<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 26, 1997
REGISTRATION NO. 333-36675
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
BURKE INDUSTRIES, INC.
AND OTHER REGISTRANTS
(See Table of Other Registrants Below)
(Exact name of each registrant as specified in its charter)
<TABLE>
<S> <C> <C>
CALIFORNIA 3069 94-3081144
(State of Incorporation or (Primary standard industrial (I.R.S. employer
organization) classification code number) identification number)
</TABLE>
------------------------
2250 SOUTH TENTH STREET
SAN JOSE, CALIFORNIA 95112
(408) 297-3500
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
------------------------------
ROCCO C. GENOVESE
BURKE INDUSTRIES, INC.
2250 SOUTH TENTH STREET
SAN JOSE, CALIFORNIA 95112
(408) 297-3500
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
------------------------------
WITH A COPY TO:
KENNETH M. DORAN, ESQ.
GIBSON, DUNN & CRUTCHER LLP
333 SOUTH GRAND AVENUE
LOS ANGELES, CALIFORNIA 90071
(213) 229-7000
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PER UNIT(1) PRICE(1) FEE
<S> <C> <C> <C> <C>
10% Senior Notes due 2007 $110,000,000 100% $110,000,000 $33,333.33
Guarantees of the 10% Notes due 2007 $110,000,000 None(2) None(2) None(2)
</TABLE>
(1) Estimated solely for the purpose of computing the registration fee pursuant
to Rule 457.
(2) Pursuant to Rule 457(n) under the Securities Act of 1933, no separate fee is
payable for the Guarantees.
------------------------------
THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF OTHER REGISTRANTS
<TABLE>
<CAPTION>
PRIMARY
STANDARD ADDRESS INCLUDING ZIP CODE
JURISDICTION INDUSTRIAL IRS EMPLOYEE AND AREA CODE AND TELEPHONE
OF CLASSIFICATION IDENTIFICATION NUMBER OF THE PRINCIPAL
NAME OF CORPORATION INCORPORATION NUMBER NUMBER EXECUTIVE OFFICES
- ------------------------------------ ------------- ------------ ---------------- ---------------------------
<S> <C> <C> <C> <C>
Burke Flooring Products, Inc. California 3069 94-2157284 2250 South Tenth Street
San Jose, CA 95112
(408) 297-3500
Burke Rubber Company, Inc. California 3069 94-2157283 2250 South Tenth Street
San Jose, CA 95112
(408) 297-3500
Burke Custom Processing, Inc. California 3069 94-2157282 2250 South Tenth Street
San Jose, CA 95112
(408) 297-3500
</TABLE>
<PAGE>
PROSPECTUS
[LOGO]
OFFER TO EXCHANGE ALL OUTSTANDING
10% SENIOR NOTES DUE 2007
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT
(GUARANTEED BY SUBSTANTIALLY ALL OF ITS SUBSIDIARIES)
($110,000,000 PRINCIPAL AMOUNT OUTSTANDING)
FOR 10% SENIOR NOTES DUE 2007
(GUARANTEED BY ALL OF ITS SUBSIDIARIES)
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK
CITY TIME, ON , 1998 (AS SUCH DATE MAY BE EXTENDED, THE "EXPIRATION
DATE").
Burke Industries, Inc., a California corporation (the "Company" or "Burke"),
hereby offers upon the terms and subject to the conditions set forth in this
Prospectus (as the same may be amended or supplemented from time to time, the
"Prospectus") and the accompanying letter of transmittal relating to the Old
Notes (as defined) (the "Notes Letter of Transmittal", which together constitute
the "Exchange Offer"), to exchange $1,000 principal amount of its 10% Senior
Notes due 2007 (the "New Notes") for each $1,000 in principal amount of its
outstanding 10% Senior Notes due 2007 (the "Old Notes") (the Old Notes and the
New Notes are collectively referred to herein as the "Notes"). An aggregate
principal amount of $110,000,000 of Old Notes is outstanding. See "The Exchange
Offer."
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. The Letter of Transmittal states
that by so acknowledging and by delivering a prospectus, a broker-dealer will
not be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. This Prospectus, as it may be amended or supplemented from time
to time, may be used by a broker-dealer in connection with resales of New Notes
received in exchange for Old Notes where such Old Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities. The Company has agreed that, starting on the Expiration Date (as
defined herein) and ending on the close of business 180 days after the
Expiration Date, it will make this Prospectus available to any broker-dealer for
use in connection with any such resale. See "Plan of Distribution."
The Company will accept for exchange any and all Old Notes validly tendered
prior to 5:00 p.m., New York City time, on the Expiration Date. Tenders of Old
Notes may be withdrawn at any time prior to 5:00 p.m., New York City time, on
the Expiration Date. The Exchange Offer is not conditioned upon any minimum
principal amount of the Old Notes being tendered for exchange. However, the
Exchange Offer is subject to the terms and provisions of the Registration Rights
Agreement, dated as of August 20, 1997 (the "Registration Rights Agreement"),
among the Company, the Subsidiary Guarantors (as defined herein), and
NationsBanc Capital Markets, Inc. (the "Initial Purchaser"). The Old Notes may
be tendered only in multiples of $1,000. See "The Exchange Offer."
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 20 HEREIN FOR A DISCUSSION OF CERTAIN
RISKS THAT SHOULD BE CONSIDERED BY HOLDERS IN EVALUATING THE EXCHANGE OFFER.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF OLD NOTES IN ANY JURISDICTION IN WHICH
THE
<PAGE>
EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE WITH THE
SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION.
The date of this Prospectus is , 1997
<PAGE>
The Old Notes were issued in a transaction (the "Prior Offering") pursuant
to which the Company issued an aggregate of $110,000,000 principal amount of the
Old Notes to the Initial Purchaser on August 20, 1997 (the "Closing Date")
pursuant to a Purchase Agreement, dated August 14, 1997 (the "Purchase
Agreement"), among the Company and the Initial Purchaser. The Initial Purchaser
subsequently resold the Old Notes in reliance on Rule 144A under the Securities
Act of 1933, as amended (the "Securities Act"). The Company, the Subsidiary
Guarantors, and the Initial Purchaser also entered into the Registration Rights
Agreement, dated August 20, 1997, pursuant to which the Company granted certain
registration rights for the benefit for the holders of the Old Notes. The
Exchange Offer is intended to satisfy certain of the Company's obligations under
the Registration Rights Agreement with respect to the Old Notes. See "The
Exchange Offer--Purpose and Effect."
The Old Notes were, and the New Notes will be, issued under the Indenture,
dated as of August 20, 1997 (the "Indenture"), among the Company, the Subsidiary
Guarantors, and United States Trust Company of New York, as trustee (the
"Trustee"), and the New Notes and the Old Notes will constitute a single series
of debt securities under the Indenture. The terms of the New Notes are identical
in all material respects to the terms of the Old Notes except that (i) the New
Notes will have been registered under the Securities Act and thus will not bear
restrictive legends restricting their transfer pursuant to the Securities Act
and will not be entitled to registration rights, (ii) holders of New Notes will
not be entitled to liquidated damages for the Company's failure to register the
Old Notes or New Notes under the Registration Rights Agreement, and (iii)
holders of New Notes will not be, and upon the consummation of the Exchange
Offer, holders of Old Notes will no longer be, entitled to certain rights under
the Registration Rights Agreement intended for the holders of unregistered
securities. The Exchange Offer shall be deemed consummated upon the occurrence
of the delivery by the Company to United States Trust Company of New York, as
registrar of the Old Notes (in such capacity, the "Registrar") under the
Indenture, of New Notes in the same aggregate principal amount as the aggregate
principal amount of Old Notes that are validly tendered by holders thereof
pursuant to the Exchange Offer. See "The Exchange Offer--Termination of Certain
Rights," "--Procedures for Tendering Old Notes" and "Description of Notes." In
the event that the Exchange Offer is consummated, any Old Notes which remain
outstanding after consummation of the Exchange Offer and the New Notes issued in
the Exchange Offer will vote together as a single class for purposes of
determining whether holders of the requisite percentage in outstanding principal
amount of Notes have taken certain actions or exercised certain rights under the
Indenture.
The New Notes will bear interest at a rate of 10% per annum. Interest on the
New Notes is payable semiannually, commencing February 15, 1998, on February 15
and August 15 of each year (each, an "Interest Payment Date") and shall accrue
from August 20, 1997 or from the most recent Interest Payment Date with respect
to the Old Notes to which interest was paid or duly provided for. The New Notes
will mature on August 15, 2007. See "Description of Notes."
The New Notes will not be redeemable at the Company's option prior to August
15, 2002. Thereafter, the New Notes will be redeemable by the Company at the
redemption prices and subject to the conditions set forth in "Description of
Notes--Optional Redemption." Notwithstanding the foregoing, 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 New Notes and (ii)
the initial principal amount of any Additional Notes (as defined herein), on one
or more occasions, with the net cash proceeds of one or more Public Equity
Offerings (as defined herein) at a redemption price of 110% of the principal
amount thereof, plus accrued and unpaid interest and Liquidated Damages (as
defined herein), if any, thereon to the redemption date, PROVIDED THAT at least
65% of the sum of (i) the initial aggregate principal amount of the New Notes
and (ii) the initial aggregate principal amount of any Additional Notes remain
outstanding immediately after redemption. See "Description of
Notes--Redemption--Optional Redemption." Upon the occurrence of a Change of
Control (as defined herein), the Company (i) will be required to make an offer
to repurchase all outstanding New Notes at 101% of the principal amount thereof,
plus accrued and unpaid interest thereon, if any, and Liquidated Damages, if
any, to the date of repurchase and (ii) prior to August 15, 2002 will have the
option to redeem the New Notes, in
2
<PAGE>
whole or in part, at a redemption price equal to the principal amount thereof,
plus accrued and unpaid interest, if any, and Liquidated Damages (as defined
herein), if any, to the redemption date plus the Applicable Premium (as defined
herein). See "Description of Notes--Redemption--Optional Redemption Upon Change
of Control" "--Purchase of Notes Upon Change of Control or Asset Sale" and
"--Certain Covenants-- Purchase of Notes Upon Change of Control." Depending upon
the circumstances prevailing at the time of such a Change of Control, there is a
risk that the Company may be unable to satisfy such obligations. See "Risk
Factors--Potential Inability to Fund Change of Control Offer."
The New Notes will be general unsecured obligations of the Company, senior
to all existing and future subordinated indebtedness of the Company and PARI
PASSU in right of payment with all other existing and future unsubordinated
indebtedness of the Company, including indebtedness under the New Credit
Facility (as defined herein). However, the obligations of the Company under the
New Credit Facility will be secured by substantially all of the assets of the
Company. Accordingly, such secured indebtedness will effectively rank senior to
the Notes to the extent of such assets. The Indenture for the Notes restricts,
but does not prohibit, the Company from incurring additional indebtedness. See
"Description of Notes--Ranking." See also "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
The New Notes will be unconditionally guaranteed on a joint and several
basis by three subsidiaries of the Company (the "Note Guarantees"); Burke
Flooring Products, Inc., a California Corporation, Burke Rubber Company, Inc., a
California Corporation, and Burke Custom Processing, Inc., a California
Corporation (collectively the "Subsidiary Guarantors"), on an unsecured, senior
subordinated basis. The Note Guarantees will rank senior to all existing and
future subordinated indebtedness of the Subsidiary Guarantors and PARI PASSU
with all other unsubordinated indebtedness of the Subsidiary Guarantors,
including the guarantees of indebtedness under the New Credit Facility. Any
Subsidiary Guarantor's obligations under the New Credit Facility, however, will
be secured by substantially all of the assets of such Subsidiary Guarantor.
Accordingly, such secured indebtedness will rank prior to the Note Guarantees
with respect to such assets. The Indenture restricts, but does not prohibit, the
Subsidiary Guarantors from incurring additional secured indebtedness. As of the
date of this Prospectus, the Company has no significant subsidiaries. See
"Description of Notes--Note Guarantees."
Based on existing interpretations of the Securities Act by the staff of the
Securities and Exchange Commission (the "Commission") set forth in "no-action"
letters issued to third parties in other transactions, the Company believes that
New Notes issued pursuant to the Exchange Offer to any holder of Old Notes in
exchange for Old Notes may be offered for resale, resold and otherwise
transferred by such holder (other than a broker-dealer who purchased Old Notes
directly from the Company for resale pursuant to Rule 144A under the Securities
Act or any other available exemption under the Securities Act) without
compliance with the registration and prospectus delivery provisions of the
Securities Act, provided that such holder is not an affiliate of the Company, is
acquiring the New Notes in the ordinary course of business and is not
participating, and has no arrangement or understanding with any person to
participate, in the distribution of the New Notes. Holders wishing to accept the
Exchange Offer must represent to the Company, as required by the Registration
Rights Agreement, that such conditions have been met. In addition, if such
holder is not a broker-dealer, it must represent that it is not engaged in, and
does not intend to engage in, a distribution of the New Notes. Each
broker-dealer that receives New Notes as a result of market-making or other
trading activities must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. See "The Exchange Offer--Resales
of the New Notes." For a period of 180 days from the Expiration Date, the
Company will make this Prospectus, as amended or supplement available to any
broker-dealer for use in connection with any such resale. See "Plan of
Disbtribution."
There has previously been only a limited secondary market, and no public
market, for the Old Notes. The Old Notes are eligible for trading in the Private
Offering, Resales and Trading through Automatic Linkages ("PORTAL") market. In
addition, the Initial Purchaser has advised the Company that it currently
intends to make a market in the New Notes; however, the Initial Purchaser is not
obligated to do so and any market
3
<PAGE>
making activities may be discontinued by the Initial Purchaser at any time.
Therefore, there can be no assurance that an active market for the New Notes
will develop. If such a trading market develops for the New Notes, future
trading prices will depend on many factors, including, among other things,
prevailing interest rates, the Company's results of operations and the market
for similar securities. Depending on such factors, the New Notes may trade at a
discount from their face value. See "Risk Factors--Lack of Public Market."
The Old Notes were issued originally in global form (the "Global Old Note").
The Global Old Note was deposited with, or on behalf of, The Depository Trust
Company (the "Depositary") and registered in the name of Cede & Co., as nominee
of the Depositary (such nominee being referred to herein as the "Global Note
Holder"). The use of the Global Old Note to represent certain of the Old Notes
permits the Depositary's participants, and anyone holding a beneficial interest
in an Old Note registered in the name of such a participant, to transfer
interests in the Old Notes electronically in accordance with the Depositary's
established procedures without the need to transfer a physical certificate. New
Notes issued in exchange for the Global Old Note will also be issued initially
as a note in global form (the "Global New Note," and, together with the Global
Old Note, the "Global Notes") and deposited with, or on behalf of, the
Depositary. After the initial issuance of the Global New Note, New Notes in
certificated form will be issued in exchange for a holder's proportionate
interest in the Global New Note only as set forth in the Indenture.
