke effective as of November 1, 1999, and, in addition, shall assume the
duties of Chief Executive Officer of Burke effective February 1, 2000."
In Section 4 of the Agreement, the date "November 1, 1999" shall be
substituted for the date "January 1, 2000."
In Section 10.C. of the Agreement, the date "October 31, 2001" shall be
substituted for the date "December 31, 2001."
Please acknowledge your acceptance of these amendments by signing both copies
of this letter where indicated below, and returning one signed copy to me.
The duplicate signed copy should be retained for your records.
Your truly, Accepted and Agreed:
/s/ George A. Sawyer /s/ Theodore M. Clark
- - ---------------------------------- ------------------------------
George A. Sawyer Theodore M. Clark
Chairman of the Board
13767 Freeway Drive, Santa Fe Springs, California 90670 - (562) 926-6556
(800) 221-0923 Fax: (562) 926-3710
<PAGE>
EXHIBIT 10.44
EXTENSION AND FIRST AMENDMENT OF LEASE, dated as of January 13, 1994,
by and between RTC PROPERTIES, INC., a New York corporation having an office
at 1185 Avenue of the Americas, Suite 310, New York, New York 10036 ("Lessor")
and MERCER PRODUCTS CO., INC., a New York corporation having an office at
Hackensack Avenue, Building 10, Kearny, New Jersey 07032 ("Lessee").
WITNESSETH:
WHEREAS, Lessor, as lessor, and Lessee, as lessee, entered into a
lease agreement dated as of December 1, 1988 (hereinafter referred to as the
"Lease Agreement"), covering premises including a portion of Building 10 at
the River Terminal Facility, Kearny, New Jersey, as more particularly
described therein (the "Premises"), and
WHEREAS, the Lease Agreement will expire on April 30, 1994; and
WHEREAS, Lessor and Lessee desire to extend the Lease Agreement for
an additional term of one year and, coincident with such extension, to
amend certain other provisions of the Lease Agreement;
NOW, THEREFORE, Lessor and Lessee do hereby agree to the extension of
theLease Agreement and to the amendment of the Lease Agreement as follows:
PARAGRAPH 1. Section 1.01 of the Lease Agreement is hereby
amended by deleting the expiration date "April 30, 1994" and inserting
in its place and stead the date "April 30, 1995".
PARAGRAPH 2. During the one year extension, the Fixed Rent
payable by Lessee pursuant to Section 2.01 shall remain unchanged.
PARAGRAPH 3. Article THIRTY-FOURTH is hereby amended to provide
that the term "Expiration Date originally provided for herein" shall
refer to the Term as extended herein, i.e., April 30, 1995.
PARAGRAPH 4. Unless otherwise provided expressly herein,
initially capitalized terms used herein shall have the same meanings
that they have in the Lease Agreement.
PARAGRAPH 5. Except as modified herein, the provisions of the
Lease Agreement shall continue in full force and effect.
IN WITNESS WHEREOF, Lessor and Lessee have duly executed this Extension
and First Amendment of Lease as of the day and year first above written.
RTC PROPERTIES, INC.
By:
-------------------------------
MERCER PRODUCTS CO., INC.
By: /s/ Thomas S. Keup
-------------------------------
Thomas S. Keup
ATTEST:
By: /s/ Phyllis P. Bartle
-----------------------------
Phyllis P. Bartle
[NOTARY SEAL]
<PAGE>
EXHIBIT 10.45
EXTENSION AND SECOND AMENDMENT OF LEASE, dated as of January 23, 1995,
by and between RTC PROPERTIES, INC., a New York corporation having an
office at 1185 Avenue of the Americas, Suite 310, New York, New York 10036
("Lessor") and MERCER PRODUCTS CO., INC., a New York corporation having an
office at Hackensack Avenue, Building 10, Kearny, New Jersey 07032
("Lessee").
WITNESSETH:
WHEREAS, Lessor, as lessor, and Lessee, as lessee, entered into a
lease agreement dated as of December 1, 1988 as amended by an Extension and
First Amendment of Lease dated as of January 13, 1994 (hereinafter referred to
as the "Lease Agreement"), covering premises including a portion of Building
10 at the River Terminal Facility, Kearny, New Jersey, as more particularly
described therein (the "Premises"); and
WHEREAS, the Lease Agreement will expire on April 30, 1995; and
WHEREAS, Lessor and Lessee desire to extend the Lease Agreement for
an additional term of two years and, coincident with such extension, to
amend certain other provisions of the Lease Agreement;
NOW, THEREFORE, Lessor and Lessee do hereby agree to the extension of
the Lease Agreement and to the amendment of the Lease Agreement as follows:
PARAGRAPH 1. Section 1.01 of the Lease Agreement is hereby
amended by deleting the expiration date "April 30, 1995" and inserting
in its place and stead the date "April 30, 1997".
PARAGRAPH 2. During the two year extension, the Fixed Rent
payable by Lessee pursuant to Section 2.01 shall remain unchanged.
PARAGRAPH 3. Article THIRTY-FOURTH is hereby amended to provide
that the term "Expiration Date originally provided for herein" shall
refer to the Term as extended herein, i.e., April 30, 1997.
PARAGRAPH 4. Unless otherwise provided expressly herein,
initially capitalized terms used herein shall have the same meanings
that they have in the Lease Agreement.
PARAGRAPH 5. Except as modified herein, the provisions of the
Lease Agreement shall continue in full force and effect.
IN WITNESS WHEREOF, Lessor and Lessee have duly executed this Extension
and Second Amendment of Lease as of the day and year first above written.
RTC PROPERTIES, INC.
By: /s/ John Neu
--------------------------------
John Neu
MERCER PRODUCTS CO., INC.
By: /s/ Thomas S. Keup
--------------------------------
Thomas S. Keup
ATTEST:
By: /s/ Phyllis Bartle
----------------------------
Phyllis Bartle
<PAGE>
EXHIBIT 10.46
THIRD AMENDMENT AND EXTENSION OF AGREEMENT OF LEASE
THIS THIRD AMENDMENT AND EXTENSION OF AGREEMENT OF LEASE, dated as
of March 26, 1997, by and between RTC PROPERTIES, INC., A NEW YORK
CORPORATION, with offices at 100 Central Avenue, South Kearny, New Jersey
07032, (herein called "Lessor"), and MERCER PRODUCTS CO., INC., A NEW YORK
CORPORATION, with offices at Building 10, Hackensack Avenue, South Kearny, New
Jersey 07032, (herein called "Lessee").
WITNESSETH:
WHEREAS, Lessor and Lessee entered into an Agreement of Lease dated as
of December 1, 1988, covering premises known as Building 10, Hackensack
Avenue, South Kearny, New Jersey, also known as Lot 20 in Block 294 on the
current Tax Map of the Town of Kearny. The land and building are a part of an
industrial park (the "Facility"), known and designated as Lots 20, 12, 13 and
14 in Block 294 on the said current Tax Map;
WHEREAS, Lessor and Lessee entered into an Extension and First Amendment
of Lease dated as of January 13, 1994, extending the term "Expiration Date"
from April 30, 1994 to April 30, 1995;
WHEREAS, Lessor and Lessee entered into an Extension and Second
Amendment of Agreement of Lease dated as of January 23, 1995, extending the
"Expiration Date" from April 30, 1995 to April 30, 1997;
WHEREAS, Lessor and Lessee desire to extend the term of the Lease for
three (3) years, from April 30, 1997 to April 30, 2000;
<PAGE>
WHEREAS, Lessor and Lessee further desire to add 10,000 square feet
of contiguous space to the Premises covered by the said Agreement of Lease
and First and Second Amendments of Agreement of Lease;
WHEREAS, Lessor and Lessee have agreed to other terms and conditions as
set forth herein;
WHEREAS, Lessor and Lessee desire to let said Agreement of Lease dated
as of December 1, 1988, said Extension and First Amendment of Agreement of
Lease dated as of January 13, 1994, and Extension and Second Amendment of
Agreement of Lease dated as of January 23, 1995, remain in full force and
effect as to all terms and conditions contained therein and to the original
Premises known as Building 10B and the additional 10,000 square feet of
contiguous space;
NOW, THEREFORE, Lessor and Lessee do hereby extend and amend the
Agreement of Lease as follows:
1. PREMISES. Lessor is the owner of the land and building which is part
of an industrial park known and designated as Lots 12 and 20 in Block 294 on
the Tax Map of the leases to Lessee and Lessee leases from Lessor for the
term, at the rental and upon all of the conditions set forth in said
Agreement of Lease dated as of December 1, 1988, Extension and First
Amendment of Agreement Lease dated as of January 13, 1994, and Extension and
Second Amendment of Agreement of Lease dated as of January 23, 1995, and as
set forth in this said Third Amendment and Extension of Agreement of Lease, a
portion of the land and the Building known as 10B (15,000
<PAGE>
square feet) and an additional 10,000 square feet of contiguous space, for a
total of 25,000 square feet, together with the building equipment attached or
appurtenant thereto, located thereon and used solely in connection with the
operation and maintenance thereof.
2. ARTICLE FIRST -- DEMISE AND TERM OF DEMISE. The term of this Third
Amendment and Extension of Agreement of Lease for the premises (Building 10B
- - -15,000 square feet and 10,000 square feet of contiguous space, for a total
of 25,000 square feet) shall commence on a date sixty (60) days from the date
of the execution of this Third Amendment and Extension of Agreement of Lease,
andexpire on April 30, 2000, unless sooner terminated pursuant to the
provisions of the above-mentioned said Agreements.
3. ARTICLE SECOND -- RENT. Lessee shall pay to Lessor rent for the
promises (Building 10B -- 15,000 square feet and 10,000 square feet
of contiguous space for a total of 25,000 square feet), during the term, over
and above the other and additional payments to be made by Lessee, as
hereinafter provided, or as provided in the Agreement of Lease dated as of
December 1, 1988 or the Extensions and Amendments of Agreements of Lease
mentioned above, and without any offset or deduction, of ONE HUNDRED
FIFTY-FOUR THOUSAND DOLLARS ($154,000.00) per annum, NET (based upon a rate of
$6.16 per square foot per annum NET), payable on the first day of each and
every month during the term. Rent for any period during the term hereof which
is for less than
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one (1) month shall be a pro rata portion of the monthly installment.
Rent shall be payable in lawful money of the United States to Lessor at
the address stated herein or to such other persons or at such other
places as Lessor may designate in writing.
4. ARTICLE THIRD -- TAXES AND ESCALATION RENT. In accordance with the
provisions of Article Third of the Agreement of Lease dated as of December
1, 1988, Lessee shall, as additional rent, pay all charges set forth
thereunder subject to a calculation as set forth in Article Third, but
substituting the square footage of Building 10B -- 15,000 square feet and
10,000 additional continuous square feet, for a total of 25,000 square feet,
for the square footage set forth in said original Agreement of Lease. In
addition, the Proportional Land Impositions shall likewise be adjusted
substituting as numerator the number of square feet of land under the
Premises (Building 10B and the additional 10,000 contiguous square feet) and
the number of square feet of land constituting the parking lot, and the
denominator being the total number of square feet of land comprising the
Land. All other terms and conditions of Article Third shall remain in full
force and effect.
5. ARTICLE FOURTH -- USE OF PREMISES. Lessee shall have the right to
use the Premises (Building 10B and the additional 10,000 contiguous square
feet) for warehousing, distribution and office use incidental thereto, and
for no other purpose, as set forth in Article Fourth of the Agreement of
Lease mentioned
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<PAGE>
above.
6. ARTICLE THIRTY-SECOND -- SECURITY DEPOSIT. Lessee has deposited with
Lessor a sum pursuant to said Agreement of Lease dated as of December 1,
1988. Said sum shall remain deposited with regard to this Third Amendment and
Extension of Lease. All other terms and conditions of Article Thirty-Second
of said Agreement of Lease shall remain in full force and effect.
7. ARTICLE THIRTY-FOURTH -- RENEWAL TERM. Lessor and Lessee agree
that there shall be no further right to extend the term of this Lease beyond
the date set forth herein, namely April 30, 2000.
8. WORK LETTER. Lessor agrees at Lessor's expense to do the
following work at said Premises:
(a) construct a new demising wall between Units 10C and 10B;
(b) create an 8' x 10' opening in the said demising wall.
9. Except as set forth herein, and as amended and extended by this Third
Amendment and Extension of Agreement of Lease, the terms and conditions of
the Agreement of Lease dated as of December 1, 1988, the Extension and First
Amendment of Agreement of Lease dated as of January 13, 1994, and the
Extension and Second Amendment of Agreement of Lease dated as of January 23,
1995, shall continue in full force and effect.
IN WITNESS WHEREOF, Lessor and Lessee have duly executed this
Third Amendment and Extension of Lease as of the day and
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<PAGE>
year first above written.
RTC PROPERTIES, INC.
By:
--------------------------
WITNESS:
- - -------------------------
MERCER PRODUCTS CO., INC.
By: /s/ J.J. Kaziow
---------------------------
J.J. Kaziow
PRESIDENT
WITNESS:
/s/ [ILLEGIBLE]
- - ---------------------------
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<PAGE>
EXHIBIT 10.47
FOURTH AMENDMENT OF LEASE, dated as of April 21, 1998, by and
between RTC PROPERTIES, INC., a New York corporation having an office at 79
Fifth Avenue, Suite 1800, New York, New York 10003 ("Lessor"), and MERCER
PRODUCTS CO., INC., a New Jersey corporation having an office at Building 10,
Hackensack Avenue, Port Kearny, Kearny, New Jersey 07032 ("Lessee").
WITNESSETH:
WHEREAS, Lessor, as lessor, and Lessee, as lessee, entered into a
lease, dated as of December 1, 1988, as amended by an Extension and First
Amendment of Lease dated as of January 13, 1994, an Extension and Second
Amendment of Lease dated as of January 23, 1995 and by a Third Amendment and
Extension of Agreement of Lease, dated as of March 1997 (as amended, the
"Lease) of certain premises including a portion of Building 10 identified as
10B, as more particularly described therein (the "Premises"); and
WHEREAS, Lessor and Lessee desire to amend certain provisions of the
Lease relating to security of Lessee's performance and obligations under the
Lease;
NOW, THEREFORE, Lessor and Lessee do hereby amend the Lease as
follows:
PARAGRAPH 1. Effective immediately, the following shall be deemed
inserted following Section 32.01 of the Lease:
"Section 32.02. In addition to the security deposited with Lessor by
Lessee under Section 32.01, additional security in the sum of $25,000
shall be deposited with Lessor (and maintained throughout the Term) by
Sovereign Specialty Chemicals, L.P. ("SOVEREIGN") for the faithful
performance and observance by Lessee of the terms, covenants and
conditions of this Lease including the payment of any Fixed Rent and
Additional Rent. Said additional security shall be in the form of cash
or a clean, irrevocable bank letter of credit reasonably acceptable to
Lessor in all respects and providing that Lessor may draw upon it at
any time and from time to time in its sole discretion when Lessee is in
default in observing or performing its obligations under this Lease.
Said letter of credit, by its terms, shall be automatically extended
for periods of one year from the present or any future expiration date
thereof, it being the intention of Lessor and SOVEREIGN that at all
times during the Term and the period of sixty (60) days thereafter
Lessor shall be in possession of a letter of credit representing said
additional security in the amount of $25,000, acceptable, as aforesaid,
or the sum of
<PAGE>
$25,000. If Lessee performs all of Lessee's obligations hereunder
the Lease, said additional security deposit, or so much thereof as
has not theretofore been applied by Lessor, shall be returned to
SOVEREIGN at the expiration of the Term hereof, and after Lessee has
vacated the Premises.
Section 32.03. Any cash security deposit provided by SOVEREIGN to
Lessor hereunder shall be deposited by Lessor with a banking
institution in an interest-bearing savings account or certificate of
deposit or similar instrument within a reasonable time after receipt of
such deposit by Lessor. Upon demand of SOVEREIGN (made no more
frequently than once in each calendar year) Lessor shall pay to
SOVEREIGN the interest then held in such savings account or accrued
with respect to such certificate of deposit or other instrument (to the
extent payable by the particular financial institution) as the case may
be, provided that Lessor shall not be obligated to make any such
payment if the additional security, provided by SOVEREIGN under Section
32.02, held by it hereunder would thereby be reduced below the sum of
$25,000. Lessor shall have no duty to obtain any particular rate of
interest and no liability for any loss in connection with the deposit."
PARAGRAPH 2. Unless otherwise expressly provided herein, initially
capitalized terms used herein shall have the same meaning that they have in
the Lease.
PARAGRAPH 3. Except as modified herein, the provisions of the Lease
shall continue in full force and effect.
IN WITNESS WHEREOF, Lessor and Lessee have duly executed this Fourth
Amendment of Lease as of the day and year first above written.
RTC PROPERTIES, INC.
By: /s/ Martin S. Ytuarte
-------------------------
ATTEST: MERCER PRODUCTS CO., INC.
By: /s/ Lou Mintz By: /s/ Keith Oster
------------------------- -------------------------
2
<PAGE>
EXHIBIT 10.48
[Net Lease]
LEASE AGREEMENT
THIS LEASE AGREEMENT is made this 22 day of June 1999, between
PROLOGIS TRUST, ("Landlord"), and the Tenant named below.
TENANT: BURKE INDUSTRIES, INC.
TENANT'S
REPRESENTATIVE, DAVID WORTHINGTON
ADDRESS, AND 2250 SOUTH TENTH STREET
TELEPHONE: SAN JOSE, CA 95112
PREMISES: That portion of the Building, containing
approximately 24,450 rentable square feet, as
determined by Landlord, as shown on Exhibit A.
PROJECT: GREAT SOUTHWEST INDUSTRIAL CENTER #1
BUILDING: GREAT SOUTHWEST INDUSTRIAL CENTER# 1 - 44601A
630 AVENUE K
GRAND PRAIRIE, TX 75050
TENANT'S
PROPORTIONATE
SHARE OF PROJECT: 39.760%
TENANT'S
PROPORTIONATE
SHARE OF BUILDING: 39.760%
LEASE TERM: Beginning on the Commencement Date and ending on
the last day of the 60th full calendar month
thereafter.
COMMENCEMENT DATE: July 15, 1999
INITIAL MONTHLY
BASE RENT: $6,621.88
INITIAL ESTIMATED 1. Amortized Improvements: $107.47
MONTHLY OPERATING
EXPENSE PAYMENTS: 2. Common Area Charges: $570.50
<PAGE>
(estimates only and
subject to 3. Taxes: $1,324.38
adjustment to actual
costs and expenses 4. Insurance: $40.75
according to the
provisions of this 5. Others: MGMT. FEE $203.75
Lease
INITIAL ESTIMATED
MONTHLY OPERATING
EXPENSE PAYMENTS: $2,246.85
INITIAL MONTHLY
BASE RENT AND
OPERATING EXPENSE
PAYMENTS: $8,868.73
SECURITY DEPOSIT: $8,868.73
BROKER: JAMIE WHITE - TRAMMEL CROW COMPANY
ADDENDA: 1. ONE RENEWAL OPTION AT MARKET 2. CONSTRUCTION
(TURNKEY) 3. ASSIGNMENT AND SUBLETTING
EXHIBITS: A. SITE PLAN
1. GRANTING CLAUSE. In consideration of the obligation of Tenant
to pay rent as herein provided and in consideration of the other terms,
covenants, and conditions hereof, Landlord leases to Tenant, and Tenant takes
from Landlord, the Premises, to have and to hold for the Lease Term, subject
to the terms, covenants and conditions of this Lease.
2. ACCEPTANCE OF PREMISES. Tenant shall accept the Premises in
its condition as of the Commencement Date, subject to all applicable laws,
ordinances, regulations, covenants and restrictions. Tenant shall have thirty
(30) days from the commencement date to submit a punchlist of defects in the
Premises to Landlord. Landlord has made no representation or warranty as to
the suitability of the Premises for the conduct of Tenant's business, and
Tenant waives any implied warranty that the Premises are suitable for
Tenant's intended purposes. Except as provided in Paragraph 10, in no event
shall Landlord have any obligation for any defects in the Premises or any
limitation on its use. The taking of possession of the Premises shall be
conclusive evidence that Tenant accepts the Premises and that the Premises
were in good condition at the time possession was taken except for items that
are Landlord's responsibility under Paragraph 10 and any punchlist items
agreed to in writing by Landlord and Tenant.
3. USE. The Premises shall be used only for the purpose of
receiving, storing, shipping and selling (but limited to wholesale sales)
products, materials and merchandise made and/or distributed by Tenant and for
such other lawful purposes as may be incidental thereto; provided, however,
with Landlord's prior written consent, Tenant may also use the Premises for
light manufacturing. Tenant shall not conduct or give notice of any auction,
liquidation, or going
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<PAGE>
out of business sale on the Premises. Tenant will use the Premises in a
careful, safe and proper manner and will not commit waste, overload the floor
or structure of the Premises or subject the Premises to use that would damage
the Premises. Tenant shall not permit any objectionable or unpleasant odors,
smoke, dust, gas, noise, or vibrations to emanate from the Premises, or take
any other action that would constitute a nuisance or would disturb,
unreasonably interfere with, or endanger Landlord or any tenants of the
Project. Outside storage, including without limitation, storage of trucks and
other vehicles, is prohibited without Landlord's prior written consent.
Tenant, at its sole expense, shall use and occupy the Premises in compliance
with all laws, including, without limitation, the Americans With Disabilities
Act, orders, judgments, ordinances, regulations, codes, directives, permits,
licenses, covenants and restrictions now or hereafter applicable to (the
Premises (collectively, "Legal Requirements"). The Premises shall not be used
as a place of public accommodation under the Americans With Disabilities Act
or similar state statutes or local ordinances or any regulations promulgated
thereunder, all as may be amended from time to time. Tenant shall, at its
expense, make any alterations or modifications, within or without the
Premises, that are required by Legal Requirements related to Tenant's use or
occupation of the Premises. Tenant will not use or permit the Premises to be
used for any purpose or in any manner that would void Tenant's or Landlord's
insurance, increase the insurance risk, or cause the disallowance of any
sprinkler credits. If any increase in the cost of any insurance on the
Premises or the Project is caused by Tenant's use or occupation of the
Premises, or because Tenant vacates the Premises, then Tenant shall pay the
amount of such increase to Landlord. Any occupation of the Premises by Tenant
prior to the Commencement Date shall be subject to all obligations of Tenant
under this Lease.