Any Old Notes not tendered and accepted in the Exchange Offer will remain
outstanding and will be entitled to all the same rights and will be subject to
the same limitations applicable thereto under the Indenture (except for those
rights which terminate upon consummation of the Exchange Offer). Following
consummation of the Exchange Offer, the Holders of Old Notes will continue to be
subject to the existing restrictions upon transfer thereof and the Company will
have no further obligation to such Holders (other than to certain Holders under
certain limited circumstances) to provide for registration under the Securities
Act of the Old Notes held by them. To the extent that Old Notes are tendered and
accepted in the Exchange Offer, a Holder's ability to sell untendered Old Notes
could be adversely affected. See "Risk Factors--Consequences of Failure to
Exchange" and "The Exchange Offers--Certain Consequences of a Failure to
Exchange."
This Prospectus, together with the Letter of Transmittal is being sent to
all registered Holders of Old Notes as of , 1997.
The Company will not receive any proceeds from this Exchange Offer. Pursuant
to the Registration Rights Agreement, the Company will bear certain registration
expenses.
4
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Available Information....................................................................................... 6
Prospectus Summary.......................................................................................... 7
Risk Factors................................................................................................ 20
The Transactions............................................................................................ 27
Use of Proceeds............................................................................................. 28
The Exchange Offer.......................................................................................... 29
Capitalization.............................................................................................. 37
Unaudited Pro Forma Consolidated Income Statements.......................................................... 38
Selected Historical Consolidated Financial Data............................................................. 42
Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 44
Business.................................................................................................... 50
Management.................................................................................................. 64
Security Ownership of Certain Beneficial Owners and Management.............................................. 69
Certain Relationships And Related Transactions.............................................................. 70
Description of Notes........................................................................................ 72
Description of New Credit Facility.......................................................................... 101
Description of Redeemable Preferred Stock and Warrants...................................................... 103
Plan of Distribution........................................................................................ 107
Legal Matters............................................................................................... 108
Experts..................................................................................................... 108
Index to Consolidated Financial Statements.................................................................. F-1
</TABLE>
5
<PAGE>
AVAILABLE INFORMATION
The Company has filed a registration statement on Form S-4 (together with
any amendments thereto, the "Registration Statement") with the Commission under
the Securities Act with respect to the New Notes. This Prospectus, which
constitutes a part of the Registration Statement, omits certain information
contained in the Registration Statement and reference is made to the
Registration Statement and the exhibits and schedules thereto for further
information with respect to the Company and the New Notes offered hereby. This
Prospectus contains summaries of the material terms and provisions of certain
documents and in each instance reference is made to the copy of such document
filed as an exhibit to the Registration Statement. Each such summary is
qualified in its entirety by such reference.
Upon the effectiveness of the Registration Statement filed with the
Commission, the Company will be subject to the reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith, will be required to file reports and other information
with the Commission. In addition, upon registration of the guarantees of the New
Notes in connection with the Exchange Offer, each Subsidiary Guarantor will also
become subject to the reporting requirements of the Exchange Act, subject to
obtaining exemptive relief from the Commission or no-action advise from the
Commission staff.
The Registration Statement (including the exhibits and schedules thereto)
and the periodic reports and other information filed by the Company with the
Commission may be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549 and at the regional offices of the Commission located at 7 World
Trade Center, 13th Floor, New York, New York 10048, and Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such
materials may be obtained from the Public Reference Section of the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549, and its public reference
facilities in New York, New York and Chicago, Illinois, at prescribed rates.
Such information may also be accessed electronically by means of the
Commission's homepage on the Internet at http://www.sec.gov., which contains
reports, proxy and information statements and other information regarding
registrants, including the Company, that file electronically with the
Commission.
6
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and financial data, including
the consolidated financial statements and notes thereto, included elsewhere in
this Prospectus. All references herein to "Burke" or "the Company" refer to
Burke Industries, Inc. and include its subsidiaries and JFL Merger Co.
("MergerCo"), unless the context otherwise requires. The Company's fiscal year
ends on the Friday closest to December 31. The financial information contained
herein for years prior to 1996 has been restated to exclude the financial
results of the custom-molded products unit, which was sold in 1996. Pro forma
information gives effect to the Transactions (as defined herein), including the
Prior Offering, and the application of the estimated proceeds therefrom as if
each had occurred on December 30, 1995 with respect to the pro forma
consolidated statement of income for the year ended January 3, 1997; on January
4, 1997 with respect to the pro forma consolidated statement of income for the
nine months ended October 3, 1997; and on October 3, 1997 with respect to the
pro forma consolidated balance sheet as of October 3, 1997.
THE COMPANY
OVERVIEW
Burke, headquartered in San Jose, California, is a leading, diversified
manufacturer of highly engineered, rubber, silicone and vinyl-based (herein
"elastomer") products. Through its vertically integrated operations and
reputation for quality elastomer-based products, Burke has become (i) the
largest domestic producer of precision silicone seals for commercial and
military aircraft ("Aerospace Products"), (ii) the dominant west coast producer
of rubber cove base and floor covering accessories for commercial and industrial
applications ("Flooring Products") and (iii) a value-added producer of
high-performance silicone hose, roofing and membrane products for the heavy-duty
truck, commercial building and environmental industries, respectively
("Commercial Products"). The Company bases its belief that it is the largest
domestic producer of certain components used in commercial and military aircraft
upon internal Company analysis and informal feedback from customers and
competitors.
The Company has grown through new product development and the successful
integration of acquired product lines and production assets. As a result, net
sales increased from $28.2 million in 1992 to $86.8 million for the twelve-month
period ended October 3, 1997. Net sales for the nine months ended October 3,
1997 totaled $68.8 million, up 26.2% from $54.5 million for the same period in
1996.
AEROSPACE PRODUCTS
Burke is the largest domestic producer of precision silicone seals used at
airframe and internal component junctures in commercial and military aircraft.
Burke seals are specified on virtually all major domestically produced
commercial aircraft, including every aircraft series manufactured by The Boeing
Company's Commercial Airplane Group ("Boeing") and on substantially all United
States military aircraft including cargo, fighter and bomber series airplanes
and several helicopter models. As a result, Burke's products have been designed
into some of the most successful commercial and military aircrafts in the world,
including the Boeing 737, 747, 757, 767 and 777, the McDonnell Douglas DC and MD
series, the Northrop Grumman F-14 and the Lockheed Martin L1011. Products are
engineered to customer specifications for selected aircraft body and engine
models and are generally made from custom tooling maintained and controlled by
Burke for use over the life of the specific aircraft program. Burke benefits
from a lengthy product-demand cycle, which can remain active for as long as 30
years, driven by new aircraft assembly and retrofit and maintenance projects.
Retrofit and maintenance projects accounted for approximately two-thirds of the
Company's 1996 Aerospace Products sales.
The Aerospace Products business also manufactures low-observable,
radar-absorbing seals and exterior tapes and coatings for stealth military
aircraft and other military applications. These products are currently in use on
the B-2 bomber and will also be used in the F-22 Advanced Tactical Fighter
("F-22"), which is being developed to replace the F-15 as the premier fighter in
the United States military arsenal.
7
<PAGE>
Aerospace Products sales increased from $3.6 million in 1993, the year that
Burke first entered the aerospace market with its purchase of assets of Purosil,
Inc. ("Purosil"), to $24.6 million in 1996, accounting for approximately 34.0%
of the Company's total net sales in 1996. Management believes the Aerospace
Products business is well positioned to benefit from the strong increase in
commercial aircraft build rates currently occurring and projected by industry
analysts to continue, along with the associated retrofit, refurbishment,
replacement and upgrade projects that are required over the life of the
aircraft.
FLOORING PRODUCTS
Through its Flooring Products business, Burke is the dominant supplier of
rubber cove base (floor border that joins flooring or carpet to a wall),
manufactured under the name BurkeBase, and other rubber-based flooring
accessories for commercial and industrial applications in the western United
States. Its principal product offerings include vinyl cove base and rubber cove
base, tile, stair treads, corners, shapes and other flooring accessories. Demand
for the Company's cove base is driven by new commercial construction,
remodeling, redecorating and general maintenance. During periods of slower
growth in new commercial construction, remodeling and redecorating activities
tend to increase, providing stable overall demand for the Company's products.
Flooring Products sales were $20.5 million in 1996, comprising 28.4% of the
Company's total net sales in 1996. In 1996, the Company diversified its Flooring
Products offerings with the introduction of new tiling products and
photoluminescent emergency lighting products marketed under the name
BurkeEmerge, and the acquisition of vinyl cove base production assets.
Management believes that the addition of the vinyl product line will enable it
to increase revenues through the increased penetration of existing markets and
the expansion of its product line to markets where vinyl cove base is more
popular than rubber cove base, such as the midwestern and eastern United States.
COMMERCIAL PRODUCTS
Burke's expertise in the mixing, blending and formulation of silicone and
organic rubber compounds has established its Commercial Products business as a
growing, value-added supplier of elastomer products for use in both intermediate
and end products. The Commercial Products business is comprised of three primary
product lines: (i) high-performance silicone truck hoses for heavy-duty trucks
and buses marketed under the Purosil brand name, (ii) membranes for commercial
roofing and fluid containment systems marketed under the Burkeline trade name
and manufactured from DuPont's patented Hypalon polymer material and (iii)
precision-formulated custom products and sheet goods that utilize Burke's
extensive formulation and production capabilities for use in end-product
elastomer applications. Commercial Products net sales increased from $10.0
million in 1992 to $27.3 million in 1996, and represented 37.6% of the Company's
total net sales in 1996. Management believes that the Commercial Products
business has significant growth potential primarily through the expansion of the
Purosil line of high-end hoses to new customers and channels of distribution and
the development of new applications for the silicone custom product line.
COMPETITIVE STRENGTHS
Burke has secured a strong competitive position in each of its specialized
market segments. Burke is the largest provider of aerospace seals to the
domestic commercial and military aerospace industries and also maintains strong
positions in its flooring, roofing and membrane, truck hose and custom product
lines. These competitive positions are sustained through the following
strengths:
ESTABLISHED CUSTOMER RELATIONSHIPS. The Company enjoys long-term
relationships with many of its customers in each of its markets. These
relationships, whether built by Burke over its long history or assumed in recent
asset acquisitions, provide the Company with a stable base from which to pursue
future expansion and give Burke a significant advantage over potential
competitors seeking to enter the Company's markets. Several of the Burke
trademarks and trade names (BurkeBase, Burkeline, SFS,
8
<PAGE>
Haskon and Purosil) are widely recognized by end users and distributors and are
generally associated with superior levels of quality and customer service in
their respective markets.
DIVERSE REVENUE BASE. The Company's products are used in a wide variety of
industries and applications and a significant share of the Company's revenue is
derived from the repair and replacement market for its products, including
aerospace seals and tape, cove base, truck hoses and fluid containment membrane.
Replacement demand is typically less affected by slower economic periods.
Management believes that this diversity has and will continue to mitigate the
effect of economic fluctuations.
TECHNOLOGICAL LEADERSHIP IN ELASTOMER-BASED PRODUCTS DEVELOPMENT AND
MANUFACTURE. Burke is widely recognized as a technological leader in
elastomer-based products due to its strong engineering, design and research
capabilities. Burke has 25 specialists in its engineering, design and laboratory
departments devoted to new product development and product cost reduction.
Management believes that its aerospace technical staff is significantly larger
than those of its direct competitors, providing the Company with a competitive
advantage in pursuing and maintaining relationships in the technologically
advanced defense and commercial aerospace industries.
VERTICALLY INTEGRATED PRODUCTION CAPABILITIES. Burke has vertically
integrated production capabilities that enable it to transform raw organic
rubber and silicone gum into a diverse array of finished products. This
capability allows management more direct control over the Company's product
development, cost structure and quality requirements, providing a competitive
edge in its targeted market segments and enables Burke's Commercial Products
business to selectively participate in market segments as a value-added,
intermediate supplier to other elastomer product producers and users.
EXPERIENCED MANAGEMENT TEAM. The management team has extensive experience
both with the Company and within the industry and encompasses a balance of both
senior leadership and a strong group of young managers. This management team has
successfully orchestrated the acquisition and integration of four independent
operations since 1993, as well as the Company's ongoing vertical integration
efforts.
BUSINESS STRATEGY
Burke intends to capitalize on its aforementioned competitive strengths in a
variety of ways in each of its major businesses. Key components of this strategy
for each of the Company's businesses include:
AEROSPACE PRODUCTS
- PENETRATE INTERNATIONAL MARKET FOR AEROSPACE SEALS. Management believes
that the Company is the only domestic aerospace seal manufacturer with the
production capacity to market beyond the United States. The Company's
recent acquisitions dramatically increased production capacity and, as a
result, the Company recently sought and was successful in being designated
as a qualified parts manufacturer for a large subcontractor of Airbus
Industries ("Airbus").
- FOCUS ON VALUE-ADDED MANUFACTURING. Management intends to further increase
its participation in the trend towards integrating higher levels of
processing and finishing to products before shipping to original equipment
manufacturers ("OEMs").
- MAINTAIN STRONG RELATIONSHIPS WITH LEADING PRIME CONTRACTORS. Management
believes that its existing relationships with leading prime military
contractors have positioned the Company to continue to participate in
"next generation" stealth military programs, including the Joint Strike
Fighter currently being developed for NATO, through the sale of
low-observable seals and tape.
FLOORING PRODUCTS
- BROADEN DOMESTIC DISTRIBUTION OF FLOORING PRODUCTS. Although the Company
is the dominant producer of rubber cove base in the western United States,
the Company believes it can successfully
9
<PAGE>
expand this product line into other geographic regions by offering the
full complement of its rubber and newly acquired vinyl flooring products.
- LEVERAGE BRAND NAME RECOGNITION AND EXISTING DISTRIBUTION CHANNELS THROUGH
PRODUCT LINE EXTENSIONS. The Company intends to continue to capitalize on
the BurkeBase trademark by expanding and upgrading its existing product
line. In addition, the Company believes that it can leverage its strong
distribution network for its flooring products through the introduction of
flooring accessories. For example, the Company's new BurkeEmerge product
line of photoluminescent emergency lighting is an alternative to strip
lighting at a 70% lower cost. Emergency lighting is increasingly being
utilized due to heightened public awareness of the dangers that can result
from unlit corridors and confusing exit signs.