4. BASE RENT. Tenant shall pay Base Rent in the amount set forth
above. The first month's Base Rent, the Security Deposit, and the first
monthly installment of estimated Operating Expenses (as hereafter defined)
shall be due and payable on the date hereof, and Tenant promises to pay to
Landlord in advance, without demand, deduction or set-off, monthly
installments of Base Rent on or before the first day of each calendar month
succeeding the Commencement Date. Payments of Base Rent for any fractional
calendar month shall be prorated. All payments required to be made by Tenant
to Landlord hereunder shall be payable at such address as Landlord may
specify from time to time by written notice delivered in accordance herewith.
The obligation of Tenant to pay Base Rent and other sums to Landlord and the
obligations of Landlord under this Lease are independent obligations. Tenant
shall have no right at any time to abate, reduce, or set-off any rent due
hereunder except as may be expressly provided in this Lease. If Tenant is
delinquent in any monthly installment of Base Rent or of estimated Operating
Expenses for more than 5 days, Tenant shall pay to Landlord on demand a late
charge equal to 5 percent of such delinquent sum. The provision for such late
charge shall be in addition to all of Landlord's other rights and remedies
hereunder or at law and shall not be construed as a penalty.
5. SECURITY DEPOSIT. The Security Deposit shall be held by
Landlord as security for the performance of Tenant's obligations under this
Lease. The Security Deposit is not an advance rental deposit or a measure of
Landlord's damages in case of Tenant's default. Upon each occurrence of an
Event of Default (hereinafter defined), Landlord may use all or part of the
Security Deposit to pay delinquent payments due under this Lease, and the
cost of any damage, injury, expense or liability caused by such Event of
Default, without prejudice to any other remedy provided herein or provided by
law. Tenant shall pay Landlord on demand the amount
3
<PAGE>
that will restore the Security Deposit to its original amount. Landlord's
obligation respecting the Security Deposit is that of a debtor, not a
trustee; no interest shall accrue thereon. The Security Deposit shall be the
property of Landlord, subject to Landlord's obligation to return the Security
Deposit to Tenant provided Tenant is not in default hereunder, and provided
Tenant's obligations under this Lease have been completely fulfilled.
Landlord shall be released from any obligation with respect to the Security
Deposit upon transfer of this Lease and the Premises to a person or entity
assuming Landlord's obligations under this Paragraph 5.
6. OPERATING EXPENSE PAYMENTS. During each month of the Lease
Term, on the same date that Base Rent is due, Tenant shall pay Landlord an
amount equal to 1/12 of the annual cost, as estimated by Landlord from time
to time, of Tenant's Proportionate Share (hereinafter defined) of Operating
Expenses for the Project. Payments thereof for any fractional calendar month
shall be prorated. The term "Operating Expenses" means all costs and expenses
incurred by Landlord with respect to the ownership, maintenance, and
operation of the Project including, but not limited to costs of: Taxes
(hereinafter defined) and fees payable to tax consultants and attorneys for
consultation and contesting taxes; insurance; utilities; maintenance, repair
and replacement of all portions of the Project, including without limitation,
paving and parking areas, roads, roofs, alleys, and driveways, mowing,
landscaping, exterior painting, utility lines, heating, ventilation and air
conditioning systems, lighting, electrical systems and other mechanical and
building systems; amounts paid to contractors and subcontractors for work or
services performed in connection with any of the foregoing; charges or
assessments of any association to which the Project is subject; property
management fees payable to a property manager which are currently 3% of the
gross payables to Landlord, including any affiliate of Landlord, or if there
is no property manager, an administration fee of 15 percent of Operating
Expenses payable to Landlord; security services, if any; trash collection,
sweeping and removal; and additions or alterations made by Landlord to the
Project or the Building in order to comply with Legal Requirements (other
than those expressly required herein to be made by Tenant) or that are
appropriate to the continued operation of the Project or the Building as a
bulk warehouse facility in the market area, provided that the cost of
additions or alterations that are required to be capitalized for federal
income tax purposes shall be amortized on a straight line basis over a period
equal to the lesser of the useful life thereof for federal income tax
purposes or 10 years. Operating Expenses do not include costs, expenses,
depreciation or amortization for capital repairs and capital replacements
required to be made by Landlord under Paragraph 10 of this Lease, debt
service under mortgages or ground rent under ground leases, costs of
restoration to the extent of net insurance proceeds received by Landlord with
respect thereto, leasing commissions, or the costs of renovating space for
tenants.
If Tenant's total payments of Operating Expenses for any year
are less than Tenant's Proportionate Share of actual Operating Expenses for
such year, then Tenant shall pay the difference to Landlord within 30 days
after demand, and if more, then Landlord shall retain such excess and credit
it against Tenant's next payments. For purposes of calculating Tenant's
Proportionate Share of Operating Expenses, a year shall mean a calendar year
except the first year, which shall begin on the Commencement Date, and the
last year, which shall end on the expiration of this Lease. With respect to
Operating Expenses which Landlord allocates to the entire Project, Tenant's
"Proportionate Share" shall be the percentage set forth on the first page of
this Lease as Tenant's Proportionate Share of the Project as reasonably
adjusted by Landlord in the future for changes in the physical size of the
Premises or the Project; and, with respect to
4
<PAGE>
Operating Expenses which Landlord allocates only to the Building, Tenant's
"Proportionate Share" shall be the percentage set forth on the first page of
this Lease as Tenant's Proportionate Share of the Building as reasonably
adjusted by Landlord in the future for changes in the physical size of the
Premises or the Building. Landlord may equitably increase Tenant's
Proportionate Share for any item of expense or cost reimbursable by Tenant
that relates to a repair, replacement, or service that benefits only the
Premises or only a portion of the Project or Building that includes the
Premises or that varies with occupancy or use. The estimated Operating
Expenses for the Premises set forth on the first page of this Lease are only
estimates, and Landlord makes no guaranty or warranty that such estimates
will be accurate.
7. UTILITIES. Tenant shall pay for all water, gas, electricity,
heat, light, power, telephone, sewer, sprinkler services, refuse and trash
collection, and other utilities and services used on the Premises, all
maintenance charges for utilities, and any storm sewer charges or other
similar charges for utilities imposed by any governmental entity or utility
provider, together with any taxes, penalties, surcharges or the like
pertaining to Tenant's use of the Premises. Landlord may cause at Tenant's
expense any utilities to be separately metered or charged directly to Tenant
by the provider. Tenant shall pay its share of all charges for jointly
metered utilities based upon consumption, as reasonably determined by
Landlord. No interruption or failure of utilities shall result in the
termination of this Lease or the abatement of rent. Tenant agrees to limit
use of water and sewer for normal restroom use and normal distribution
warehouse use.
8. TAXES. Landlord shall pay all taxes, assessments and
governmental charges (collectively referred to as "Taxes") that accrue
against the Project during the Lease Term, which shall be included as part of
the Operating Expenses charged to Tenant. Landlord may contest by appropriate
legal proceedings the amount, validity, or application of any Taxes or liens
thereof. All capital levies or other taxes assessed or imposed on Landlord
upon the rents payable to Landlord under this Lease and any franchise tax,
any excise, transaction, sales or privilege tax, assessment, levy or charge
measured by or based, in whole or in part, upon such rents from the Premises
and/or the Project or any portion thereof shall be paid by Tenant to Landlord
monthly in estimated installments or upon demand, at the option of Landlord,
as additional rent; provided, however, in no event shall Tenant be liable for
any net income taxes imposed on Landlord unless such net income taxes are in
substitution for any Taxes payable hereunder. If any such tax or excise is
levied or assessed directly against Tenant, then Tenant shall be responsible
for and shall pay the same at such times and in such manner as the taxing
authority shall require. Tenant shall be liable for all taxes levied or
assessed against any personal property or fixtures placed in the Premises,
whether levied or assessed against Landlord or Tenant.
9. INSURANCE. Landlord shall maintain all risk property insurance
covering the full replacement cost of the Building. Landlord may, but is not
obligated to, maintain such other insurance and additional coverages as it
may deem necessary, including, but not limited to, commercial liability
insurance and rent loss insurance. All such insurance shall be included as
part of the Operating Expenses charged to Tenant. The Project or Building may
be included in a blanket policy (in which case the cost of such insurance
allocable to the Project or Building will be determined by Landlord based
upon the insurer's cost calculations). Tenant shall also reimburse Landlord
for any increased premiums or additional insurance which Landlord reasonably
deems necessary as a result of Tenant's use of the Premises.
5
<PAGE>
Tenant, at its expense, shall maintain during the Lease
Term: all risk property insurance covering the full replacement cost of all
property and improvements installed or placed in the Premises by Tenant at
Tenant's expense; worker's compensation insurance with no less than the
minimum limits required by law; employer's liability insurance with such
limits as required by law; and commercial liability insurance, with a minimum
limit of $1,000,000 per occurrence and a minimum umbrella limit of
$1,000,000, for a total minimum combined general liability and umbrella limit
of $2,000,000 (together with such additional umbrella coverage as Landlord
may reasonably require) for property damage, personal injuries, or deaths of
persons occurring in or about the Premises. Landlord may from time to time
require reasonable increases in any such limits. The commercial liability
policies shall name Landlord as an additional insured, insure on an
occurrence and not a claims-made basis, be issued by insurance companies
which are reasonably acceptable to Landlord, not be cancelable unless 30
days' prior written notice shall have been given to Landlord, contain a
hostile fire endorsement and a contractual liability endorsement and provide
primary coverage to Landlord (any policy issued to Landlord providing
duplicate or similar coverage shall be deemed excess over Tenant's policies).
Such policies or certificates thereof shall be delivered to Landlord by
Tenant upon commencement of the Lease Term and upon each renewal of said
insurance.
The all risk property insurance obtained by Landlord and
Tenant shall include a waiver of subrogation by the insurers and all rights
based upon an assignment from its insured, against Landlord or Tenant, their
officers, directors, employees, managers, agents, invitees and contractors,
in connection with any loss or damage thereby insured against. Neither party
nor its officers, directors, employees, managers, agents, invitees or
contractors shall be liable to the other for loss or damage caused by any
risk coverable by all risk property insurance, and each party waives any
claims against the other party, and its officers, directors, employees,
managers, agents, invitees and contractors for such loss or damage. The
failure of a party to insure its property shall not void this waiver.
Landlord and its agents, employees and contractors shall not be liable for,
and Tenant hereby waives all claims against such parties for, business
interruption and losses occasioned thereby sustained by Tenant or any person
claiming through Tenant resulting from any accident or occurrence in or upon
the Premises or the Project from any cause whatsoever, including without
limitation, damage caused in whole or in part, directly or indirectly, by the
negligence of Landlord or its agents, employees or contractors.
10. LANDLORD'S REPAIRS. Landlord shall maintain, at its expense, the
structural soundness of the roof, foundation, and exterior walls of the Building
in good repair, reasonable wear and tear and uninsured losses and damages caused
by Tenant, its agents and contractors excluded. The term "walls" as used in this
Paragraph 10 shall not include windows, glass or plate glass, doors or overhead
doors, special store fronts, dock bumpers, dock plates or levelers, or office
entries. Tenant shall promptly give Landlord written notice of any repair
required by Landlord pursuant to this Paragraph 10, after which Landlord shall
have a reasonable opportunity to repair. Landlord shall install a new HVAC at
Landlord's expense.
11. TENANT'S REPAIRS. Landlord, at Tenant's expense as provided in
Paragraph 6, shall maintain in good repair and condition the parking areas
and other common areas of the Building, including, but not limited to
driveways, alleys, landscape and grounds surrounding the Premises. Subject to
Landlord's obligation in Paragraph 10 and subject to Paragraphs 9 and 15,
Tenant, at its expense, shall repair, replace and maintain in good condition
all portions of the
6
<PAGE>
Premises and all areas, improvements and systems exclusively serving the
Premises including, without limitation, dock and loading areas, truck doors,
plumbing, water and sewer lines up to points of common connection, fire
sprinklers and fire protection systems, entries, doors, ceilings and roof
membrane (to be maintained by Landlord at Tenant's cost), windows, interior
walls, and the interior side of demising walls, and heating, ventilation and
air conditioning systems. Such repair and replacements include capital
expenditures and repairs whose benefit may extend beyond the Term. Heating,
ventilation and air conditioning systems and other mechanical and building
systems serving the Premises shall be maintained at Tenant's expense pursuant
to maintenance service contracts entered into by Tenant or, at Landlord's
election, by Landlord. The scope of services and contractors under such
maintenance contracts shall be reasonably approved by Landlord. If Tenant
fails to perform any repair or replacement for which it is responsible,
Landlord may perform such work and be reimbursed by Tenant within 10 days
after demand therefor. Subject to Paragraphs 9 and 15, Tenant shall bear the
full cost of any repair or replacement to any part of the Building or Project
that results from damage caused by Tenant, its agents, contractors, or
invitees and any repair that benefits only the Premises.
12. TENANT-MADE ALTERATIONS AND TRADE FIXTURES. Except for
cosmetic alterations, any alterations, additions, or improvements made by or
on behalf of Tenant to the Premises ("Tenant-Made Alterations") shall be
subject to Landlord's prior written consent. Tenant shall cause, at its
expense, all Tenant-Made Alterations to comply with insurance requirements
and with Legal Requirements and shall construct at its expense any alteration
or modification required by Legal Requirements as a result of any Tenant-Made
Alterations. All Tenant-Made Alterations shall be constructed in a good and
workmanlike manner by contractors reasonably acceptable to Landlord and only
good grades of materials shall be used. All plans and specifications for any
Tenant-Made Alterations shall be submitted to Landlord for its approval.
Landlord may monitor construction of the Tenant-Made Alterations. Tenant
shall reimburse Landlord for its costs in reviewing plans and specifications
and in monitoring construction. Landlord's right to review plans and
specifications and to monitor construction shall be solely for its own
benefit, and Landlord shall have no duty to see that such plans and
specifications or construction comply with applicable laws, codes, rules and
regulations. Tenant shall provide Landlord with the identities and mailing
addresses of all persons performing work or supplying materials, prior to
beginning such construction, and Landlord may post on and about the Premises
notices of non-responsibility pursuant to applicable law. Tenant shall
furnish security or make other arrangements satisfactory to Landlord to
assure payment for the completion of all work free and clear of liens and
shall provide certificates of insurance for worker's compensation and other
coverage in amounts and from an insurance company satisfactory to Landlord
protecting Landlord against liability for personal injury or property damage
during construction. Upon completion of any Tenant-Made Alterations, Tenant
shall deliver to Landlord sworn statements setting forth the names of all
contractors and subcontractors who did work on the Tenant-Made Alterations
and final lien waivers from all such contractors and subcontractors. Upon
surrender of the Premises, all Tenant-Made Alterations and any leasehold
improvements constructed by Landlord or Tenant shall remain on the Premises
as Landlord's property, except to the extent Landlord requires removal at
Tenant's expense of any such items or Landlord and Tenant have otherwise
agreed in writing in connection with Landlord's consent to any Tenant-Made
Alterations. Tenant shall repair any damage caused by such removal.
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Tenant, at its own cost and expense and without Landlord's
prior approval, may erect such shelves, bins, machinery and trade fixtures
(collectively "Trade Fixtures") in the ordinary course of its business
provided that such items do not alter the basic character of the Premises, do
not overload or damage the Premises, and may be removed without injury to the
Premises, and the construction, erection, and installation thereof complies
with all Legal Requirements and with Landlord's requirements set forth above.
Tenant shall remove its Trade Fixtures and shall repair any damage caused by
such removal.
13. SIGNS. Tenant shall not make any changes to the exterior of
the Premises, install any exterior lights, decorations, balloons, flags,
pennants, banners, or painting, or erect or install any signs, windows or
door lettering, placards, decorations, or advertising media of any type which
can be viewed from the exterior of the Premises, without Landlord's prior
written consent which shall not be unreasonably withheld. Upon surrender or
vacation of the Premises, Tenant shall have removed all signs and repair,
paint, and/or replace the building facia surface to which its signs are
attached. Tenant shall obtain all applicable governmental permits and
approvals for sign and exterior treatments. All signs, decorations,
advertising media, blinds, draperies and other window treatment or bars or
other security installations visible from outside the Premises shall be
subject to Landlord's approval and conform in all respects to Landlord's
requirements.
14. PARKING. Tenant shall be entitled to park in common with other
tenants of the Project in those areas designated for non-reserved parking.
Landlord may allocate parking spaces among Tenant and other tenants in the
Project if Landlord determines that such parking facilities are becoming
crowded. Landlord shall not be responsible for enforcing Tenant's parking
rights against any third parties.
15. RESTORATION. If at any time during the Lease Term the Premises
are damaged by a fire or other casualty, Landlord shall notify Tenant within
60 days after such damage as to the amount of time Landlord reasonably
estimates it will take to restore the Premises. If the restoration time is
estimated to exceed 6 months, either Landlord or Tenant may elect to
terminate this Lease upon notice to the other party given no later than 30
days after Landlord's notice. If neither party elects to terminate this Lease
or if Landlord estimates that restoration will take 6 months or less, then,
subject to receipt of sufficient insurance proceeds, Landlord shall promptly
restore the Premises excluding the improvements installed by Tenant or by
Landlord and paid by Tenant, subject to delays arising from the collection of
insurance proceeds or from Force Majeure events. Tenant at Tenant's expense
shall promptly perform, subject to delays arising from the collection of
insurance proceeds, or from Force Majeure events, all repairs or restoration
not required to be done by Landlord and shall promptly re-enter the Premises
and commence doing business in accordance with this Lease. Notwithstanding
the foregoing, either party may terminate this Lease if the Premises are
damaged during the last year of the Lease Term and Landlord reasonably
estimates that it will take more than one month to repair such damage. Tenant
shall pay to Landlord with respect to any damage to the Premises the amount
of the commercially reasonable deductible under Landlord's insurance policy
(currently $10,000) within 10 days after presentment of Landlord's invoice.
If the damage involves the premises of other tenants, Tenant shall pay the
portion of the deductible that the cost of the restoration of the Premises
bears to the total cost of restoration, as determined by Landlord. Base Rent
and Operating Expenses shall be abated for the period of repair and
restoration in the proportion which the area of the Premises, if any, which
is not usable by Tenant bears to the total area of the
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Premises. Such abatement shall be the sole remedy of Tenant, and except as
provided herein, Tenant waives any right to terminate the Lease by reason of
damage or casualty loss.
16. CONDEMNATION. If any part of the Premises or the Project
should be taken for any public or quasi-public use under governmental law,
ordinance, or regulation, or by right of eminent domain, or by private
purchase in lieu thereof (a "Taking" or "Taken"), and the Taking would
prevent or materially interfere with Tenant's use of the Premises or in
Landlord's judgment would materially interfere with or impair its ownership
or operation of the Project, then upon written notice by Landlord this Lease
shall terminate and Base Rent shall be apportioned as of said date. If part
of the Premises shall be Taken, and this Lease is not terminated as provided
above, the Base Rent payable hereunder during the unexpired Lease Term shall
be reduced to such extent as may be fair and reasonable under the
circumstances. In the event of any such Taking, Landlord shall be entitled to
receive the entire price or award from any such Taking without any payment
to Tenant, and Tenant hereby assigns to Landlord Tenant's interest, if any,
in such award. Tenant shall have the right, to the extent that same shall not
diminish Landlord's award, to make a separate claim against the condemning
authority (but not Landlord) for such compensation as may be separately
awarded or recoverable by Tenant for moving expenses and damage to Tenant's
Trade Fixtures, if a separate award for such items is made to Tenant.
17. ASSIGNMENT AND SUBLETTING. Without Landlord's prior written
consent, Tenant shall not assign this Lease or sublease the Premises or any
part thereof or mortgage, pledge, or hypothecate its leasehold interest or
grant any concession or license within the Premises and any attempt to do any
of the foregoing shall be void and of no effect. For purposes of this
paragraph, a transfer of the ownership interests controlling Tenant shall be
deemed an assignment of this Lease unless such ownership interests are
publicly traded. Notwithstanding the above, Tenant may assign or sublet the
Premises, or any part thereof, to any entity controlling Tenant, controlled
by Tenant or under common control with Tenant (a "Tenant Affiliate"), without
the prior written consent of Landlord. Tenant shall reimburse Landlord for
all of Landlord's reasonable out-of-pocket expenses in connection with any
assignment or sublease. Upon Landlord's receipt of Tenant's written notice of
a desire to assign or sublet the Premises, or any part thereof (other than to
a Tenant Affiliate), Landlord may, by giving written notice to Tenant within
30 days after receipt of Tenant's notice, terminate this Lease with respect
to the space described in Tenant's notice, as of the date specified in
Tenant's notice for the commencement of the proposed assignment or sublease.
Notwithstanding any assignment or subletting, Tenant and any
guarantor or surety of Tenant's obligations under this Lease shall at all
times remain fully responsible and liable for the payment of the rent and for
compliance with all of Tenant's other obligations under this Lease
(regardless of whether Landlord's approval has been obtained for any such
assignments or sublettings). In the event that the rent due and payable by a
sublessee or assignee (or a combination of the rental payable under such
sublease or assignment plus any bonus or other consideration therefor or
incident thereto) exceeds the rental payable under this Lease, then Tenant
shall be bound and obligated to pay Landlord as additional rent hereunder all
such excess rental and other excess consideration within 10 days following
receipt thereof by Tenant.