COMMERCIAL PRODUCTS
- INCREASE PENETRATION OF PUROSIL SILICONE HOSES. The Company believes the
growth opportunities for its Purosil silicone hoses have not yet fully
been exploited, particularly in the heavy-duty truck and bus aftermarket.
New initiatives include increasing customer share at Mack Truck, Inc.
("Mack Truck") and other targeted accounts as well as initiating
production of silicone hoses for a major new customer.
- PROMOTE ADDITIONAL HYPALON APPLICATIONS. Management is continuing to work
with DuPont to promote Hypalon as a durable and environmentally sound
liner product suitable for new water-containment applications.
In addition to these internal growth strategies, the Company intends to seek
selective acquisitions where it can expand and strengthen existing product lines
and its distribution and technological capabilities. The Company believes that
certain market niches in which it competes are highly fragmented, with a number
of manufacturers that would make attractive acquisition candidates.
The Company's principal executive offices are located at 2250 South Tenth
Street, San Jose, California 95112, telephone: (408) 297-3500.
SUMMARY OF THE TRANSACTIONS
THE INVESTORS
J.F. Lehman Equity Investors I, L.P. ("JFLEI") was formed in February 1997
by John F. Lehman, Donald Glickman and George Sawyer, the managing principals of
J.F. Lehman & Company ("Lehman"), and managing members of JFL Investors, L.L.C.,
the general partner of JFLEI. Lehman is a private investment firm with offices
in New York, NY and Washington, D.C. that has focused on purchasing defense,
aerospace, marine and other niche manufacturing and service companies since
1992. During this time, Lehman has made investments in middle market companies
that design and manufacture advanced electronic navigation and guidance systems
for marine and aerospace uses, electronic and electromechanical devices and
subsystems for military and commercial applications, and infrared decoy flares
and medium caliber ammunition.
In each of its investments, Lehman has taken an active, hands-on approach
toward portfolio company oversight. Lehman expects to provide the Company with
additional strategic opportunities utilizing its general and limited partners
with significant experience in the defense and aerospace industries. These
partners include: Mr. Oliver C. Boileau, Jr., former President of Boeing
Aerospace and General Dynamics Corporation; Mr. Thomas G. Pownall, former
Chairman and Chief Executive Officer of Martin Marietta; Sir Christopher
Lewinton, current Chairman of TI Group plc; and General P.X. Kelley, former
Commandant of the United States Marine Corps. See "Management" for a description
of the Company's Board of Directors.
10
<PAGE>
THE RECAPITALIZATION
The Company entered into an Agreement and Plan of Merger, dated as of August
13, 1997 (the "Merger Agreement"), among JFLEI, MergerCo and certain
shareholders of the Company, pursuant to which the Company was recapitalized
(the "Recapitalization") by means of a merger of MergerCo into the Company (the
"Merger"), with the Company as the surviving corporation. Pursuant to the
Merger, all shares of the Company's common stock (the "Common Stock"), other
than those shares (the "Continuing Shares") retained by certain members of
management and certain other shareholders of the Company (the "Continuing
Shareholders"), were converted into the right to receive an amount in cash equal
to approximately $9.33 per share (the "Recapitalization Consideration").
Immediately after consummation of the Recapitalization, JFLEI and the Continuing
Shareholders owned 65% and 15%, respectively, of the issued and outstanding
shares of the Company's Common Stock, on a fully diluted basis. Warrants to
purchase an aggregate of 20% of the Company's Common Stock, on a fully diluted
basis (the "Warrants"), were issued to the purchasers of $16.0 million in Series
A and $2.0 million in Series B 11 1/2% Cumulative Redeemable Preferred Stock
(collectively, the "Redeemable Preferred Stock") of the Company. In connection
with the Recapitalization, the Company entered into certain financing
transactions, including the Prior Offering, described more fully elsewhere in
this Prospectus. The consummation of the Prior Offering, the Recapitalization
and the financing thereof (collectively, the "Transactions") were conditioned
upon each other. See "The Transactions," "Description of New Credit Facility"
and "Description of Redeemable Preferred Stock and Warrants."
The following table sets forth the sources and uses of funds in connection
with the Transactions:
<TABLE>
<CAPTION>
(DOLLARS IN
THOUSANDS)
<S> <C>
Sources of Funds:
Issuance of Senior Notes.............................................. $ 110,000
JFLEI Investment...................................................... 20,000
Issuance of Redeemable Preferred Stock and Warrrants.................. 18,000
Continuing Shares(1).................................................. 6,740
New Credit Facility................................................... 0
--------
$ 154,740
--------
--------
Uses of Funds:
Aggregate Recapitalization Consideration(1)........................... $ 117,892
Repayment of Existing Credit Facility and Subordinated Debt........... 19,014
Transaction Expenses.................................................. 7,305
Working Capital....................................................... 10,529
--------
$ 154,740
--------
--------
</TABLE>
- ------------------------
(1) Pursuant to the Recapitalization, (i) 8,676,168 shares of Common Stock of
the Company converted into the right to receive the Recapitalization
Consideration, (ii) options to purchase 1,542,000 shares of Common Stock of
the Company were converted into the right to receive the Recapitalization
Consideration less the applicable exercise price, (iii) warrants to
purchase 1,700,000 shares of Common Stock of the Company were converted
into the right to receive the Recapitalization consideration less the
applicable exercise price and (iv) 722,702 Continuing Shares were retained
by the Continuing Shareholders, which represent an aggregate of 15% of the
issued and outstanding shares of the Company on a fully diluted basis. See
"The Transactions." These line items include the value of the Continuing
Shares based on the Recapitalization Consideration.
11
<PAGE>
THE PRIOR OFFERING
The outstanding $110.0 million principal amount of Old Notes were sold by
the Company to the Initial Purchaser on the Closing Date pursuant to the
Purchase Agreement among the Company and the Initial Purchaser. The Initial
Purchaser subsequently resold the Old Notes in reliance on Rule 144A under the
Securities Act. The Company, the Subsidiary Guarantors and the Initial Purchaser
also entered into the Registration Rights Agreement pursuant to which the
Company granted certain registration rights for the benefit of the holders of
the Old Notes. The Exchange Offer is intended to satisfy certain of the
Company's obligations under the Registration Rights Agreement with respect to
the Old Notes. See "The Exchange Offer--Purpose and Effect."
THE EXCHANGE OFFER
<TABLE>
<S> <C>
The Exchange Offer........... The Company is offering upon the terms and subject to the
conditions set forth herein and in the accompanying letter
of transmittal (the "Letter of Transmittal"), to exchange
$1,000 in principal amount of its 10% Senior Notes due 2007
(the "New Notes," with the Old Notes and the New Notes
collectively referred to herein as the "Notes") for each
$1,000 in principal amount of the outstanding Old Notes (the
"Exchange Offer"). As of the date of this Prospectus, $110.0
million in aggregate principal amount of the Old Notes is
outstanding. See "The Exchange Offer--Terms of the Exchange
Offer."
Expiration Date.............. 5:00 p.m., New York City time, on , 1998 as the
same may be extended. See "The Exchange Offer--Expiration
Date; Extensions; Amendments."
Conditions of the Exchange
Offer...................... The Exchange Offer is not conditioned upon any minimum
principal amount of Old Notes being tendered for exchange.
The only condition to the Exchange Offer is the declaration
by the Commission of the effectiveness of the Registration
Statement of which this Prospectus constitutes a part. See
"The Exchange Offer--Conditions of the Exchange Offer."
Termination of Certain
Rights..................... Pursuant to the Registration Rights Agreement and the Old
Notes, holders of Old Notes (i) have rights to receive
Liquidated Damages and (ii) have certain rights intended for
the holders of unregistered securities. "Liquidated Damages"
means damages of $0.05 per week per $1,000 principal amount
of Old Notes (up to a maximum of $0.30 per week per $1,000
principal amount) during the period in which a Registration
Default is continuing pursuant to the terms of the
Registration Rights Agreement. Holders of New Notes will not
be and, upon consummation of the Exchange Offer, holders of
Old Notes will no longer be, entitled to (i) the right to
receive the Liquidated Damages or (ii) certain other rights
under the Registration Rights Agreement intended for holders
of unregistered securities. See "The Exchange
Offer--Termination of Certain Rights" and "--Procedures for
Tendering Old Notes."
Accrued Interest............. The New Notes will bear interest at a rate equal to 10% per
annum. Interest shall accrue from August 20, 1997 or from
the most recent
</TABLE>
12
<PAGE>
<TABLE>
<S> <C>
Interest Payment Date with respect to the Old Notes to which
interest was paid or duly provided for. See "Description of
Notes--Principal, Maturity and Interest."
Procedures for Tendering Old
Notes...................... Unless a tender of Old Notes is effected pursuant to the
procedures for book-entry transfer as provided herein, each
holder desiring to accept the Exchange Offer must complete
and sign the Letter of Transmittal, have the signature
thereon guaranteed if required by the Letter of Transmittal,
and mail or deliver the Letter of Transmittal, together with
the Old Notes or a Notice of Guaranteed Delivery and any
other required documents (such as evidence of authority to
act, if the Letter of Transmittal is signed by someone
acting in a fiduciary or representative capacity), to the
Exchange Agent (as defined) at the address set forth on the
back cover page of this Prospectus prior to 5:00 p.m., New
York City time, on the Expiration Date. Any Beneficial Owner
(as defined) of the Old Notes whose Old Notes are registered
in the name of a nominee, such as a broker, dealer,
commercial bank or trust company and who wishes to tender
Old Notes in the Exchange Offer, should instruct such entity
or person to promptly tender on such Beneficial Owner's
behalf. See "The Exchange Offer--Procedures for Tendering
Old Notes."
Guaranteed Delivery
Procedures................. Holders of Old Notes who wish to tender their Old Notes and
(i) whose Old Notes are not immediately available or (ii)
who cannot deliver their Old Notes or any other documents
required by the Letter of Transmittal to the Exchange Agent
prior to the Expiration Date (or complete the procedure for
book-entry transfer on a timely basis), may tender their Old
Notes according to the guaranteed delivery procedures set
forth in the Letter of Transmittal. See "The Exchange
Offer--Guaranteed Delivery Procedures."
Acceptance of Old Notes and
Delivery of New Notes...... Upon effectiveness of the Registration Statement of which
this Prospectus constitutes a part and consummation of the
Exchange Offer, the Company will accept any and all Old
Notes that are properly tendered in the Exchange Offer prior
to 5:00 p.m., New York City time, on the Expiration Date.
The New Notes issued pursuant to the Exchange Offer will be
delivered promptly after acceptance of the Old Notes. See
"The Exchange Offer--Acceptance of Old Notes for Exchange;
Delivery of New Notes."
Withdrawal Rights............ Tenders of Old Notes may be withdrawn at any time prior to
5:00 p.m., New York City time, on the Expiration Date. See
"The Exchange Offer--Withdrawal Rights."
The Exchange Agent........... United States Trust Company of New York is the exchange
agent (in such capacity, the "Exchange Agent"). The address
and telephone number of the Exchange Agent are set forth in
"The Exchange Offer--The Exchange Agent; Assistance."
Fees and Expenses............ All expenses incident to the Company's consummation of the
Exchange Offer and compliance with the Registration Rights
</TABLE>
13
<PAGE>
<TABLE>
<S> <C>
Agreement will be borne by the Company. The Company will
also pay certain transfer taxes applicable to the Exchange
Offer. See "The Exchange Offer--Fees and Expenses."
Resales of the New Notes..... Based on existing interpretations by the staff of the
Commission set forth in no-action letters issued to third
parties, the Company believes that New Notes issued pursuant
to the Exchange Offer to a holder in exchange for Old Notes
may be offered for resale, resold and otherwise transferred
by a holder (other than (i) a broker-dealer who purchased
the Old Notes directly from the Company for resale pursuant
to Rule 144A under the Securities Act or any other available
exemption under the Securities Act or (ii) a person that is
an affiliate of the Company within the meaning of Rule 405
under the Securities Act), without compliance with the
registration and prospectus delivery provisions of the
Securities Act, provided that such holder is acquiring the
New Notes in the ordinary course of business and is not
participating, and has no arrangement or understanding with
any person to participate, in a distribution of the New
Notes. Each broker-dealer that receives New Notes in
exchange for Old Notes, where such Old Notes were acquired
by such broker as a result of market-making or other trading
activities, must acknowledge that it will deliver a
prospectus in connection with any resale of such New Notes.
See "The Exchange Offer--Resales of the New Notes" and "Plan
of Distribution."
Effect of Not Tendering Old
Notes for Exchange......... Old Notes that are not tendered or that are not properly
tendered will, following the expiration of the Exchange
Offer, continue to be subject to the existing restrictions
upon transfer thereof. The Company will have no further
obligations to provide for the registration under the
Securities Act of such Old Notes and such Old Notes will,
following the expiration of the Exchange Offer, bear
interest at the same rate as the New Notes.
Certain Federal Income Tax
Consequences............... The Company believes that the exchange pursuant to the
Exchange Offer will not be a taxable event for federal
income tax purposes. See "Certain Federal Income Tax
Consequences of the Exchange Offer."
</TABLE>
DESCRIPTION OF NEW NOTES
The form and terms of the New Notes will be identical in all material
respects to the form and terms of the Old Notes, except that (i) the New Notes
have been registered under the Securities Act and, therefore, will not bear
legends restricting the transfer thereof, (ii) holders of the New Notes will not
be entitled to Liquidated Damages and (iii) holders of the New Notes will not
be, and upon consummation of the Exchange Offer, holders of the Old Notes will
no longer be, entitled to certain rights under the Registration Rights Agreement
intended for the holders of unregistered securities, except in limited
circumstances. See "Exchange Offer--Termination of Certain Rights." The Exchange
Offer shall be deemed consummated upon the occurrence of the delivery by the
Company to the Registrar under the Indenture of the New Notes in the same
aggregate principal amount as the aggregate principal amount of Old Notes that
are tendered by holders thereof pursuant to the Exchange Offer. See "The
Exchange Offer--Termination of Certain Rights" and "Procedures for Tendering Old
Note;" and "Description of Notes."
14
<PAGE>
<TABLE>
<S> <C>
Securities Offered........... $110,000,000 aggregate principal amount of 10% Senior
Subordinated Notes Due 2007.
Maturity Date................ August 15, 2007.