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If this Lease be assigned or if the Premises be subleased
(whether in whole or in part) or in the event of the mortgage, pledge, or
hypothecation of Tenant's leasehold interest or grant of any concession or
license within the Premises or if the Premises be occupied in whole or in
part by anyone other than Tenant, then upon a default by Tenant hereunder
Landlord may collect rent from the assignee, sublessee, mortgagee, pledgee,
party to whom the leasehold interest was hypothecated, concessionee or
licensee or other occupant and, except to the extent set forth in the
preceding paragraph, apply the amount collected to the next rent payable
hereunder; and all such rentals collected by Tenant shall be held in trust
for Landlord and immediately forwarded to Landlord. No such transaction or
collection of rent or application thereof by Landlord, however, shall be
deemed a waiver of these provisions or a release of Tenant from the further
performance by Tenant of its covenants, duties, or obligations hereunder.
18. INDEMNIFICATION. Except for the negligence of Landlord, its
agents, employees or contractors, and to the extent permitted by law, Tenant
agrees to indemnify, defend and hold harmless Landlord, and Landlord's
agents, employees and contractors, from and against any and all losses,
liabilities, damages, costs and expenses (including attorneys' fees)
resulting from claims by third parties for injuries to any person and damage
to or theft or misappropriation or loss of property occurring in or about the
Project and arising from the use and occupancy of the Premises or from any
activity, work, or thing done, permitted or suffered by Tenant in or about
the Premises or due to any other act or omission of Tenant, its subtenants,
assignees, invitees, employees, contractors and agents. The furnishing of
insurance required hereunder shall not be deemed to limit Tenant's
obligations under this Paragraph.
19. INSPECTION AND ACCESS. Landlord and its agents,
representatives, and contractors may enter the Premises at any reasonable
time to inspect the Premises and to make such repairs as may be required or
permitted pursuant to this Lease and for any other business purpose. Landlord
and Landlord's representatives may enter the Premises during business hours
for the purpose of showing the Premises to prospective purchasers and, during
the last year of the Lease Term, to prospective tenants. Landlord may erect a
suitable sign on the Premises stating the Premises are available to let or
that the Project is available for sale. Landlord may grant easements, make
public dedications, designate common areas and create restrictions on or
about the Premises, provided that no such easement, dedication, designation
or restriction materially interferes with Tenant's use or occupancy of the
Premises. At Landlord's request, Tenant shall execute such instruments as may
be necessary for such easements, dedications or restrictions.
20. QUIET ENJOYMENT. If Tenant shall perform all of the covenants
and agreements herein required to be performed by Tenant, Tenant shall,
subject to the terms of this Lease, at all times during the Lease Term, have
peaceful and quiet enjoyment of the Premises against any person claiming by,
through or under Landlord.
21. SURRENDER. Upon termination of the Lease Term or earlier
termination of Tenant's right of possession, Tenant shall surrender the
Premises to Landlord in the same condition as received, broom clean, ordinary
wear and tear and casualty loss and condemnation covered by Paragraphs 15 and
16 excepted. Any Trade Fixtures, Tenant-Made Alterations and property not so
removed by Tenant as permitted or required herein shall be deemed abandoned
and may be stored, removed, and disposed of by Landlord at Tenant's expense,
and Tenant waives all claims against Landlord for any damages resulting from
Landlord's retention and
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disposition of such property. All obligations of Tenant hereunder not fully
performed as of the termination of the Lease Term shall survive the
termination of the Lease Term, including without limitation, indemnity
obligations, payment obligations with respect to Operating Expenses and
obligations concerning the condition and repair of the Premises.
22. HOLDING OVER. If Tenant retains possession of the Premises
after the termination of the Lease Term, unless otherwise agreed in writing,
such possession shall be subject to immediate termination by Landlord at any
time, and all of the other terms and provisions of this Lease (excluding any
expansion or renewal option or other similar right or option) shall be
applicable during such holdover period, except that Tenant shall pay Landlord
from time to time, upon demand, as Base Rent for the holdover period, an
amount equal to 150% of the Base Rent in effect on the termination date,
computed on a monthly basis for each month or part thereof during such
holding over. All other payments shall continue under the terms of this
Lease. In addition, Tenant shall be liable for all damages incurred by
Landlord as a result of such holding over. No holding over by Tenant, whether
with or without consent of Landlord, shall operate to extend this Lease
except as otherwise expressly provided, and this Paragraph 22 shall not be
construed as consent for Tenant to retain possession of the Premises.
23. EVENTS OF DEFAULT. Each of the following events shall be an
event of default ("Event of Default") by Tenant under this Lease:
(i) Tenant shall fail to pay any installment of Base Rent
or any other payment required herein when due, and such failure
shall continue for a period of 5 days from the date such payment
was due.
(ii) Tenant or any guarantor or surety of Tenant's
obligations hereunder shall (A) make a general assignment for the
benefit of creditors; (B) commence any case, proceeding or other
action seeking to have an order for relief entered on its behalf as
a debtor or to adjudicate it a bankrupt or insolvent, or seeking
reorganization, arrangement, adjustment, liquidation, dissolution
or composition of it or its debts or seeking appointment of a
receiver, trustee, custodian or other similar official for it or
for all or of any substantial part of its property (collectively a
"proceeding for relief"); (C) become the subject of any proceeding
for relief which is not dismissed within 60 days of its filing or
entry; or (D) die or suffer a legal disability (if Tenant,
guarantor, or surety is an individual) or be dissolved or otherwise
fail to maintain its legal existence (if Tenant, guarantor or
surety is a corporation, partnership or other entity).
(iii) Any insurance required to be maintained by Tenant
pursuant to this Lease shall be cancelled or terminated or shall
expire or shall be reduced or materially changed, except, in each
case, as permitted in this Lease.
(iv) Tenant shall not occupy or shall vacate the Premises
or shall fail to continuously operate its business at the Premises
for the permitted use set forth herein, whether or not Tenant is in
monetary or other default under this Lease.
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(v) Tenant shall attempt or there shall occur any
assignment, subleasing or other transfer of Tenant's interest in or
with respect to this Lease except as otherwise permitted in this
Lease.
(vi) Tenant shall fail to discharge any lien placed upon
the Premises in violation of this Lease within 30 days after any
such lien or encumbrance is filed against the Premises.
(vii) Tenant shall fail to comply with any provision of this
Lease other than those specifically referred to in this Paragraph
23, and except as otherwise expressly provided herein, such default
shall continue for more than 30 days after Landlord shall have
given Tenant written notice of such default.
24. LANDLORD'S REMEDIES. Upon each occurrence of an Event of
Default and so long as such Event of Default shall be continuing, Landlord
may at any time thereafter at its election: terminate this Lease or Tenant's
right of possession, (but Tenant shall remain liable as hereinafter provided)
and/or pursue any other remedies at law or in equity. Upon the termination of
this Lease or termination of Tenant's right of possession, it shall be lawful
for Landlord, without formal demand or notice of any kind, to re-enter the
Premises by summary dispossession proceedings or any other action or
proceeding authorized by law and to remove Tenant and all persons and
property therefrom. If Landlord re-enters the Premises, Landlord shall have
the right to keep in place and use, or remove and store, all of the
furniture, fixtures and equipment at the Premises.
If Landlord terminates this Lease, Landlord may recover from
Tenant the sum of: all Base Rent and all other amounts accrued hereunder to
the date of such termination; the cost of reletting the whole or any part of
the Premises, including without limitation brokerage fees and/or leasing
commissions incurred by Landlord, and costs of removing and storing Tenant's
or any other occupant's property, repairing, altering, remodeling, or
otherwise putting the Premises into condition acceptable to a new tenant or
tenants, and all reasonable expenses incurred by Landlord in pursuing its
remedies, including reasonable attorneys' fees and court costs; and the
excess of the then present value of the Base Rent and other amounts payable
by Tenant under this Lease as would otherwise have been required to be paid
by Tenant to Landlord during the period following the termination of this
Lease measured from the date of such termination to the expiration date
stated in this Lease, over the present value of any net amounts which Tenant
establishes Landlord can reasonably expect to recover by reletting the
Premises for such period, taking into consideration the availability of
acceptable tenants and other market conditions affecting leasing. Such
present values shall be calculated at a discount rate equal to the 90-day
U.S. Treasury bill rate at the date of such termination.
If Landlord terminates Tenant's right of possession (but not
this Lease), Landlord may, but shall be under no obligation to, relet the
Premises for the account of Tenant for such rent and upon such terms as shall
be satisfactory to Landlord without thereby releasing Tenant from any
liability hereunder and without demand or notice of any kind to Tenant. For
the purpose of such reletting Landlord is authorized to make any repairs,
changes, alterations, or additions in or to the Premises as Landlord deems
reasonably necessary or desirable. If the Premises are not relet, then Tenant
shall pay to Landlord as damages a sum equal to the amount
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of the rental reserved in this Lease for such period or periods, plus the
cost of recovering possession of the Premises (including attorneys' fees and
costs of suit), the unpaid Base Rent and other amounts accrued hereunder at
the time of repossession, and the costs incurred in any attempt by Landlord
to relet the Premises. If the Premises are relet and a sufficient sum shall
not be realized from such reletting [after first deducting therefrom, for
retention by Landlord, the unpaid Base Rent and other amounts accrued
hereunder at the time of reletting, the cost of recovering possession
(including attorneys' fees and costs of suit), all of the costs and expense
of repairs, changes, alterations, and additions, the expense of such
reletting (including without limitation brokerage fees and leasing
commissions) and the cost of collection of the rent accruing therefrom] to
satisfy the rent provided for in this Lease to be paid, then Tenant shall
immediately satisfy and pay any such deficiency. Any such payments due
Landlord shall be made upon demand therefor from time to time and Tenant
agrees that Landlord may file suit to recover any sums falling due from time
to time. Notwithstanding any such reletting without termination, Landlord may
at any time thereafter elect in writing to terminate this Lease for such
previous breach.
Exercise by Landlord of any one or more remedies hereunder
granted or otherwise available shall not be deemed to be an acceptance of
surrender of the Premises and/or a termination of this Lease by Landlord,
whether by agreement or by operation of law, it being understood that such
surrender and/or termination can be effected only by the written agreement of
Landlord and Tenant. Any law, usage, or custom to the contrary
notwithstanding, Landlord shall have the right at all times to enforce the
provisions of this Lease in strict accordance with the terms hereof; and the
failure of Landlord at any time to enforce its rights under this Lease
strictly in accordance with same shall not be construed as having created a
custom in any way or manner contrary to the specific terms, provisions, and
covenants of this Lease or as having modified the same. Tenant and Landlord
further agree that forbearance or waiver by Landlord to enforce its rights
pursuant to this Lease or at law or in equity, shall not be a waiver of
Landlord's right to enforce one or more of its rights in connection with any
subsequent default. A receipt by Landlord of rent or other payment with
knowledge of the breach of any covenant hereof shall not be deemed a waiver
of such breach, and no waiver by Landlord of any provision of this Lease
shall be deemed to have been made unless expressed in writing and signed by
Landlord. To the greatest extent permitted by law, Tenant waives the service
of notice of Landlord's intention to re-enter as provided for in any statute,
or to institute legal proceedings to that end, and also waives all right of
redemption in case Tenant shall be dispossessed by a judgment or by warrant
of any court or judge. The terms "enter," "re-enter," "entry" or "re-entry,"
as used in this Lease, are not restricted to their technical legal meanings.