Interest Payment Dates....... August 15 and February 15, commencing February 15, 1998.
Ranking...................... The Notes will be general unsecured obligations of the
Company, senior to all existing and future subordinated
indebtedness of the Company and PARI PASSU in right of
payment with all other existing and future unsubordinated
indebtedness of the Company, including indebtedness under
the New Credit Facility. However, the obligations of the
Company under the New Credit Facility will be secured by
substantially all of the assets of the Company. Accordingly,
such secured indebtedness will effectively rank senior to
the Notes to the extent of such assets. The Indenture for
the Notes (the "Indenture") restricts, but does not
prohibit, the Company from incurring additional
indebtedness. See "Description of Notes--Ranking."
Optional Redemption.......... On or after August 15, 2002, the Company may redeem the
Notes, in whole or in part, at the redemption prices set
forth herein, plus accrued and unpaid interest, if any, and
Liquidated Damages, if any, to the date of redemption.
Notwithstanding the foregoing, at any time on or before
August 15, 2000, the Company may redeem up to 35% of the sum
of (i) the initial aggregate principal amount of the Notes
and (ii) the initial aggregate principal amount of any
Additional Notes, on one or more occasions, with the net
cash proceeds of one or more Public Equity Offerings (as
defined herein) at a redemption price of 110% of the
principal amount thereof, plus accrued and unpaid interest,
if any, and Liquidated Damages, if any, to the date of
redemption provided that at least 65% of the sum of (i) the
initial aggregate principal amount of Notes and (ii) the
initial aggregate principal amount of any Additional Notes
remain outstanding immediately after redemption. See
"Description of Notes-- Redemption--Optional Redemption."
Guarantees................... The Notes will be unconditionally guaranteed on a joint and
several basis (the "Note Guarantees") by substantially all
of the subsidiaries of the Company, (collectively, the
"Subsidiary Guarantors"). The Note Guarantees will rank
senior to all existing and future subordinated indebtedness
of the Subsidiary Guarantors and PARI PASSU with all other
unsubordinated indebtedness of the Subsidiary Guarantors,
including the guarantees of indebtedness under the New
Credit Facility. Any Subsidiary Guarantor's obligations
under the New Credit Facility, however, will be secured by
substantially all of the assets of such Subsidiary
Guarantor. Accordingly, such secured indebtedness will rank
prior to the Note Guarantees with respect to such assets.
The Indenture restricts, but does not prohibit, the
Subsidiary Guarantors from incurring additional secured
indebtedness. As of the date of this Prospectus, the Company
has no significant subsidiaries. See "Description of
Notes--Note Guarantees."
</TABLE>
15
<PAGE>
<TABLE>
<S> <C>
Mandatory Redemption......... None.
Change of Control............ Upon a Change of Control (as defined herein), the Company
(i) will be required to make an offer to repurchase all
outstanding Notes at 101% of the principal amount thereof
plus accrued and unpaid interest thereon, if any, and
Liquidated Damages, if any, to the date of repurchase and
(ii) prior to August 15, 2002 will have the option to redeem
the Notes, in whole or in part, at a redemption price equal
to the principal amount thereof, plus accrued and unpaid
interest, if any, and Liquidated Damages, if any, to the
redemption date plus the Applicable Premium (as defined
herein). See "Description of Notes-- Redemption--Optional
Redemption Upon Change of Control," "--Purchase of Notes
Upon Change of Control or Asset Sale" and "--Certain
Covenants--Purchase of Notes Upon Change of Control." There
can be no assurance that sufficient funds will be available
to the Company at the time of any Change of Control to make
any required repurchases of Notes. See "Risk
Factors--Potential Inability to Fund Change of Control
Offer."
Covenants.................... The Indenture will restrict, among other things, the
Company's and its subsidiaries' ability to incur additional
indebtedness, pay dividends or make certain other restricted
payments, incur liens, sell preferred stock of subsidiaries,
apply net proceeds from certain asset sales, merge or
consolidate with any other person, sell, assign, transfer,
lease, convey or otherwise dispose of substantially all of
the assets of the Company or enter into certain transactions
with affiliates. See "Description of Notes--Certain
Covenants."
Use of Proceeds.............. The proceeds of the Prior Offering and of other financing
transactions described herein were used to pay the
Recapitalization Consideration, to repay certain existing
indebtedness of the Company and to pay fees and expenses of
the Transactions, including the Prior Offering, and for
general corporate purposes. See "The Transactions" and "Use
of Proceeds."
Absence of a Public Market
for the New Notes.......... The New Notes are a new issue of securities with no
established market. Accordingly, there can be no assurance
as to the development or liquidity of any market for the New
Notes. The Initial Purchaser has advised the Company that it
currently intends to make a market in the New Notes.
However, the Initial Purchaser is not obligated to do so,
and any market making with respect to the New Notes may be
discontinued at any time without notice. The Company does
not intend to apply for listing of the New Notes on a
securities exchange.
</TABLE>
RISK FACTORS
For a discussion of certain matters that should be considered by prospective
investors in connection with the Exchange Offer, see "Risk Factors."
16
<PAGE>
SUMMARY UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
The following sets forth summary unaudited pro forma consolidated financial
data derived from the unaudited pro forma consolidated financial data contained
elsewhere herein (the "Pro Formas"). The following unaudited pro forma
consolidated statement of income data of the Company for the year ended January
3, 1997 and for the nine months ended October 3, 1997 give effect to the
Transactions as if they had occurred on December 30, 1995. No unaudited
consolidated balance sheet data of the Company has been presented as the effects
of the transactions are reflected in the unaudited financial statements of the
Company as at and for the nine months ended October 3, 1997, appearing elsewhere
herein. Certain management assumptions and adjustments relating to the
Transactions are described in the accompanying notes hereto. This pro forma
information is not necessarily indicative of the results that would have
occurred had the Transactions been completed on the dates indicated or the
Company's actual or future results or financial position. The summary pro forma
consolidated financial data should be read in conjunction with the information
contained in the financial statements of the Company and the notes thereto,
"Unaudited Pro Forma Consolidated Income Statements," "Selected Historical
Consolidated Financial Data" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere herein.
17
<PAGE>
SUMMARY UNAUDITED PRO FORMA FINANCIAL DATA (CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
----------------------------
<S> <C> <C>
NINE MONTHS
FISCAL ENDED
YEAR 1996 OCTOBER 3, 1997
----------- ---------------
OPERATING DATA:
Net sales............................................................................. $ 72,466 $ 68,785
Cost of sales......................................................................... 49,689 48,423
----------- ---------------
Gross profit.......................................................................... 22,777 20,362
Selling, general and administrative expenses.......................................... 11,818 9,275
----------- ---------------
Income from operations................................................................ 10,959 11,087
Interest expense, net................................................................. 11,000 8,250
----------- ---------------
Income before income tax provision and discontinued operation......................... (41) 2,837
Income tax provision.................................................................. (17) 1,021
----------- ---------------
Income from continuing operations before discontinued operation....................... $ (24) $ 1,816
----------- ---------------
----------- ---------------
OTHER DATA:
EBITDA(1)............................................................................. $ 12,378 $ 12,146
EBITDA margin(1)...................................................................... 17.1% 18%
Depreciation and amortization......................................................... 1,419 1,059
Capital expenditures(2)............................................................... 1,684 727
Cash interest expense................................................................. 11,000 8,250
Ratio of EBITDA to cash interest expense.............................................. 1.1x 1.5x
Ratio of earnings to fixed charges(3)................................................. -- 1.3x
Ratio of earnings to combined fixed charges(4)........................................ -- --
Net cash (used in) provided by operating activities................................... (335) 3,391
Net cash provided by investing activities............................................. 134 727
Net cash provided by (used in) financing activities................................... 13,482 (818)
</TABLE>
- ------------------------
(1) EBITDA is the sum of income before discontinued operation (as applicable),
income tax provision and interest, depreciation and amortization expense.
EBITDA is presented because it is a widely accepted financial indicator of a
company's ability to service indebtedness. However, EBITDA should not be
considered as an alternative to income from operations or to cash flows from
operating activities (as determined in accordance with generally accepted
accounting principles) and should not be construed as an indication of a
company's operating performance or as a measure of liquidity.
(2) Capital expenditures for 1996 include the acquisition of assets of Kentile
($854).
(3) In calculating the ratio of earnings to fixed charges, earnings consist of
income before income tax provision, discontinued operation (as applicable)
plus fixed charges (excluding capitalized interest). Fixed charges consist
of interest expense incurred (which includes amortization of deferred
financing costs) whether expensed or capitalized and a portion of rental
expense estimated to be attributable to interest. Earnings were insufficient
to cover the pro forma fixed charges by $60 for fiscal year 1996
(4) In calculating the ratio of earnings to combined fixed charges, combined
fixed charges consist of fixed charges, paid-in-kind dividends on the
Redeemable Preferred Stock and accretion of the carrying value of the
Redeemable Preferred Stock. Earnings were insufficient to cover the pro
forma combined fixed charges by $3,685 and $95 for fiscal year 1996 and the
nine months ended October 3, 1997, respectively.
18
<PAGE>
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA
The summary consolidated financial data below for the three years ended
January 3, 1997 and as of December 29, 1995 and January 3, 1997 have been
derived from the Consolidated Financial Statements of the Company which have
been audited by Ernst & Young LLP, independent auditors, and are included
elsewhere in this Prospectus. The summary consolidated financial data below for
the years ended January 1, 1993 and December 31, 1993 and as of January 1, 1993,
December 31, 1993 and December 30, 1994 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 summary financial
data for the nine months ended September 27, 1996 and as of and for the nine
months ended October 3, 1997 have been derived from the Company's Unaudited
Consolidated Financial Statements for those periods included elsewhere in the
Prospectus and the summary financial data as of September 27, 1996 have been
derived from the Company's Unaudited Consolidated Financial Statements for that
period, but are not included elsewhere herein and, in each case, include, in the
opinion of management, all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of the results for the unaudited
interim periods. Results for the nine months ended October 3, 1997 are not
necessarily indicative of the results that may be expected for the entire year.
The information presented below is qualified in its entirety by, and should be
read in conjunction with, "Selected Historical Consolidated Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements of the Company and related
notes included elsewhere in this Prospectus. The data below reflect the
acquisition by 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 and of Kentile Corporation ("Kentile") in
April 1996.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
-------------
<S> <C> <C> <C> <C> <C> <C>
FISCAL YEAR
----------------------------------------------------- SEPTEMBER 27,
1992 1993 1994 1995 1996 1996
--------- --------- --------- --------- --------- -------------
OPERATING DATA: (DOLLARS IN THOUSANDS)
Net sales......................................... $ 28,195 $ 36,431 $ 44,370 $ 68,411 $ 72,466 $ 54,476
Cost of sales..................................... 18,714 25,355 29,998 49,226 49,689 37,722
--------- --------- --------- --------- --------- -------------
Gross profit...................................... 9,481 11,076 14,372 19,185 22,777 16,754
Selling, general and administrative expenses(1)... 8,630 9,215 8,152 10,212 11,610 8,305
--------- --------- --------- --------- --------- -------------
Income (Loss) from operations..................... 851 1,861 6,220 8,973 11,167 8,449
Interest expense, net............................. 2,828 2,897 2,812 3,007 2,668 2,054
--------- --------- --------- --------- --------- -------------
Income (loss) before income tax provision
(benefit), cumulative effect of accounting
change, extraordinary loss and discontinued
operation(2).................................... (1,977) (1,036) 3,408 5,966 8,499 6,395
Income tax provision (benefit).................... (3) 146 1,395 3,393 3,466 2,558
--------- --------- --------- --------- --------- -------------
Income (loss) from continuing operations before
cumulative effect of accounting change,
extraordinary loss and discontinued
operation(2).................................... $ (1,974) $ (1,182) $ 2,013 $ 2,573 $ 5,033 $ 3,837
--------- --------- --------- --------- --------- -------------
--------- --------- --------- --------- --------- -------------
Net income (loss)(2).............................. $ (2,180) $ (657) $ 1,502 $ 1,094 $ 4,101 $ 2,905
--------- --------- --------- --------- --------- -------------
--------- --------- --------- --------- --------- -------------
OTHER DATA:
Ratio of earnings to fixed charges(3)............. -- -- 2.1x 2.8x 3.7x 3.8 x
BALANCE SHEET DATA (AT PERIOD END):
Working capital................................... $ 2,096 $ 4,932 $ 4,766 $ 5,402 $ 5,328 $ 6,837
Total assets...................................... 24,469 30,535 28,551 39,729 40,673 38,065
Long-term obligations, less current portion....... 19,406 20,011 16,937 21,803 18,126 17,008
Shareholders' equity (deficit).................... (4) (654) 849 340 4,283 2,981
<CAPTION>
<S> <C>
OCTOBER 3,
1997
-----------
OPERATING DATA:
Net sales......................................... $ 68,785
Cost of sales..................................... 48,423
-----------
Gross profit...................................... 20,362
Selling, general and administrative expenses(1)... 24,833
-----------
Income (Loss) from operations..................... (4,471 )
Interest expense, net............................. 2,625
-----------
Income (loss) before income tax provision
(benefit), cumulative effect of accounting
change, extraordinary loss and discontinued
operation(2).................................... (7,096 )
Income tax provision (benefit).................... (2,555 )
-----------
Income (loss) from continuing operations before
cumulative effect of accounting change,
extraordinary loss and discontinued
operation(2).................................... $ (4,541 )
-----------
-----------
Net income (loss)(2).............................. $ (4,541 )
-----------
-----------
OTHER DATA:
Ratio of earnings to fixed charges(3)............. --
BALANCE SHEET DATA (AT PERIOD END):
Working capital................................... $ 21,501
Total assets...................................... 59,252
Long-term obligations, less current portion....... 110,000
Shareholders' equity (deficit).................... (86,620 )
</TABLE>
- ------------------------------
(1) Selling, general and administrative expenses include amortization of
acquisition costs of $1,161 and $850 in 1992 and 1993, respectively.
(2) Net income reflects (i) benefit of cumulative effect of change in accounting
method for income taxes of $551 in 1993, (ii) extraordinary loss on debt
settlement, net of income tax benefit, of $815 in 1995 and (iii) losses, net
of income tax benefit, of $206, $26, $511, $664 and $308 in 1992, 1993,
1994, 1995 and through September 27, 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.
(3) 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 $2,004, $1,048 and $7,120 for the fiscal years 1992, 1993 and the nine
months ended October 3, 1997, respectively.
19
<PAGE>
RISK FACTORS
In addition to the other information contained in this Prospectus, holders
of Notes should consider carefully the following Risk Factors affecting the
business of the Company, as well as the other information set forth elsewhere in
this Prospectus.
SIGNIFICANT LEVERAGE AND DEBT SERVICE
After consummation of the Transactions, the Company and its subsidiaries
incurred significant outstanding indebtedness and became highly leveraged. See
"Capitalization." In addition, subject to the limitations set forth in the
Indenture, the Company and its subsidiaries may incur additional indebtedness,
including up to $15.0 million under the New Credit Facility.
The degree to which the Company is leveraged could have important
consequences to the holders of the Notes, including (i) the Company's
vulnerability to adverse general economic and industry conditions, (ii) the
Company's ability to obtain additional financing for future capital
expenditures, general corporate or other purposes and (iii) the dedication of a
substantial portion of the Company's cash flow from operations to the payment of
principal and interest on indebtedness, thereby reducing the funds available for
operations and future business opportunities.
The Company's ability to make scheduled payments on the principal of, or
interest on, or to refinance, its indebtedness will depend on its future
operating performance and cash flow, which are subject to prevailing economic
conditions, prevailing interest rate levels, and financial, competitive,
business and other factors, many of which are beyond its control, as well as the
availability of borrowings under the New Credit Facility or successor
facilities. However, based upon the current and anticipated level of operations,
the Company believes that its cash flow from operations, together with amounts
available under the New Credit Facility and its other sources of liquidity, will
be adequate to meet its anticipated cash requirements for the foreseeable future
for working capital, capital expenditures, interest payments and principal
payments. There can be no assurance, however, that the Company's business will
continue to generate cash flow at or above current levels. If the Company is
unable to generate sufficient cash flow from operations in the future to service
its indebtedness, it may be required to refinance all or a portion of its
existing indebtedness, including the Notes, or to obtain additional financing.
There can be no assurance that any such refinancing would be possible or that
any additional financing could be obtained. The inability to obtain additional
financing could have a material adverse effect on the Company. Finally, in order
to pay the principal balance of the Notes due at maturity, the Company may have
to obtain alternative financing.
RANKING OF NOTES; ASSET ENCUMBRANCE
The Notes and Note Guarantees will be senior unsecured obligations and will
rank PARI PASSU in right of payment with all other existing and future senior
obligations of the Company and the Subsidiary Guarantors, respectively. Loans
under the New Credit Facility will be secured by substantially all of the
Company's assets and will be guaranteed by the Company's domestic subsidiaries,
which guarantees will be secured by substantially all of the assets of the
Company's domestic subsidiaries. Accordingly, the Notes and the Note Guarantees
are effectively subordinated to all secured indebtedness to the extent of the
collateral and will rank PARI PASSU in right of payment with all other existing
and future senior obligations of the Company or the Subsidiary Guarantors,
respectively. Upon an event of default under any such secured indebtedness, the
lenders could elect to declare all amounts outstanding, together with accrued
and unpaid interest thereon, to be immediately due and payable. If the Company
or the Subsidiary Guarantors were unable to repay those amounts, the lenders
could proceed against the collateral granted them to secure that indebtedness.
There can be no assurance that the assets of the Company or the relevant
subsidiary would be sufficient to repay in full any such secured indebtedness.
20
<PAGE>
RESTRICTIVE COVENANTS
The New Credit Facility and the Indenture will contain numerous restrictive
covenants, which limit the discretion of the management of the Company with
respect to certain business matters. These covenants will place significant
restrictions on, among other things, the ability of the Company to incur
additional indebtedness, to create liens or other encumbrances, to pay dividends
or make other restricted payments, to make investments, loans and guarantees and
to sell or otherwise dispose of a substantial portion of assets to, or merge or
consolidate with, another entity. The New Credit Facility also contains a number
of financial covenants that will require the Company to meet certain financial
ratios and tests and provide that a "change of control" will constitute an event
of default. See "Description of Notes--Certain Covenants" and "Description of
New Credit Facility." A failure to comply with the obligations contained in the
New Credit Facility or the Indenture, if not cured or waived, could permit
acceleration of the related indebtedness and acceleration of indebtedness under
other instruments that contain cross-acceleration or cross-default provisions.
In the case of an event of default under the New Credit Facility, the lenders
under the New Credit Facility would be entitled to exercise the remedies
available to a secured lender under applicable law. If the Company were
obligated to repay all or a significant portion of its indebtedness, there can
be no assurance that the Company would have sufficient cash to do so or that the
Company could successfully refinance such indebtedness. Other indebtedness of
the Company that may be incurred in the future may contain financial or other
covenants more restrictive than those applicable to the New Credit Facility or
the Notes.
IMPORTANCE OF KEY CUSTOMERS TO THE AEROSPACE PRODUCTS BUSINESS
Certain customers are material to the business and operations of the
Company. Boeing accounted for $7.9 million, or 11.0% of the Company's total net
sales and 32.3% of the Aerospace Products business' net sales in 1996, and for
$6.4 million, or 9.4%, of the Company's total net sales and 27.5% of the
Aerospace Products division's net sales in 1995. In 1996, the top five customers
of the Aerospace Products division accounted for $16.5 million in net sales,
representing 22.8% and 67.1%, respectively, of the Company's total and the
Aerospace Product business' net sales in that year.
The Company's prospects will continue to depend on the success of these
customers whose products incorporate aerospace products manufactured by the
Company, as well as Boeing's retention of the Company as a major supplier.
Although the Company believes that it has excellent long-standing relationships
with these customers and that such relationships are mutually beneficial, the
Company does not have long-term contracts with Boeing or any of its other major
customers and the loss of any as a customer, or a significant reduction in the
Company's business with any of them would have a material adverse effect on the
Company and its business, results of operations and financial condition. See
"--Competition."
DEPENDENCE ON CUSTOMERS IN CYCLICAL INDUSTRIES
A majority of the Company's revenues were derived from customers who are in
industries and businesses that are highly cyclical in nature, such as the
commercial and military aerospace and commercial construction industries. The
world-wide market for commercial jet aircraft is predominantly driven by
long-term trends in airline passenger traffic. The principal factors underlying
long-term traffic growth are sustained economic growth in developed and emerging
countries and political stability. Demand for commercial aircraft is further
influenced by airline industry profitability, world trade policies, government-
to-government relations, technological changes and price and other competitive
factors. The military aircraft industry is highly sensitive to changes in
international political conditions, national priorities and United States
government defense budgets. The commercial construction industry is affected by
downturns in general economic conditions, raw material price fluctuations and
adverse weather conditions. Each of these industries is also subject to changes
in general economic conditions. In addition, because the Company conducts its
operations in a variety of markets, it is subject to the economic conditions in
each
21
<PAGE>
such market. General economic downturns in the commercial and military aerospace
and commercial construction industries could have a material adverse effect on
the Company and its business, results of operations and financial condition. The
Company's outlook for its aerospace business and its allocation of resources are
premised on the continued growth in the commercial aerospace industry. If this
growth fails to continue, the Company's results of operations could be adversely
affected.
COMPETITION
The Company experiences significant competition in all of the areas in which
it does business. In general, other than the aerospace seals market, the markets
in which it competes are not dominated by a single company or a small number of
companies; instead a large number of companies offer products that overlap and
are competitive with those offered by the Company. A number of the Company's
competitors are significantly larger and have greater financial resources than
the Company, and some of these competitors are divisions or subsidiaries of
large, diversified companies that have access to the financial resources of
their parent companies. The Company believes that the principal competitive
factors in the businesses in which it operates are technologically advanced
production, management capability, past performance in terms of timeliness and
quality of product and price. There can be no assurance that the Company will be
able to compete successfully. See "Business--Products and Markets--Aerospace
Products--Competition," "--Flooring Products--Competition" and "--Commercial
Products--Competition."
DEPENDENCE ON KEY PERSONNEL
The Company's operations are largely dependent on the efforts of its senior
management. There can be no assurance that the Company will be able to retain
such persons. Additionally, in order to successfully manage its growth strategy,
the Company must continue to attract qualified personnel. The Company does not
maintain "key man" life insurance policies on any of its employees. If certain
of the current key personnel should cease to be employed by the Company for any
reason, or if the Company should be unable to continue to attract and retain
qualified management personnel, the Company's business, financial condition and
results of operations could suffer a material adverse effect. See "Management."
CONTROL BY INVESTORS
Following the Recapitalization, the Company is now controlled by JFLEI,
which beneficially owns shares representing 65% of the voting interest in the
Company, on a fully diluted basis, and has the right to designate eight of the
nine directors of the Company. In addition, certain limited partners in JFLEI
own warrants representing an additional 20% of the Common Stock on a fully
diluted basis. Pursuant to the terms of the Shareholders Agreement (as defined
herein), for so long as it, together with its related transferees, owns 75% of
the Warrants initially issued to it, one of the holders of the Warrants has the
right to designate the ninth director. In addition, pursuant to the terms in the
Shareholders Agreement, for so long as it, together with its related
transferees, owns 75% of the Warrants initially issued to it, another of the
holders of the Warrants has the right to cause the number of directors of the
Company to be increased to ten and to designate the tenth director. Accordingly,
JFLEI and certain of the investors therein have the power to elect the Company's
board of directors, appoint new management and approve any action requiring the
approval of the holders of the Company's Common Stock, including adopting
amendments to the Company's Articles of Incorporation and approving mergers or
sales of substantially all of the Company's assets. The directors elected by
JFLEI have the authority to make decisions affecting the capital structure of
the Company, including the issuance of additional indebtedness and the
declaration of dividends. See "Management," "Certain Relationships and Related
Transactions" and "Security Ownership of Certain Beneficial Owners and
Management."
22
<PAGE>
GOVERNMENT PROCUREMENT POLICIES
Approximately one-third of the Company's Aerospace Products division's net
sales in 1996 were made pursuant to contracts between the United States
government, on the one hand, and the Company or a customer of the Company, on
the other hand. Management's projected growth in the Aerospace Products division
is based, in part, on management's belief that there will continue to be growth
in purchases made under United States government military aircraft contracts and
that the Company will benefit, directly or indirectly through its customers,
from such growth. There can be no assurance, however, that there will be
continued growth in such purchases. See "--Dependence on Customers in Cyclical
Industries." In addition, contracts with the United States government are
subject to cancellation for default or for convenience by the government if
deemed in its best interests. Contracts which are terminated for convenience
generally provide for payments to a contractor for its costs and a proportionate
share of profit for work accomplished through the date of termination. Contracts
which are terminated for default generally provide that the government pay only
for the work it has accepted, can require the contractor to pay the difference
between the original contract price and the cost to reprocure the contract items
net of the value of the work accepted from the original contractor, and can hold
a contractor liable for damages. There can be no assurance that any current or
prospective contract on which the Company is a primary contractor or any such
contract on which the Company is a subcontractor or supplier will not be
terminated for default or for convenience by the government or that any such
cancellation will not result in the Company realizing a loss or failing to
realize the expected profit on any such contract.
FUTURE ACQUISITIONS
The Company expects to continue a strategy of identifying and acquiring
companies with complementary products or services that may be expected to
enhance the Company's operations and profitability. There can be no assurance
that the Company will be able to identify appropriate acquisition candidates,
negotiate appropriate acquisition terms, obtain financing which may be needed to
effect such acquisitions or integrate acquisitions successfully into the
Company's operations or that any of such acquisitions will prove profitable.
RAW MATERIALS
Principal raw materials purchased by the Company for use in its products
include various custom and standard grades of rubber, silicone gum and vinyl as
well as the Hypalon polymer material. The Company has historically not
experienced any significant supply restrictions and has generally been able to
pass through increases in the price of these materials to customers. In 1995,
however, the Company experienced a significant price increase in one of the raw
materials used in the manufacture of one of its flooring products. Due to the
competitive nature of the flooring products business and the Company's
proprietary formula for this product, the Company was unable to fully pass this
price increase along to its consumers and its gross margins for this product
were adversely affected. Although the Company does not currently anticipate that
it will experience any similar price increases for this or any other raw
material used by the Company in the near future, there can be no assurance that
such price increases will not occur and that the Company's results of operations
will not be adversely affected thereby.
INABILITY TO FUND CHANGE OF CONTROL OFFER
Upon a Change in Control (as defined in the Indenture), each holder will
have the right to require the Company to repurchase all or any part of such
holder's Notes at 101% of the principal amount thereof, plus accrued and unpaid
interest thereon to the date of repurchase. See "Description of Notes--Certain
Covenants--Purchase of Notes Upon Change of Control." However, there can be no
assurance that sufficient funds will be available to the Company at the time of
the Change of Control to make any required repurchases of Notes tendered.
Moreover, restrictions in the New Credit Facility prohibit the Company from
making such required repurchases; therefore, any such repurchases would
constitute an
23
<PAGE>
event of default under the New Credit Facility absent a waiver. In addition, the
holders of the Redeemable Preferred Stock may also require the Company to
repurchase their shares of Redeemable Preferred Stock upon a Change of Control,
which would also constitute a default under the New Credit Facility, absent a
waiver. Notwithstanding these provisions, the Company could enter into certain
transactions, including certain recapitalizations, that would not constitute a
Change of Control but would increase the amount of debt outstanding at such
time. See "Description of New Credit Facility."
ENVIRONMENTAL MATTERS
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, the 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. See "The Transactions." Based in part on the investigations
conducted and the indemnification provisions of the Merger Agreement with
respect to environmental matters, the Company believes, although there can be no
assurance, that its liabilities relating to these environmental matters will not
have a material adverse effect on its future financial position or results of
operations. The Company does not maintain a reserve for environmental
liabilities.
FRAUDULENT CONVEYANCE AND PREFERENCE CONSIDERATIONS
Under applicable provisions of federal bankruptcy law or comparable
provisions of state fraudulent conveyance law, if, among other things, the
Company or any of the Subsidiary Guarantors, at the time it incurred the
indebtedness evidenced by the Notes or its Note Guarantee, as the case may be,
(i)(a) was or is insolvent or rendered insolvent by reason of such occurrence or
(b) was or is engaged in a business or transaction of which the assets remaining
with the Company or such Subsidiary Guarantor were unreasonably small or
constitute unreasonably small capital or (c) intended or intends to incur, or
believed, believes or should have believed that it would incur, debts beyond its
ability to repay such debts as they mature and (ii) the Company or such
Subsidiary Guarantor received or receives less than the reasonably equivalent
value or fair consideration for the incurrence of such indebtedness, the Notes
and the Note Guarantees could be invalidated or subordinated to all other debts
of the Company or such Subsidiary Guarantors, as the case may be. The Notes or
Note Guarantees could also be invalidated or subordinated if it were found that
the Company or the Subsidiary Guarantor party thereto, as the case may be,
incurred indebtedness in connection with the Notes or its Note Guarantee with
the intent of hindering, delaying or defrauding current or future creditors of
the Company or such Subsidiary Guarantor, as the case may be. In addition, the
payment of interest and principal by the Company pursuant to the Notes or the
payment of amounts by a Subsidiary Guarantor pursuant to a Note Guarantee could
be voided and required to be returned to the person making such payment, or to a
fund for the benefit of the creditors of the Company or such Subsidiary
Guarantor, as the case may be.