Any reletting of the Premises shall be on such terms and conditions as
Landlord in its sole discretion may determine (including without limitation a
term different than the remaining Lease Term, rental concessions, alterations
and repair of the Premises, lease of less than the entire Premises to any
tenant and leasing any or all other portions of the Project before reletting
the Premises). Landlord shall not be liable, nor shall Tenant's obligations
hereunder be diminished because of, Landlord's failure to relet the Premises
or collect rent due in respect of such reletting.
25. TENANT'S REMEDIES/LIMITATION OF LIABILITY. Landlord shall not
be in default hereunder unless Landlord fails to perform any of its
obligations hereunder within 30 days after written notice from Tenant
specifying such failure (unless such performance will, due to the nature of
the obligation, require a period of time in excess of 30 days, then after
such period of
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time as is reasonably necessary). All obligations of Landlord hereunder shall
be construed as covenants, not conditions; and, except as may be otherwise
expressly provided in this Lease, Tenant may not terminate this Lease for
breach of Landlord's obligations hereunder. All obligations of Landlord under
this Lease will be binding upon Landlord only during the period of its
ownership of the Premises and not thereafter. The term "Landlord" in this
Lease shall mean only the owner, for the time being of the Premises, and in
the event of the transfer by such owner of its interest in the Premises, such
owner shall thereupon be released and discharged from all obligations of
Landlord thereafter accruing, but such obligations shall be binding during
the Lease Term upon each new owner for the duration of such owner's
ownership. Any liability of Landlord under this Lease shall be limited solely
to its interest in the Project, and in no event shall any personal liability
be asserted against Landlord in connection with this Lease nor shall any
recourse be had to any other property or assets of Landlord.
26. WAIVER OF JURY TRIAL. TENANT AND LANDLORD WAIVE ANY RIGHT TO
TRIAL BY JURY OR TO HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE, WHETHER
SOUNDING IN CONTRACT, TORT, OR OTHERWISE, BETWEEN LANDLORD AND TENANT ARISING
OUT OF THIS LEASE OR ANY OTHER INSTRUMENT, DOCUMENT, OR AGREEMENT EXECUTED OR
DELIVERED IN CONNECTION HEREWITH OR THE TRANSACTIONS RELATED HERETO.
27. SUBORDINATION. This Lease and Tenant's interest and rights
hereunder are and shall be subject and subordinate at all times to the lien
of any first mortgage, now existing or hereafter created on or against the
Project or the Premises, and all amendments, restatements, renewals,
modifications, consolidations, refinancing, assignments and extensions
thereof, without the necessity of any further instrument or act on the part
of Tenant. Tenant agrees, at the election of the holder of any such mortgage,
to attorn to any such holder. Tenant agrees upon demand to execute,
acknowledge and deliver such instruments, confirming such subordination and
such instruments of attornment as shall be requested by any such holder.
Notwithstanding the foregoing, any such holder may at any time subordinate
its mortgage to this Lease, without Tenant's consent, by notice in writing to
Tenant, and thereupon this Lease shall be deemed prior to such mortgage
without regard to their respective dates of execution, delivery or recording
and in that event such holder shall have the same rights with respect to this
Lease as though this Lease had been executed prior to the execution, delivery
and recording of such mortgage and had been assigned to such holder. The term
"mortgage" whenever used in this Lease shall be deemed to include deeds of
trust, security assignments and any other encumbrances, and any reference to
the "holder" of a mortgage shall be deemed to include the beneficiary under a
deed of trust.
28. MECHANIC'S LIENS. Tenant has no express or implied authority
to create or place any lien or encumbrance of any kind upon, or in any manner
to bind the interest of Landlord or Tenant in, the Premises or to charge the
rentals payable hereunder for any claim in favor of any person dealing with
Tenant, including those who may furnish materials or perform labor for any
construction or repairs. Tenant covenants and agrees that it will pay or
cause to be paid all sums legally due and payable by it on account of any
labor performed or materials furnished in connection with any work performed
on the Premises and that it will save and hold Landlord harmless from all
loss, cost or expense based on or arising out of asserted claims or liens
against the leasehold estate or against the interest of Landlord in the
Premises or under this Lease. Tenant shall give Landlord immediate written
notice of the placing of any lien or encumbrance
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against the Premises and cause such lien or encumbrance to be discharged
within 30 days of the filing or recording thereof; provided, however, Tenant
may contest such liens or encumbrances as long as such contest prevents
foreclosure of the lien or encumbrance and Tenant causes such lien or
encumbrance to be bonded or insured over in a manner satisfactory to Landlord
within such 30 day period.
29. ESTOPPEL CERTIFICATES. Tenant agrees, from time to time,
within 10 days after request of Landlord, to execute and deliver to Landlord,
or Landlord's designee, any estoppel certificate requested by Landlord,
stating that this Lease is in full force and effect, the date to which rent
has been paid, that Landlord is not in default hereunder (or specifying in
detail the nature of Landlord's default), the termination date of this Lease
and such other matters pertaining to this Lease as may be requested by
Landlord. Tenant's obligation to furnish each estoppel certificate in a
timely fashion is a material inducement for Landlord's execution of this
Lease. No cure or grace period provided in this Lease shall apply to Tenant's
obligations to timely deliver an estoppel certificate. Tenant hereby
irrevocably appoints Landlord as its attorney in fact to execute on its
behalf and in its name any such estoppel certificate if Tenant fails to
execute and deliver the estoppel certificate within 10 days after Landlord's
written request thereof.
30. ENVIRONMENTAL REQUIREMENTS. Except for Hazardous Material
contained in products used by Tenant in de minimis quantities for ordinary
cleaning and office purposes, Tenant shall not permit or cause any party to
bring any Hazardous Material upon the Premises or transport, store, use,
generate, manufacture or release any Hazardous Material in or about the
Premises without Landlord's prior written consent. Tenant, at its sole cost
and expense, shall operate its business in the Premises in strict compliance
with all Environmental Requirements and shall remediate in a manner
satisfactory to Landlord any Hazardous Materials released on or from the
Project by Tenant, its agents, employees, contractors, subtenants or
invitees. Tenant shall complete and certify to disclosure statements as
requested by Landlord from time to time relating to Tenant's transportation,
storage, use, generation, manufacture or release of Hazardous Materials on
the Premises. The term "Environmental Requirements" means all applicable
present and future statutes, regulations, ordinances, rules, codes,
judgments, orders or other similar enactments of any governmental authority
or agency regulating or relating to health, safety, or environmental
conditions on, under, or about the Premises or the environment, including
without limitation, the following: the Comprehensive Environmental Response,
Compensation and Liability Act; the Resource Conservation and Recovery Act;
and all state and local counterparts thereto, and any regulations or policies
promulgated or issued thereunder. The term "Hazardous Materials" means and
includes any substance, material, waste, pollutant, or contaminant listed or
defined as hazardous or toxic, under any Environmental Requirements, asbestos
and petroleum, including crude oil or any fraction thereof, natural gas
liquids, liquified natural gas, or synthetic gas usable for fuel (or mixtures
of natural gas and such synthetic gas). As defined in Environmental
Requirements, Tenant is and shall be deemed to be the "operator" of Tenant's
"facility" and the "owner" of all Hazardous Materials brought on the Premises
by Tenant, its agents, employees, contractors or invitees, and the wastes,
by-products, or residues generated, resulting, or produced therefrom.
Tenant shall indemnify, defend, and hold Landlord harmless
from and against any and all losses (including, without limitation,
diminution in value of the Premises or the Project
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and loss of rental income from the Project), claims, demands, actions, suits,
damages (including, without limitation, punitive damages), expenses
(including, without limitation, remediation, removal, repair, corrective
action, or cleanup expenses), and costs (including, without limitation,
actual attorneys' fees, consultant fees or expert fees and including, without
limitation, removal or management of any asbestos brought into the property
or disturbed in breach of the requirements of this Paragraph 30, regardless
of whether such removal or management is required by law) which are brought
or recoverable against, or suffered or incurred by Landlord as a result of
any release of Hazardous Materials for which Tenant is obligated to remediate
as provided above or any other breach of the requirements under this
Paragraph 30 by Tenant, its agents, employees, contractors, subtenants,
assignees or invitees, regardless of whether Tenant had knowledge of such
noncompliance. The obligations of Tenant under this Paragraph 30 shall
survive any termination of this Lease.
Notwithstanding anything to the contrary in the Paragraph 30,
Tenant shall have no liability of any kind to Landlord as to Hazardous
Materials on the premises caused or permitted by: (i) Landlord, its agents,
employees, contractors or invitees; or (ii) any other tenants in the Project
or their agents, employees, contractors, subtenants, assignees or invitees;
or (iii) any other person or entity located outside of the Premises or the
Project; or (iv) that which existed at the Building. Landlord or Premises
prior to occupancy by Tenant.
Landlord shall have access to, and a right to perform
inspections and tests of, the Premises to determine Tenant's compliance with
Environmental Requirements, its obligations under this Paragraph 30, or the
environmental condition of the Premises. Access shall be granted to Landlord
upon Landlord's prior notice to Tenant and at such times so as to minimize,
so far as may be reasonable under the circumstances, any disturbance to
Tenant's operations. Such inspections and tests shall be conducted at
Landlord's expense, unless such inspections or tests reveal that Tenant has
not complied with any Environmental Requirement, in which case Tenant shall
reimburse Landlord for the reasonable cost of such inspection and tests.
Landlord's receipt of or satisfaction with any environmental assessment in no
way waives any rights that Landlord holds against Tenant.
31. RULES AND REGULATIONS. Tenant shall, at all times during the
Lease Term and any extension thereof, comply with all reasonable rules and
regulations at any time or from time to time established by Landlord covering
use of the Premises and the Project. The current rules and regulations are
attached hereto. In the event of any conflict between said rules and
regulations and other provisions of this Lease, the other terms and
provisions of this Lease shall control. Landlord shall not have any liability
or obligation for the breach of any rules or regulations by other tenants in
the Project.
32. SECURITY SERVICE. Tenant acknowledges and agrees that, while
Landlord may patrol the Project, Landlord is not providing any security
services with respect to the Premises and that Landlord shall not be liable
to Tenant for, and Tenant waives any claim against Landlord with respect to,
any loss by theft or any other damage suffered or incurred by Tenant in
connection with any unauthorized entry into the Premises or any other breach
of security with respect to the Premises.
16
<PAGE>
33. FORCE MAJEURE. Landlord shall not be held responsible for
delays in the performance of its obligations hereunder when caused by
strikes, lockouts, labor disputes, acts of God, inability to obtain labor or
materials or reasonable substitutes therefor, governmental restrictions,
governmental regulations, governmental controls, delay in issuance of
permits, enemy or hostile governmental action, civil commotion, fire or other
casualty, and other causes beyond the reasonable control of Landlord ("Force
Majeure").