The measures of insolvency for purposes of the foregoing considerations will
vary depending upon the law applied in any proceeding with respect to the
foregoing. Generally, however, the Company or a Subsidiary Guarantor would be
considered insolvent if (i) the sum of its debts, including contingent
24
<PAGE>
liabilities, were greater than the sum of all of its assets at a fair valuation
or if the present fair saleable value of its assets were less than the amount
that would be required to pay its probable liability on its existing debts,
including contingent liabilities, as they become absolute and mature or (ii) it
could not pay its debts as they become due.
Additionally, under federal bankruptcy or applicable state insolvency law,
if certain bankruptcy or insolvency proceedings were initiated by or against the
Company or any Subsidiary Guarantor within 90 days after any payment by the
Company or such Subsidiary Guarantor with respect to the Notes or a Note
Guarantee, respectively, or after the issuance of a Note Guarantee, or if the
Company or such Subsidiary Guarantor anticipated becoming insolvent at the time
of such payment or issuance, all or a portion of such payment or such Note
Guarantee could be avoided as a preferential transfer, and the recipient of any
such payment could be required to return such payment.
To the extent any Note Guarantees were voided as a fraudulent conveyance or
held unenforceable for any other reason, holders of Notes would cease to have
any claim in respect of such Subsidiary Guarantor and would be creditors solely
of the Company and any Subsidiary Guarantor whose Note Guarantee was not avoided
or held unenforceable. In such event, the claims of holders of Notes against the
issuer of an invalid Note Guarantee would be subject to the prior payment of all
liabilities and preferred stock claims of such Subsidiary Guarantor. There can
be no assurance that, after providing for all prior claims and preferred stock
interests, if any, there would be sufficient assets to satisfy the claims of
holders of Notes relating to any voided portions of any Note Guarantees. The
Company currently has no significant subsidiaries.
On the basis of its historical financial information, and recent operating
history, as discussed in "Prospectus Summary," "Unaudited Pro Forma Consolidated
Financial Statements" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations," the Company believes that, after giving
effect to the indebtedness incurred in connection with the Transactions, it will
not be insolvent, will not have unreasonably small assets or capital for the
businesses in which it is engaged and will not incur debts beyond its ability to
pay such debts as they mature. There can be no assurance, however, as to what
standard a court would apply in making such determinations.
ABSENCE OF PUBLIC MARKET FOR THE NOTES
The New Notes are a new issue of securities, have no established trading
market and may be widely distributed. The Company does not intend to list the
New Notes on any national securities exchange or to seek the admission thereof
to trading in the Nasdaq National Market System. The Company has been advised by
the Initial Purchaser that it currently intends to make a market in the New
Notes. However, the Initial Purchaser is not obligated to do so and may
discontinue such market-making at any time without notice. In addition, such
market-making activity will be subject to the limitations imposed by the
Securities Act and the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and may be limited during the Exchange Offer. See "Plan of
Distribution." Accordingly, there can be no assurance that an active public or
other market will develop for the New Notes or as to the liquidity of or the
trading for the New Notes. If a trading market does not develop or is not
maintained,, holders of the New Notes may experience difficulty in reselling the
New Notes or may be unable to sell them at all. If a public trading market
develops for the New Notes, future trading prices of the New Notes will depend
on many factors, including, among other things, prevailing interest rates, the
Company's results of operations and the market for similar securities. Depending
on prevailing interest rates, the market for similar securities and other facts,
including the financial condition of the Company, the New Notes may trade at a
discount from their principal amount.
25
<PAGE>
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Old Notes who do not exchange for New Notes pursuant to the
Exchange Offer will continue to be subject to the restrictions on transfer of
such Old Notes as set forth in the legend thereon as a consequence of the
issuance of the Old Notes pursuant to exemptions from, or in transactions not
subject to, the registration requirements of the Securities Act and applicable
state securities laws. In general, the Old Notes may not be offered or sold,
unless registered under the Securities Act, except pursuant to an exemption
from, or in a transaction not subject to, the Securities Act and applicable
state securities laws. The Company does not currently anticipate that it will
register the Old Notes under the Securities Act. New Notes issued pursuant to
the Exchange Offer may be offered for resale, resold, or otherwise transferred
by Holders thereof (other than any such holder which is an "affiliate" of the
Company or any Guarantor within the meaning of Rule 405 under the Securities
Act) without compliance with the registration and prospectus delivery provisions
of the Securities Act provided that such New Notes are in the ordinary course of
such holders' business and such holders have no arrangement with any person to
participate in the distribution of such notes. Each broker-dealer that receives
New Notes as a result of market-making activities or other trading activities
must acknowledge that it will deliver a prospectus in connection with any resale
of such New Notes. The Letter of Transmittal states that, by so acknowledging
and delivering a prospectus, a broker-dealer will not be deemed to admit that it
is an "underwriter" within the meaning of the Securities Act. The Company has
agreed that, for a period of 180 days after the Expiration Date, it will make
this Prospectus available to any broker-dealer for use in connection with any
such resale. See "Plan of Distribution." However, to comply with the Securities
laws of certain jurisdictions, if applicable, the New Notes may not be offered
or sold unless they have been registered or qualified for sale in such
jurisdictions or an exemption from registration or qualification is available
and is complied with. To the extent that Old Notes are tendered and accepted in
the Exchange Offer, the trading market for untendered and tendered but
unaccepted Old Notes will be adversely affected.
26
<PAGE>
THE TRANSACTIONS
Pursuant to the Merger Agreement among JFLEI, MergerCo, the Company and all
of the shareholders of the Company, MergerCo merged with and into the Company
with the Company surviving the Merger. The Merger, together with the related
transactions described below are collectively referred to as the
"Recapitalization."
Pursuant to the terms of the Merger Agreement:
- All outstanding shares of the Company's Common Stock, other than those
retained by the Continuing Shareholders, were converted into the right to
receive an amount in cash equal to the Recapitalization Consideration and
all vested options to purchase the Company's Common Stock were canceled
and converted into the right to receive an amount in cash equal to the
Recapitalization Consideration less the applicable exercise price.
- The Continuing Shareholders agreed to retain an aggregate of 722,702
Continuing Shares, which represents approximately 15% of the common equity
of the Company, on a fully diluted basis, after consummation of the
Recapitalization.
- The shareholders of the Company prior to the Recapitalization made certain
customary representations, warranties and covenants to the Company and
JFLEI in connection with the Merger. These shareholders agreed to
indemnify the Company and JFLEI against any losses brought about by a
breach of these representations, warranties or covenants, up to an
aggregate maximum amount of approximately $8.8 million (except for certain
tax and title issues which are not subject to this indemnification cap).
This indemnity, excluding these tax and title issues, will expire on March
31, 1998.
The Merger was financed through a series of related transactions:
- JFLEI made a capital contribution in the amount of $20.0 million to
MergerCo (the "JFLEI Investment") and received 3,134,298 shares of common
stock of MergerCo in consideration thereof;
- Concurrently with the consummation of the Merger, in consideration for
$18.0 million, the Company issued 18,000 shares of Redeemable Preferred
Stock, together with the Warrants to purchase an aggregate of 20% of the
issued and outstanding common stock of the Company, to certain purchasers
thereof that are limited partners of JFLEI. See "Description of Redeemable
Preferred Stock and Warrants;"
- The Old Notes were issued by the Company concurrently with consummation of
the Merger; and
- The Company entered into a credit facility (the "New Credit Facility"),
which provides for revolving credit borrowings of up to $15.0 million. No
borrowings were or will be drawn under the New Credit Facility in
connection with the Transactions. See "Description of New Credit
Facility."
Immediately following the consummation of the Transactions, (i) JFLEI and
its affiliates owned approximately 65% of the common equity of the Company on a
fully diluted basis, (ii) the holders of the Warrants obtained the right to
purchase approximately 20% of the common equity of the Company, on a fully
diluted basis and (iii) the Continuing Shareholders owned approximately 15% of
the common equity of the Company, on a fully diluted basis. Accordingly, the
merger was accounted for as a recapitalization for financial reporting purposes
and the historical basis of the Company's assets and liabilities has not been
impacted by the transaction.
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<PAGE>
USE OF PROCEEDS
The gross proceeds to the Company from the Offering were $110.0 million
before deducting commissions and estimated expenses of the Offering. The Company
used the proceeds from the issuance of the Senior Notes, JFLEI Investment, the
issuance of the Redeemable Preferred Stock and Warrants and the proceeds of the
other Transactions, (i) to pay certain shareholders of the Company the
Recapitalization Consideration for their shares of the Company's Common Stock
and for their outstanding options to purchase the Company's Common Stock which
were not Continuing Shares, (ii) to repay certain existing indebtedness of the
Company, (iii) to pay certain expenses of the Transactions and (iv) for general
corporate purposes.
The following table sets forth the sources and uses of funds in connection
with the Transactions:
<TABLE>
<CAPTION>
(DOLLARS IN
THOUSANDS)
<S> <C>
Sources of Funds:
Issuance of Senior Notes............................................. $ 110,000
JFLEI Investment..................................................... 20,000
Issuance of Redeemable Preferred Stock and Warrants.................. 18,000
Continuing Shares(1)................................................. 6,740
New Credit Facility.................................................. 0
--------
$ 154,740
--------
--------
Uses of Funds:
Aggregate Recapitalization Consideration(1).......................... $ 117,892
Repayment of Existing Credit Facility and Subordinated Debt.......... 19,014
Transaction Expenses(2).............................................. 7,305
Working Capital...................................................... 10,529
--------
$ 154,740
--------
--------
</TABLE>
- ------------------------
(1) Pursuant to the Recapitalization, (i) 8,676,168 shares of Common Stock of
the Company were converted into the right to receive the Recapitalization
Consideration, (ii) options to purchase 1,542,000 shares of Common Stock of
the Company were converted into the right to receive the Recapitalization
Consideration less the applicable exercise price, (iii) warrants to purchase
1,700,000 shares of Common Stock of the Company were converted into the
right to receive the Recapitalization Consideration less the applicable
exercise price and (iv) 722,702 Continuing Shares were retained by the
Continuing Shareholders, which represent an aggregate of 15% of the issued
and outstanding shares of the Company, on a fully diluted basis. See "The
Transactions." These line items include the value of the Continuing Shares
based on the Recapitalization Consideration.
(2) Includes discounts and commissions and expenses incurred in connection with
the Offering, fees and expenses paid in connection with the Recapitalization
and the financing thereof, fees and expenses paid in connection with the
issuance of the Preferred Stock and Warrants and fees and expenses paid in
connection with the New Credit Facility. See "The Transactions,"
"Description of New Credit Facility," "Description of Redeemable Preferred
Stock and Warrants" and "Certain Relationships and Related Transactions."
28
<PAGE>
THE EXCHANGE OFFER
PURPOSE AND EFFECT
The Old Notes were sold by the Company to the Initial Purchaser on August
20, 1997 pursuant to the Purchase Agreement. The Initial Purchaser subsequently
resold the Old Notes in reliance on Rule 144A under the Securities Act. The
Company, the Subsidiary Guarantors and the Initial Purchaser entered into the
Registration Rights Agreement, pursuant to which the Company and the Subsidiary
Guarantors agreed, for the benefit of the Holders of the Old Notes, at the
expense of the Company and the Subsidiary Guarantors, to (i) file on or prior to
the 60th calendar day following the Closing Date a registration statement (the
"Exchange Offer Registration Statement") with the Commission, (ii) use its best
efforts to cause the Exchange Offer Registration Statement to be declared
effective under the Securities Act on or prior to the 120th calendar day
following the Closing Date, and (iii) use its best efforts to consummate the
Exchange Offer on or prior to the 150th calendar day following the Closing Date.
The Company will keep the Exchange Offer open for not less than 30 days and not
more than 45 days (or longer if required by applicable law) after the date
notice of the Exchange Offer is mailed to the Holders of the Old Notes. This
Exchange Offer is intended to satisfy the Company's exchange offer obligations
under the Registration Rights Agreement.
CONSEQUENCES OF FAILURE TO EXCHANGE OLD NOTES
Following the expiration of the Exchange Offer, holders of Old Notes not
tendered, or not properly tendered will not have any further registration rights
and such Old Notes will continue to be subject to the existing restrictions on
transfer thereof. Accordingly, the liquidity of the market for a holder's Old
Notes could be adversely affected upon expiration of the Exchange Offer if such
holder elects to not participate in the Exchange Offer.
TERMS OF THE EXCHANGE OFFER
The Company hereby offers, upon the terms and subject to the conditions set
forth herein and in the accompanying Letter of Transmittal, to exchange $1,000
in principal amount of the New Notes for each $1,000 in principal amount of the
outstanding Old Notes. The Company will accept for exchange any and all Old
Notes that are validly tendered on or prior to 5:00 p.m., New York City time, on
the Expiration Date. Tenders of the Old Notes may be withdrawn at any time prior
to 5:00 p.m., New York City time, on the Expiration Date. The Exchange Offer is
not conditioned upon any minimum principal amount of Old Notes being tendered
for exchange. However, the Exchange Offer is subject to the terms and provisions
of the Registration Rights Agreement. See "Conditions of the Exchange Offer."
Old Notes may be tendered only in multiples of $1,000. Subject to the
foregoing, holders of Old Notes may tender less than the aggregate principal
amount represented by the Old Notes held by them, provided that they
appropriately indicate this fact on the Letter of Transmittal accompanying the
tendered Old Notes (or so indicate pursuant to the procedures for book-entry
transfer).
As of the date of this Prospectus, $110.0 million in aggregate principal
amount of the Old Notes is outstanding, the maximum amount authorized by the
Indenture for all Notes. Solely for reasons of administration (and for no other
purpose), the Company has fixed the close of business on , 1997, as the
record date (the "Record Date") for purposes of determining the persons to whom
this Prospectus and the Letter of Transmittal will be mailed initially. Only a
holder of the Old Notes (or such holder's legal representative or
attorney-in-fact) may participate in the Exchange Offer. There will be no fixed
record date for determining holders of the Old Notes entitled to participate in
the Exchange Offer. The Company believes that, as of the date of this
Prospectus, no such holder is an affiliate (as defined in Rule 405 under the
Securities Act) of the Company.
29
<PAGE>
The Company shall be deemed to have accepted validly tendered Old Notes
when, as and if the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering holders
of Old Notes and for the purposes of receiving the New Notes from the Company.
If any tendered Old Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, certificates for any such unaccepted Old Notes will be returned,
without expense, to the tendering holder thereof as promptly as practicable
after the Expiration Date.
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The Expiration Date shall be , 1998 at 5:00 p.m., New York City time,
unless the Company, in its sole discretion, extends the Exchange Offer, in which
case the Expiration Date shall be the latest date and time to which the Exchange
Offer is extended.
In order to extend the Exchange Offer, the Company will notify the Exchange
Agent of any extension by oral or written notice and will make a public
announcement thereof, each prior to 9:00 a.m., New York City time, on the next
business day after the previously scheduled Expiration Date.
The Company reserves the right, in its sole discretion, (i) to delay
accepting any Old Notes, (ii) to extend the Exchange Offer, (iii) if any of the
conditions set forth below under "Conditions of the Exchange Offer" shall not
have been satisfied, to terminate the Exchange Offer, by giving oral or written
notice of such delay, extension, or termination to the Exchange Agent, and (iv)
to amend the terms of the Exchange Offer in any manner. If the Exchange Offer is
amended in a manner determined by the Company to constitute a material change,
the Company will promptly disclose such amendments by means of a prospectus
supplement that will be distributed to the registered holders of the Old Notes.
CONDITIONS OF THE EXCHANGE OFFER
The Exchange Offer is not conditioned upon any minimum principal amount of
the Old Notes being tendered for exchange. However, the Exchange Offer is
conditioned upon the declaration by the Commission of the effectiveness of the
Registration Statement of which this Prospectus constitutes a part.
TERMINATION OF CERTAIN RIGHTS
Pursuant to the Registration Rights Agreement the Company and the Subsidiary
Guarantors agreed, at their own expense, to (i) file on or prior to the 60th
calendar day following the Closing Date a registration statement (the "Exchange
Offer Registration Statement") with the Commission with respect to a registered
offer to exchange the Old Notes for a new issue of debt securities of the
Company (the "Exchange Notes") to be issued under the Indenture in the same
aggregate principal amount as and with the terms that will be identical in all
respects to the Old Notes (except that the Exchange Notes will not contain terms
that will be identical in all respects to the interest rate step-up provision
and transfer restrictions) and (ii) use its best efforts to cause the Exchange
Offer Registration Statement to be declared effective under the Securities Act
on or prior to the 120th calendar day following the Closing Date and (iii) use
its best effort to consummate the Exchange Offer on or prior to the 150th
calendar day following the Closing Date. The Company agreed to keep the Exchange
Offer open for not less than 30 days and not more than 45 days (or longer if
required by applicable law) after the date notice of the Exchange Offer is
mailed to the Holders of the Old Notes.
In the event that changes in the law or applicable interpretations of the
staff of the Commission do not permit the Company to effect the Exchange Offer,
or if for any reason the Exchange Offer is not consummated within 150 days of
the Closing Date or in certain other circumstances, the Registration Rights
Agreement provides that the Company and the Subsidiary Guarantors will, at their
own expense,
30
<PAGE>
(i) as promptly as practicable, and in any event on or prior to 60 days after
such filing obligation arises, file with the Commission a shelf registration
statement (the Shelf Registration Statement") covering resales of the Old Notes,
(ii) use their best efforts to cause the Shelf Registration Statement to be
declared effective under the Securities Act on or prior to 45 days after such
filing occurs and (iii) keep effective the Shelf Registration Statement until
two years after its effective date (or such shorter period that will terminate
when all the Old Notes covered thereby have been sold pursuant thereto or in
certain other circumstances).
The Registration Rights Agreement provides that, subject to certain
exceptions, in the event of a Registration Default (as defined below), holders
of Old Notes are entitled to receive Liquidated Damages, with respect to the
first 90-day period immediately following the occurrence of such Registration
Default, an amount equal to $0.05 per week per $1,000 principal amount of Old
Notes held by such holders. The amount of Liquidated Damages will increase by an
additional $0.05 per week per $1,000 principal amount of Old Notes with respect
to each subsequent 90-day period until all Registration Defaults have been
cured, up to a maximum of amount of Liquidated Damages of $0.30 per week per
$1,000 principal amount of Old Notes. A "Registration Default" with respect to
the Exchange Offer shall occur if: (i) the Company fails to file any of the
Registration Statements required by the Registration Rights Agreement on or
before the date specified for such filing, (ii) any of such Registration
Statements is not declared effective by the Commission on or prior to the date
specified for such effectiveness (the "Effectiveness Target Date"), or (c) the
Company fails to consummate the Exchange Offer within 30 business days of the
Effectiveness Target Date with respect to the Exchange Offer Registration
Statement or (iv) the Shelf Registration Statement or the Exchange Offer
Registration Statement is declared effective but thereafter ceases to be
effective or usable in connection with resales of Notes during the periods
specified in the Registration Rights Agreement. Holders of New Notes will not be
and, upon consummation of the Exchange Offer, holders of Old Notes will no
longer be, entitled to (i) the right to receive the Liquidated Damages or (ii)
certain other rights under the Registration Rights Agreement intended for
holders of Old Notes. The Exchange Offer shall be deemed consummated upon the
occurrence of the delivery by the Company to the Registrar under the Indenture
of New Notes in the same aggregate principal amount as the aggregate principal
amount of Old Notes that are tendered by holders thereof pursuant to the
Exchange Offer.
ACCRUED INTEREST
The New Notes will bear interest at a rate equal to 10% per annum, which
interest shall accrue from August 20, 1997 or from the most recent Interest
Payment Date with respect to the Old Notes to which interest was paid or duly
provided for. See "Description of Notes--Principal, Maturity and Interest."
PROCEDURES FOR TENDERING OLD NOTES
The tender of a holder's Old Notes as set forth below and the acceptance
thereof by the Company will constitute a binding agreement between the tendering
holder and the Company upon the terms and subject to the conditions set forth in
this Prospectus and in the accompanying Letter of Transmittal. Except as set
forth below, a holder who wishes to tender Old Notes for exchange pursuant to
the Exchange Offer must transmit such Old Notes, together with a properly
completed and duly executed Letter of Transmittal, including all other documents
required by such Letter of Transmittal, to the Exchange Agent at the address set
forth on the back cover page of this Prospectus prior to 5:00 p.m., New York
City time, on the Expiration Date. THE METHOD OF DELIVERY OF OLD NOTES, LETTERS
OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF
THE HOLDER. IF SUCH DELIVERY IS BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL,
PROPERLY INSURED, WITH RETURN RECEIPT REQUESTED, BE USED. INSTEAD OF DELIVERY BY
MAIL, IT IS RECOMMENDED THAT THE HOLDER USE AN OVERNIGHT OR HAND DELIVERY
SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE TIMELY
DELIVERY.
31
<PAGE>
Any financial institution that is a participant in the Depositary's
Book-Entry Transfer Facility system may make book-entry delivery of the Old
Notes by causing the Depositary to transfer such Old Notes into the Exchange
Agent's account in accordance with the Depositary's procedures for such
transfer. In connection with a book-entry transfer, a Letter of Transmittal need
not be transmitted to the Exchange Agent, provided that the book-entry transfer
procedure must be complied with prior to 5:00 p.m., New York City time, on the
Expiration Date.
Each signature on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed unless the Old Notes surrendered for exchange
pursuant hereto are tendered (i) by a registered holder of the Old Notes who has
not completed either the box entitled "Special Exchange Instructions" or the box
entitled "Special Delivery Instructions" in the Letter of Transmittal, or (ii)
by an Eligible Institution (as defined). In the event that a signature on a
Letter of Transmittal or a notice of withdrawal, as the case may be, is required
to be guaranteed, such guarantee must be by a firm which is a member of a
registered national securities exchange or the National Association of
Securities Dealers, Inc., a commercial bank or trust company having an office or
correspondent in the United States or otherwise be an "eligible guarantor
institution" within the meaning of Rule 17Ad-15 under the Exchange Act
(collectively, "Eligible Institutions"). If the Letter of Transmittal is signed
by a person other than the registered holder of the Old Notes, the Old Notes
surrendered for exchange must either (i) be endorsed by the registered holder,
with the signature thereon guaranteed by an Eligible Institution, or (ii) be
accompanied by a bond power, in satisfactory form as determined by the Company
in its sole discretion, duly executed by the registered holder, with the
signature thereon guaranteed by an Eligible Institution. The term "registered
holder" as used herein with respect to the Old Notes means any person in whose
name the Old Notes are registered on the books of the Registrar.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of Old Notes tendered for exchange will be
determined by the Company in its sole discretion, which determination shall be
final and binding. The Company reserves the absolute right to reject any and all
Old Notes not properly tendered and to reject any Old Notes the Company's
acceptance of which might, in the judgment of the Company or its counsel, be
unlawful. The Company also reserves the absolute right to waive any defects or
irregularities or conditions of the Exchange Offer as to particular Old Notes
either before or after the Expiration Date (including the right to waive the
ineligibility of any holder who seeks to tender Old Notes in the Exchange
Offer). The interpretation of the terms and Conditions of the Exchange Offer
(including the Letter of Transmittal and the instructions thereto) by the
Company shall be final and binding on all parties. Unless waived, any defects or
irregularities in connection with tenders of Old Notes for exchange must be
cured within such period of time as the Company shall determine. The Company
will use reasonable efforts to give notification of defects or irregularities
with respect to tenders of Old Notes for exchange but shall not incur any
liability for failure to give such notification. Tenders of the Old Notes will
not be deemed to have been made until such irregularities have been cured or
waived.
If any Letter of Transmittal, endorsement, bond power, power of attorney or
any other document required by the Letter of Transmittal is signed by a trustee,
executor, corporation or other person acting in a fiduciary or representative
capacity, such person should so indicate when signing and, unless waived by the
Company, proper evidence satisfactory to the Company, in its sole discretion, of
such person's authority to so act must be submitted.
Any beneficial owner of the Old Notes (a "Beneficial Owner") whose Old Notes
are registered in the name of a broker, dealer, commercial bank, trust company
or other nominee and who wishes to tender Old Notes in the Exchange Offer should
contact such registered holder promptly and instruct such registered holder to
tender on such Beneficial Owner's behalf. If such Beneficial Owner wishes to
tender directly, such Beneficial Owner must, prior to completing and executing
the Letter of Transmittal and tendering Old Notes, make appropriate arrangements
to register ownership of the Old Notes in such Beneficial Owner's name.
Beneficial Owners should be aware that the transfer of registered ownership may
take considerable time.
32
<PAGE>
By tendering, each registered holder will represent to the Company that,
among other things (i) the New Notes to be acquired in connection with the
Exchange Offer by the holder and each Beneficial Owner of the Old Notes are
being acquired by the holder and each Beneficial Owner in the ordinary course of
business of the holder and each Beneficial Owner, (ii) the holder and each
Beneficial Owner are not participating, do not intend to participate, and have
no arrangement or understanding with any person to participate, in the
distribution of the New Notes, (iii) the holder and each Beneficial Owner
acknowledge and agree that any person participating in the Exchange Offer for
the purpose of distributing the New Notes must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with a
secondary resale transaction of the New Notes acquired by such person and cannot
rely on the position of the staff of the Commission set forth in no-action
letters that are discussed herein under "Resales of New Notes," (iv) that if the
holder is a broker-dealer that acquired Old Notes as a result of market making
or other trading activities, it will deliver a Prospectus in connection with any
resale of New Notes acquired in the Exchange Offer, (v) the holder and each
Beneficial Owner understand that a secondary resale transaction described in
clause (iii) above should be covered by an effective registration statement
containing the selling security holder information required by Item 507 of
Regulation S-K of the Commission and (vi) neither the holder nor any Beneficial
Owner is an "affiliate," as defined under Rule 405 of the Securities Act, of the
Company except as otherwise disclosed to the Company in writing. In connection
with a book-entry transfer, each participant will confirm that it makes the
representations and warranties contained in the Letter of Transmittal.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available or (ii) who cannot deliver their Old Notes or any other
documents required by the Letter of Transmittal to the Exchange Agent prior to
the Expiration Date (or complete the procedure for book-entry transfer on a
timely basis), may tender their Old Notes according to the guaranteed delivery
procedures set forth in the Letter of Transmittal. Pursuant to such procedures:
(i) such tender must be made by or through an Eligible Institution and a Notice
of Guaranteed Delivery (as defined in the Letter of Transmittal) must be signed
by such Holder, (ii) on or prior to the Expiration Date, the Exchange Agent must
have received from the Holder and the Eligible Institution a properly completed
and duly executed Notice of Guaranteed Delivery (by facsimile transmission, mail
or hand delivery) setting forth the name and address of the Holder, the
certificate number or numbers of the tendered Old Notes, and the principal
amount of tendered Old Notes, stating that the tender is being made thereby and
guaranteeing that, within four (4) business days after the date of delivery of
the Notice of Guaranteed Delivery, the tendered Old Notes, a duly executed
Letter of Transmittal and any other required documents will be deposited by the
Eligible Institution with the Exchange Agent and (iii) such properly completed
and executed documents required by the Letter of Transmittal and the tendered
Old Notes in proper form for transfer (or confirmation of a book-entry transfer
of such Old Notes into the Exchange Agent's account at the Depositary) must be
received by the Exchange Agent within four (4) business days after the
Expiration Date. Any Holder who wishes to tender Old Notes pursuant to the
guaranteed delivery procedures described above must ensure that the Exchange
Agent receives the Notice of Guaranteed Delivery and Letter of Transmittal
relating to such Old Notes prior to 5:00 p.m., New York City time, on the
Expiration Date.
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES
Upon satisfaction or waiver of all the conditions to the Exchange Offer, the
Company will accept any and all Old Notes that are properly tendered in the
Exchange Offer prior to 5:00 p.m., New York City time, on the Expiration Date.
The New Notes issued pursuant to the Exchange Offer will be delivered promptly
after acceptance of the Old Notes. For purposes of the Exchange Offer, the
Company shall be deemed to have accepted validly tendered Old Notes, when, as,
and if the Company has given oral or written notice thereof to the Exchange
Agent.