34. ENTIRE AGREEMENT. This Lease constitutes the complete
agreement of Landlord and Tenant with respect to the subject matter hereof.
No representations, inducements, promises or agreements, oral or written,
have been made by Landlord or Tenant, or anyone acting on behalf of Landlord
or Tenant, which are not contained herein, and any prior agreements,
promises, negotiations, or representations are superseded by this Lease. This
Lease may not be amended except by an instrument in writing signed by both
parties hereto.
35. SEVERABILITY. If any clause or provision of this Lease is
illegal, invalid or unenforceable under present or future laws, then and in
that event, it is the intention of the parties hereto that the remainder of
this Lease shall not be affected thereby. It is also the intention of the
parties to this Lease that in lieu of each clause or provision of this Lease
that is illegal, invalid or unenforceable, there be added, as a part of this
Lease, a clause or provision as similar in terms to such illegal, invalid or
unenforceable clause or provision as may be possible and be legal, valid and
enforceable.
36. BROKERS. Tenant represents and warrants that it has dealt with
no broker, agent or other person in connection with this transaction and that
no broker, agent or other person brought about this transaction, other than
the broker, if any, set forth on the first page of this Lease, and Tenant
agrees to indemnify and hold Landlord harmless from and against any claims by
any other broker, agent or other person claiming a commission or other form
of compensation by virtue of having dealt with Tenant with regard to this
leasing transaction.
37. MISCELLANEOUS. (a) Any payments or charges due from Tenant to
Landlord hereunder shall be considered rent for all purposes of this Lease.
(b) If and when included within the term "Tenant," as used in
this instrument, there is more than one person, firm or corporation, each
shall be jointly and severally liable for the obligations of Tenant.
(c) All notices required or permitted to be given under this
Lease shall be in writing and shall be sent by registered or certified mail,
return receipt requested, or by a reputable national overnight courier
service, postage prepaid, or by hand delivery addressed to the parties at
their addresses below, and with a copy sent to Landlord at 14100 EAST 35TH
PLACE, AURORA, COLORADO 80011. Either party may by notice given aforesaid
change its address for all subsequent notices. Except where otherwise
expressly provided to the contrary, notice shall be deemed given upon
delivery.
(d) Except as otherwise expressly provided in this Lease or as
otherwise required by law, Landlord retains the absolute right to withhold
any consent or approval.
17
<PAGE>
(e) At Landlord's request from time to time Tenant shall
furnish Landlord with true and complete copies of its most recent annual and
quarterly financial statements prepared by Tenant or Tenant's accountants and
any other financial information or summaries that Tenant typically provides
to its lenders or shareholders.
(f) Neither this Lease nor a memorandum of lease shall be filed
by or on behalf of Tenant in any public record. Landlord may prepare and
file, and upon request by Landlord Tenant will execute, a memorandum of lease.
(g) The normal rule of construction to the effect that any
ambiguities are to be resolved against the drafting party shall not be
employed in the interpretation of this Lease or any exhibits or amendments
hereto.
(h) The submission by Landlord to Tenant of this Lease shall
have no binding force or effect, shall not constitute an option for the
leasing of the Premises, nor confer any right or impose any obligations upon
either party until execution of this Lease by both parties.
(i) Words of any gender used in this Lease shall be held and
construed to include any other gender, and words in the singular number shall
be held to include the plural, unless the context otherwise requires. The
captions inserted in this Lease are for convenience only and in no way
define, limit or otherwise describe the scope or intent of this Lease, or any
provision hereof, or in any way affect the interpretation of this Lease.
(j) Any amount not paid by Tenant within 5 days after its due
date in accordance with the terms of this Lease shall bear interest from such
due date until paid in full at the lesser of the highest rate permitted by
applicable law or 10 percent per year. It is expressly the intent of Landlord
and Tenant at all times to comply with applicable law governing the maximum
rate or amount of any interest payable on or in connection with this Lease.
If applicable law is ever judicially interpreted so as to render usurious any
interest called for under this Lease, or contracted for, charged, taken,
reserved, or received with respect to this Lease, then it is Landlord's and
Tenant's express intent that all excess amounts theretofore collected by
Landlord be credited on the applicable obligation (or, if the obligation has
been or would thereby be paid in full, refunded to Tenant), and the
provisions of this Lease immediately shall be deemed reformed and the amounts
thereafter collectible hereunder reduced, without the necessity of the
execution of any new document, so as to comply with the applicable law, but
so as to permit the recovery of the fullest amount otherwise called for
hereunder.
(k) Construction and interpretation of this Lease shall be
governed by the laws of the state in which the Project is located, excluding
any principles of conflicts of laws.
(l) Time is of the essence as to the performance of Tenant's
obligations under this Lease.
(m) All exhibits and addenda attached hereto are hereby
incorporated into this Lease and made a part hereof. In the event of any
conflict between such exhibits or addenda and the terms of this Lease, such
exhibits or addenda shall control.
18
<PAGE>
38. LANDLORD'S LIEN/SECURITY INTEREST.
[TEXT INTENTIONALLY DELETED]
39. LIMITATION OF LIABILITY OF TRUSTEES, SHAREHOLDERS, AND
OFFICERS OF PROLOGIS TRUST. Any obligation or liability whatsoever of
ProLogis Trust, a Maryland real estate investment trust, which may arise at
any time under this Lease or any obligation or liability which may be
incurred by it pursuant to any other instrument, transaction, or undertaking
contemplated hereby shall not be personally binding upon, nor shall resort
for the enforcement thereof be had to the property of, its trustees,
directors, shareholders, officers, employees or agents, regardless of whether
such obligation or liability is in the nature of contract, tort, or otherwise.
19
<PAGE>
IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease as
of the day and year first above written.
TENANT: LANDLORD:
BURKE INDUSTRIES, INC. PROLOGIS TRUST
By: /s/ Hisham Alameddine By: /s/ Steven K. Meyer
----------------------------- --------------------------
Name: HISHAM ALAMEDDINE Name: STEVEN K. MEYER
Title: VICE PRESIDENT, OPERATIONS Title: MANAGING DIRECTOR
Address Address
2250 SOUTH TENTH STREET 2310 LBJ FREEWAY
SUITE 200
SAN JOSE, CA 95112 DALLAS, TX 75234
20
<PAGE>
RULES AND REGULATIONS
1. The sidewalk, entries, and driveways of the Project shall not
be obstructed by Tenant, or its agents, or used by them for any purpose other
than ingress and egress to and from the Premises.
2. Tenant shall not place any objects, including antennas,
outdoor furniture, etc., in the parking areas, landscaped areas or other
areas outside of its Premises, or on the roof of the Project.
3. Except for seeing-eye dogs, no animals shall be allowed in the
offices, halls, or corridors in the Project.
4. Tenant shall not disturb the occupants of the Project or
adjoining buildings by the use of any radio or musical instrument or by the
making of loud or improper noises.
5. If Tenant desires telegraphic, telephonic or other electric
connections in the Premises, Landlord or its agent will direct the
electrician as to where and how the wires may be introduced; and, without
such direction, no boring or cutting of wires will be permitted. Any such
installation or connection shall be made at Tenant's expense.
6. Tenant shall not install or operate any steam or gas engine or
boiler, or other mechanical apparatus in the Premises, except as specifically
approved in the Lease. The use of oil, gas or inflammable liquids for
heating, lighting or any other purpose is expressly prohibited. Explosives or
other articles deemed extra hazardous shall not be brought into the Project.
7. Parking any type of recreational vehicles is specifically
prohibited on or about the Project. Except for the overnight parking of
operative vehicles, no vehicle of any type shall be stored in the parking
areas at any time. In the event that a vehicle is disabled, it shall be
removed within 48 hours. There shall be no "For Sale" or other advertising
signs on or about any parked vehicle. All vehicles shall be parked in the
designated parking areas in conformity with all signs and other markings. All
parking will be open parking, and no reserved parking, numbering or lettering
of individual spaces will be permitted except as specified by Landlord.
8. Tenant shall maintain the Premises free from rodents, insects
and other pests.
9. Landlord reserves the right to exclude or expel from the
Project any person who, in the judgment of Landlord, is intoxicated or under
the influence of liquor or drugs or who shall in any manner do any act in
violation of the Rules and Regulations of the Project.
10. Tenant shall not cause any unnecessary labor by reason of
Tenant's carelessness or indifference in the preservation of good order and
cleanliness. Landlord shall not be responsible to Tenant for any loss of
property on the Premises, however occurring, or for any damage done to the
effects of Tenant by the janitors or any other employee or person.
21
<PAGE>
11. Tenant shall give Landlord prompt notice of any defects in the
water, lawn sprinkler, sewage, gas pipes, electrical lights and fixtures,
heating apparatus, or any other service equipment affecting the Premises.
12. Tenant shall not permit storage outside the Premises,
including without limitation, outside storage of trucks and other vehicles,
or dumping of waste or refuse or permit any harmful materials to be placed in
any drainage system or sanitary system in or about the Premises.
13. All moveable trash receptacles provided by the trash disposal
firm for the Premises must be kept in the trash enclosure areas, if any,
provided for that purpose.
14. No auction, public or private, will be permitted on the
Premises or the Project.
15. No awnings shall be placed over the windows in the Premises
except with the prior written consent of Landlord.
16. The Premises shall not be used for lodging, sleeping or
cooking or for any immoral or illegal purposes or for any purpose other than
that specified in the Lease. No gaming devices shall be operated in the
Premises.
17. Tenant shall ascertain from Landlord the maximum amount of
electrical current which can safely be used in the Premises, taking into
account the capacity of the electrical wiring in the Project and the Premises
and the needs of other tenants, and shall not use more than such safe
capacity. Landlord's consent to the installation of electric equipment shall
not relieve Tenant from the obligation not to use more electricity than such
safe capacity.
18. Tenant assumes full responsibility for protecting the Premises
from theft, robbery and pilferage.
19. Tenant shall not install or operate on the Premises any
machinery or mechanical devices of a nature not directly related to Tenant's
ordinary use of the Premises and shall keep all such machinery free of
vibration, noise and air waves which may be transmitted beyond the Premises.
22
<PAGE>
ADDENDUM 1
ONE RENEWAL OPTION AT MARKET
ATTACHED TO AND A PART OF THE LEASE AGREEMENT
DATED JUNE 22, 1999, BETWEEN
PROLOGIS TRUST
and
BURKE INDUSTRIES, INC.
(a) Provided that as of the time of the giving of the Extension
Notice and the Commencement Date of the Extension Term, (x) Tenant is the
Tenant originally named herein, (y) Tenant actually occupies all of the
Premises initially demised under this Lease and any space added to the
Premises, and (z) no Event of Default exists or would exist but for the
passage of time or the giving of notice, or both; then Tenant shall have the
right to extend the Lease Term for an additional term of 5 years (such
additional term is hereinafter called the "EXTENSION TERM") commencing on the
day following the expiration of the Lease Term (hereinafter referred to as
the "COMMENCEMENT DATE OF THE EXTENSION TERM"). Tenant shall give Landlord
notice (hereinafter called the "EXTENSION NOTICE") of its election to extend
the term of the Lease Term at least 6 months, but not more than 9 months,
prior to the scheduled expiration date of the Lease Term.
(b) The Base Rent payable by Tenant to Landlord during the
Extension Term shall be the greater of (i) the Base Rent applicable to the
last year of the initial Lease term and (ii) the then prevailing market rate
for comparable space in the Project and comparable buildings in the vicinity
of the Project, taking into account the size of the Lease, the length of the
renewal term, market escalations and the credit of Tenant. The Base Rent
shall not be reduced by reason of any costs or expenses saved by Landlord by
reason of Landlord's not having to find a new tenant for such premises
(including, without limitation, brokerage commissions, costs of improvements,
rent concessions or lost rental income during any vacancy period). In the
event Landlord and Tenant fail to reach an agreement on such rental rate and
execute the Amendment (defined below) at least 3 months prior to the
expiration of the Lease, then Tenant's exercise of the renewal option shall
be deemed withdrawn and the Lease shall terminate on its original expiration
date.
(c) The determination of Base Rent does not reduce the Tenant's
obligation to pay or reimburse Landlord for Operating Expenses and other
reimbursable items as set forth in the Lease, and Tenant shall reimburse and
pay Landlord as set forth in the Lease with respect to such Operating
Expenses and other items with respect to the Premises during the Extension
Term without regard to any cap on such expenses set forth in the Lease.
(d) Except for the Base Rent as determined above, Tenant's
occupancy of the Premises during the Extension Term shall be on the same
terms and conditions as are in effect immediately prior to the expiration of
the initial Lease Term; provided, however, Tenant shall have no further right
to any allowances, credits or abatements or any options to expand, contract,
renew or extend the Lease.
23
<PAGE>
(e) If Tenant does not give the Extension Notice within the period
set forth in paragraph (a) above, Tenant's right to extend the Lease Term
shall automatically terminate. Time is of the essence as to the giving of the
Extension Notice.
(f) Landlord shall have no obligation to refurbish or otherwise
improve the Premises for the Extension Term. The Premises shall be tendered
on the Commencement Date of the Extension Term in "as-is" condition.
(g) If the Lease is extended for the Extension Term, then Landlord
shall prepare and Tenant shall execute an amendment to the Lease confirming
the extension of the Lease Term and the other provisions applicable thereto
(the "Amendment").
(h) If Tenant exercises its right to extend the term of the Lease
for the Extension Term pursuant to this Addendum, the term "Lease Term" as
used in the Lease, shall be construed to include, when practicable, the
Extension Term except as provided in (d) above.
24
<PAGE>
ADDENDUM 2
CONSTRUCTION
(TURNKEY)
ATTACHED TO AND A PART OF THE LEASE AGREEMENT
DATED JUNE 22, 1999, BETWEEN
PROLOGIS TRUST
and
BURKE INDUSTRIES, INC.
(a) Landlord agrees to furnish or perform at Landlord's sole cost
and expense those items of construction and those improvements ("Tenant
Improvements") specified below:
LANDLORD AGGRESS TO INSTALL A CLASS IV WET SPRINKLER IN THE
PREMISES.
(b) If Tenant shall desire any changes, Tenant shall so advise
Landlord in writing and Landlord shall determine whether such changes can be
made in a reasonable and feasible manner. Any and all costs of reviewing any
requested changes, and any and all costs of making any changes to the Tenant
Improvements which Tenant may request and which Landlord may agree to shall
be at Tenant's sole cost and expense and shall be paid to Landlord upon
demand and before execution of the change order.
(c) Landlord shall proceed with and complete the construction of
the Tenant Improvements. As soon as such improvements have been Substantially
Completed, Landlord shall notify Tenant in writing of the date that the
Tenant Improvements were Substantially Completed. Such date, unless an
earlier date is specified as the Commencement Date in this Lease or otherwise
agreed to in writing between Landlord and Tenant, shall be the "Commencement
Date", unless the completion of such improvements was delayed due to any act
or omission of, or delay caused by, Tenant including, without limitation,
Tenant's failure to approve plans, complete submittals or obtain permits
within the time periods agreed to by the parties or as reasonably required by
Landlord, in which case the Commencement Date shall be the date such
improvements would have been completed but for the delays caused by Tenant.
The Tenant Improvements shall be deemed substantially completed
("Substantially Completed") when, in the opinion of the construction manager
(whether an employee or agent of Landlord or a third party construction
manager), the Premises are substantially completed except for punch list
items which do not prevent in any material way the use of the Premises for
the purposes for which they were intended. After the Commencement Date Tenant
shall, upon demand, execute and deliver to Landlord a letter of acceptance of
delivery of the Premises.
(d) The failure of Tenant to take possession of or to occupy the
Premises shall not serve to relieve Tenant of obligations arising on the
Commencement Date or delay the payment of rent by Tenant. Subject to
applicable ordinances and building codes governing Tenant's right to occupy
or perform in the Premises, Tenant shall be allowed to install its tenant
improvements, machinery, equipment, fixtures, or other property on the
Premises during the final stages of completion of construction provided that
Tenant does not thereby interfere with the completion of construction or
cause any labor dispute as a result of such installations, and provided
further
25
<PAGE>
that Tenant does hereby agree to indemnify, defend, and hold Landlord
harmless from any loss or damage to such property, and all liability, loss,
or damage arising from any injury to the Project or the property of Landlord,
its contractors, subcontractors, or materialmen, and any death or personal
injury to any person or persons arising out of such installations, whether or
not any such loss, damage, liability, death, or personal injury was caused by
Landlord's negligence. Any such occupancy or performance in the Premises
shall be in accordance with the provisions governing Tenant-Made Alterations
and Trade Fixtures in the Lease, and shall be subject to Tenant providing to
Landlord satisfactory evidence of insurance for personal injury and property
damage related to such installations and satisfactory payment arrangements
with respect to installations permitted hereunder. Delay in putting Tenant in
possession of the Premises shall not serve to extend the term of this Lease
or to make Landlord liable for any damages arising therefrom.
(e) Except for incomplete punch list items, Tenant upon the
Commencement Date shall have and hold the Premises as the same shall then be
without any liability or obligation on the part of Landlord for making any
further alterations or improvements of any kind in or about the Premises.
26
<PAGE>
ADDENDUM 3
ASSIGNMENT AND SUBLETTING
ATTACHED TO AND A PART OF THE LEASE AGREEMENT
DATED JUNE 22, 1999, BETWEEN
PROLOGIS TRUST
and
BURKE INDUSTRIES, INC.
(a) Landlord shall not unreasonably withhold its consent to
Tenant's request for permission to assign the Lease or sublease all or part
of the Premises. It shall be reasonable for the Landlord to withhold its
consent to any assignment or sublease in any of the following instances:
(i) The assignee or sublessee does not have a net worth
calculated according to generally accepted accounting principles at
least equal to the greater of the net worth of Tenant immediately
prior to such assignment or sublease or the net worth of the Tenant
at the time it executed the Lease;
(ii) The intended use of the Premises by the assignee or
sublessee is not reasonably satisfactory to Landlord;
(iii) The intended use of the Premises by the assignee or
sublessee would materially increase the pedestrian or vehicular
traffic to the Premises or the Project;
(iv) Occupancy of the Premises by the assignee or sublessee
would, in Landlord's opinion, violate any agreement binding upon
Landlord or the Project with regard to the identity of tenants,
usage in the Project, or similar matters;
(v) The identity or business reputation of the assignee or
sublessee will, in the good faith judgment of Landlord, tend to
damage the goodwill or reputation of the Project;
(vi) The assignment or sublet is to another tenant in the
Project and is at rates which are below those charged by Landlord
for comparable space in the Project;
(vii) In the case of a sublease, the subtenant has not
acknowledged that the Lease controls over any inconsistent
provision in the sublease; or
(viii) The proposed assignee or sublessee is a government
entity.
The foregoing criteria shall not exclude any other reasonable basis for
Landlord to refuse its consent to such assignment or sublease.
(b) Any approved assignment or sublease shall be expressly subject
to the terms and conditions of this Lease.
27
<PAGE>
(c) Tenant shall provide to Landlord all information concerning
the assignee or sublessee as Landlord may request.
(d) Landlord may revoke its consent immediately and without notice
if, as of the effective date of the assignment or sublease, there has
occurred and is continuing any default under the Lease.
(e) Landlord's agreement to not unreasonably withhold its consent
shall only apply to the first assignment or sublease under the Lease.
28
<PAGE>
EXHIBIT A
GS W INDUSTRIAL CENTER BUILDING #1
630 AVENUE K, GRAND PRAIRIE, TEXAS
[Site Map]
29
<PAGE>
EXHIBIT 12.1
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
AND COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------------------
1995 1996 1997 1998 1999
--------- --------- --------- -------- -------
<S> <C> <C> <C> <C> <C>
Interest expense...... $3,039 $ 2,771 $ 5,900 $14,062 $14,888
Estimated interest
portion of rent
expense............. 335 381 468 694 913
------ ------- ------- ------- -------
Fixed charges......... $3,374 $ 3,152 $ 6,368 $14,756 $15,801
------ ------- ------- ------- -------
------ ------- ------- ------- -------
Income (loss) before
income taxes........ $5,966 $ 8,499 $(5,761) 190 $(5,453)
Fixed charges......... 3,374 3,152 6,368 14,756 15,801
Less: interest
charges capitalized.. (30) (19) (29) (13) (2)
------ ------- ------- ------- -------
Earnings ............. $9,310 $11,632 $ 578 $14,933 $10,346
------ ------- ------- ------- -------
------ ------- ------- ------- -------
Ratio of earnings to
fixed charges(A).... 2.8x 3.7x -- 1.0x --
------ ------- ------- ------- -------
------ ------- ------- ------- -------
</TABLE>
- - ------------------------
(A) Earnings were insufficient to cover fixed charges by $5,455 in
fiscal year 1999. (1997 = $5,790)
<PAGE>
EXHIBIT 21.1
<TABLE>
<CAPTION>
Jurisdiction of
Name Incorporation
- - ---- ---------------
<S> <C>
Burke Flooring Products, Inc. California
Burke Rubber Company, Inc. California
Burke Custom Processing, Inc. California
Burkeline Construction Company, Inc. California
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 348
<SECURITIES> 0
<RECEIVABLES> 14,285
<ALLOWANCES> 658
<INVENTORY> 15,585
<CURRENT-ASSETS> 31,573
<PP&E> 35,489
<DEPRECIATION> 14,464
<TOTAL-ASSETS> 87,034
<CURRENT-LIABILITIES> 17,225
<BONDS> 140,000
20,536
3,000
<COMMON> 25,708
<OTHER-SE> (122,936)
<TOTAL-LIABILITY-AND-EQUITY> 87,034
<SALES> 107,504
<TOTAL-REVENUES> 107,504
<CGS> 78,288
<TOTAL-COSTS> 78,288
<OTHER-EXPENSES> 19,615
<LOSS-PROVISION> 233
<INTEREST-EXPENSE> 14,821
<INCOME-PRETAX> (5,453)
<INCOME-TAX> 921
<INCOME-CONTINUING> (6,374)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,374)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