33
<PAGE>
In all cases, issuances of New Notes for Old Notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely receipt
by the Exchange Agent of such Old Notes, a properly completed and duly executed
Letter of Transmittal and all other required documents (or of confirmation of a
book-entry transfer of such Old Notes into the Exchange Agent's account at the
Depositary); provided, however, that the Company reserves the absolute right to
waive any defects or irregularities in the tender or conditions of the Exchange
Offer. If any tendered Old Notes are not accepted for any reason, such
unaccepted Old Notes will be returned without expense to the tendering Holder
thereof as promptly as practicable after the expiration or termination of the
Exchange Offer.
WITHDRAWAL RIGHTS
Tenders of the Old Notes may be withdrawn by delivery of a written notice to
the Exchange Agent, at its address set forth on the back cover page of this
Prospectus, at any time prior to 5:00 p.m., New York City time, on the
Expiration Date. Any such notice of withdrawal must (i) specify the name of the
person having deposited the Old Notes to be withdrawn (the "Depositor"), (ii)
identify the Old Notes to be withdrawn (including the certificate number or
numbers and principal amount of such Old Notes, as applicable), (iii) be signed
by the Holder in the same manner as the original signature on the Letter of
Transmittal by which such Old Notes were tendered (including any required
signature guarantees) or be accompanied by a bond power in the name of the
person withdrawing the tender, in satisfactory form as determined by the Company
in its sole discretion, duly executed by the registered holder, with the
signature thereon guaranteed by an Eligible Institution together with the other
documents required upon transfer by the Indenture and (iv) specify the name in
which such Old Notes are to be re-registered, if different from the Depositor,
pursuant to such documents of transfer. Any questions as to the validity, form
and eligibility (including time of receipt) of such notices will be determined
by the Company, in its sole discretion. The Old Notes so withdrawn will be
deemed not to have been validly tendered for exchange for purposes of the
Exchange Offer. Any Old Notes which have been tendered for exchange but which
are withdrawn will be returned to the Holder thereof without cost to such Holder
as soon as practicable after withdrawal. Properly withdrawn Old Notes may be
retendered by following one of the procedures described under "The Exchange
Offer--Procedures for Tendering Old Notes" at any time on or prior to the
Expiration Date.
THE EXCHANGE AGENT; ASSISTANCE
United States Trust Company of New York is the Exchange Agent. All tendered
Old Notes, executed Letters of Transmittal and other related documents should be
directed to the Exchange Agent. Questions and requests for assistance and
requests for additional copies of the Prospectus, the Letter of Transmittal and
other related documents should be addressed to the Exchange Agent as follows:
BY REGISTERED OR CERTIFIED MAIL :
United States Trust Company of New York
P.O. Box 844
Cooper Station
New York, NY 10276-0844
Attn: Corporate Trust Services
BY FACSIMILE:
(212) 420-6152
34
<PAGE>
BY OVERNIGHT COURIER:
United States Trust Company of New York
770 Broadway, 13th Floor
New York, New York 10003
Attn: Corporate Trust Services
BY HAND:
United States Trust Company of New York
111 Broadway
Lower Level
New York, New York 10006
Attn: Corporate Trust Services
Confirm by Telephone 800-548-6565
FEES AND EXPENSES
All expenses incident to the Company's consummation of the Exchange Offer
and compliance with the Registration Rights Agreement will be borne by the
Company, including, without limitation: (i) all registration and filing fees
(including, without limitation, fees and expenses of compliance with state
securities or Blue Sky laws), (ii) printing expenses (including, without
limitation, expenses of printing certificates for the New Notes in a form
eligible for deposit with the Depositary and of printing Prospectuses), (iii)
messenger, telephone and delivery expenses, (iv) fees and disbursements of
counsel for the Company, (v) fees and disbursements of independent certified
public accountants, (vi) rating agency fees, (vii) internal expenses of the
Company (including, without limitation, all salaries and expenses of officers
and employees of the Company performing legal or accounting duties) and (ix)
fees and expenses incurred in connection with the listing of the New Notes on a
securities exchange.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers or others
soliciting acceptance of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
it for its reasonable out-of-pocket expenses in connection therewith.
The Company will pay all transfer taxes, if any, applicable to the exchange
of Old Notes pursuant to the Exchange Offer. If, however, a transfer tax is
imposed for any reason other than the exchange of Old Notes pursuant to the
Exchange Offer, then the amount of any such transfer taxes (whether imposed on
the registered holder or any other persons) will be payable by the tendering
holder. If satisfactory evidence of payment of such taxes or exemption is not
submitted with the Letter of Transmittal, the amount of such transfer taxes will
be billed directly to such tendering holder.
ACCOUNTING TREATMENT
The New Notes will be recorded at the same carrying value as the Old Notes,
as reflected in the Company's accounting records on the date of the exchange.
Accordingly, no gain or loss will be recognized by the Company for accounting
purposes. The expenses of the Exchange Offer will be amortized over the term of
the New Notes.
FEDERAL INCOME TAX CONSEQUENCES
The following discussion summarizing federal income tax consequences of the
Exchange Offer reflects the opinion of Gibson, Dunn, & Crutcher LLP, counsel to
the Company, as to material federal income tax consequences expected to result
from the Exchange Offer. An opinion of counsel is not binding on the Internal
Revenue Service ("IRS") or the courts, and there can be no assurances that the
IRS will not take, and that a court would not sustain, a position contrary to
that described below. Moreover, the following
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<PAGE>
discussion does not constitute comprehensive tax advice to any particular Holder
of Old Notes. The summary is based on the current provisions of the Internal
Revenue Code of 1986, as amended, and applicable Treasury regulations, judicial
authority and administrative pronouncements. The tax consequences described
below could be modified by future changes in the relevant law, which could have
retroactive effect. Each Holder of Old Notes should consult its own tax adviser
as to these and any other federal income tax consequences of the Exchange Offer
as well as any tax consequences to it under foreign, state, local or other law.
In the opinion of Gibson, Dunn & Crutcher LLP, exchanges of Old Notes for
Notes pursuant to the Exchange Offer will be treated as a modification of the
Old Notes that does not constitute a material change in their terms, and the
Company intends to treat the exchanges in that manner. Therefore, a Note is
treated as a continuation of the corresponding Old Note. An exchanging Holder's
holding period for a Note will include such Holder's holding period for the Old
Note. Such Holder will not recognize any gain or loss, and such Holder's basis
in the Note will be the same as such Holder's basis in the Old Note. The
Exchange Offer will result in no federal income tax consequences to a
non-exchanging Holder.
RESALES OF THE NEW NOTES
Based on an interpretation by the staff of the Commission set forth in
no-action letters issued to third parties, the Company believes that the New
Notes issued pursuant to the Exchange Offer to a holder in exchange for Old
Notes may be offered for resale, resold and otherwise transferred by such holder
(other than (i) a broker-dealer who purchased Old Notes directly from the
Company for resale pursuant to Rule 144A under the Securities Act or any other
available exemption under the Securities Act or (ii) a person that is an
affiliate of the Company within the meaning of Rule 405 under the Securities
Act) without compliance with the registration and prospectus delivery provisions
of the Securities Act, provided that such holder is acquiring the New Notes in
the ordinary course of business and is not participating, and has no arrangement
or understanding with any person to participate, in the distribution of the New
Notes. The Company has not requested or obtained an interpretive letter from the
Commission staff with respect to this Exchange Offer, and the Company and the
holders are not entitled to rely on interpretive advice provided by the staff to
other persons, which advice was based on the facts and conditions represented in
such letters. However, the Exchange Offer is being conducted in a manner
intended to be consistent with the facts and conditions represented in such
letters. If any holder acquires New Notes in the Exchange Offer for the purpose
of distributing or participating in a distribution of the New Notes, such holder
cannot rely on the position of the staff of the Commission enunciated in MORGAN
STANLEY & CO., INCORPORATED (available June 5, 1991) and EXXON CAPITAL HOLDINGS
CORPORATION (available April 13, 1989), or interpreted in the Commission's
letter to SHEARMAN AND STERLING (available July 2, 1993), or similar no-action
or interpretive letters and must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with a secondary
resale transaction, unless an exemption from registration is otherwise
available. Each broker-dealer that receives New Notes in exchange for Old Notes,
where such Old Notes were acquired by such broker-dealer as a result of
market-making or other trading activities, must acknowledge that it will deliver
a Prospectus in connection with any resale of such New Notes. See "Plan of
Distribution."
It is expected that the New Notes will be freely transferable by the holders
thereof, subject to the limitations described in the immediately preceding
paragraph. Sales of New Notes acquired in the Exchange Offer by holders who are
"affiliates" of the Company within the meaning of the Securities Act will be
subject to certain limitations on resale under Rule 144 of the Securities Act.
Such persons will only be entitled to sell New Notes in compliance with the
volume limitations set forth in Rule 144, and sales of New Notes by affiliates
will be subject to certain Rule 144 requirements as to the manner of sale,
notice and the availability of current public information regarding the Company.
The foregoing is a summary only of Rule 144 as it may apply to affiliates of the
Company. Any such persons must consult their own legal counsel for advice as to
any restrictions that might apply to the resale of their Notes.
36
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company on a
historical basis as of October 3, 1997. The historical balance sheet as of
October 3, 1997 already reflects the effect of the Recapitalization. The Old
Notes surrendered in exchange for the New Notes will be retired and canceled and
cannot be reissued. Accordingly, issuance of the New Notes will not result in
any increase or decrease in the indebtedness of the Company. As such, no effect
has been given to the Exchange Offer in this capitalization table. This table
should be read in conjunction with "The Transactions," "Description of Notes,"
"Description of New Credit Facility," "Description of Preferred Stock and
Warrants," the Unaudited Pro Forma Consolidated Income Statements and the notes
thereto and the Consolidated Financial Statements and the notes thereto
appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
OCTOBER 3, 1997
-------------------
<S> <C>
HISTORICAL
-------------------
<CAPTION>
(DOLLARS IN
THOUSANDS)
<S> <C>
----------
----------
Long-term obligations (net of current maturities):
10% Senior Notes due 2007.................................................................... $ 110,000
----------
Total long-term obligations:................................................................. 110,000
Redeemable Preferred Stock, no par value; 50,000 shares authorized; 18,000 shares issued and
outstanding(1)............................................................................. 15,681
Shareholders' equity:
Common Stock, no par value; 20,000,000 shares authorized; 3,857,000 shares issued and
outstanding(2)............................................................................. 25,464
Accumulated deficit.......................................................................... (112,084)
----------
Capital deficiency........................................................................... (86,620)
----------
Total capitalization......................................................................... $ 39,061
----------
----------
</TABLE>
- ------------------------
(1) The warrants attached to the preferred stock were valued at $2,500.
Dividends on the Redeemable Preferred Stock are cumulative, accrue quarterly
at the rate of 11 1/2% per annum on the stated value of $18,000 and are paid
in-kind through July 15, 2000. The amount shown is net of the accretion of
the warrants, the dividend-in-kind and expenses associated with issuance
totaling $181. See "Description of Redeemable Preferred Stock and Warrants."
(2) Excludes 964,000 shares of Common Stock reserved for issuance pursuant to
the Warrants. See "The Transactions" and "Description of Preferred Stock and
Warrants."
37
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENTS
The following Unaudited Pro Forma Consolidated Income Statements (as defined
below) of the Company are based on the audited and unaudited financial
statements of the Company appearing elsewhere in this Prospectus, as adjusted to
illustrate the estimated effects of the Transactions. The unaudited pro forma
adjustments are based upon available information and certain assumptions that
the Company believes are reasonable. The Unaudited Pro Forma Consolidated Income
Statements and accompanying notes should be read in conjunction with the
historical financial statements of the Company and other financial information
pertaining to the Company appearing elsewhere in this Prospectus including "The
Transactions," "Capitalization" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
The Unaudited Pro Forma Consolidated Income Statements have been prepared to
give effect to the Transactions, including the Offering, and the application of
the net proceeds therefrom, as if such transactions had occurred on December 30,
1995 for the statement of income for the year ended January 3, 1997, and for the
statement of income for the nine months ended October 3, 1997 (the "Unaudited
Pro Forma Consolidated Income Statements") A Unaudited Pro Forma Consolidated
Balance Sheet has not being prepared as the effects of the Transactions,
including the Offering are reflected in the unaudited financial statements of
the Company as at and for the nine months ended October 3, 1997, appearing
elsewhere in this Prospectus.
The Unaudited Pro Forma Consolidated Income Statements do not purport to be
indicative of what the Company's results of operation would actually have been
had the Transactions been completed at the beginning of the period indicated or
to project the Company's results of operations for any future date.
38
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED JANUARY 3, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL
FISCAL YEAR
END PRO FORMA
1996 ADJUSTMENTS PRO FORMA
-------------- ----------- -----------
<S> <C> <C> <C>
Net sales.............................................................. $ 72,466 $ -- $ 72,466
Costs and expenses:
Cost of sales........................................................ 49,689 -- 49,689
Selling.............................................................. 6,824 -- 6,824
General and administrative........................................... 4,786 (292)(1) 4,994
500(1)
------- ----------- -----------
Income from operations................................................. 11,167 (208) 10,959
Interest expense, net.................................................. 2,668 8,332(2) 11,000
------- ----------- -----------
Income (loss) before income tax provision (benefit) and discontinued
operation............................................................ 8,499 (8,540) (41)
Income tax provision (benefit)......................................... 3,466 (3,483) (17)
------- ----------- -----------
Income (loss) from continuing operations before discontinued
operation............................................................ 5,033 $ (5,057) $ (24)
------- ----------- -----------
----------- -----------
Loss from discontinued operation, net of income tax benefit of $205.... (308)
Loss on disposal of discontinued operation, net of income tax benefit
of $356.............................................................. (624)
-------
Net Income............................................................. $ 4,101
-------
-------
</TABLE>
The accompanying notes to the unaudited pro forma consolidated statements
of income are an integral part of this statement.
39
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED OCTOBER 3, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL
NINE MONTHS
ENDED
OCTOBER 3, PRO FORMA
1997 ADJUSTMENTS PRO FORMA
-------------- ----------- -----------
<S> <C> <C> <C>
Net sales.............................................................. $ 68,785 $ -- $ 68,785
Costs and expenses:
Cost of sales........................................................ 48,423 -- 48,423
Selling.............................................................. 5,508 -- 5,508
General and administrative........................................... 5,220 (279)(1) 3,767
(1,174)(4)
Stock option purchase................................................ 14,105 (14,105)(3) --
------- ----------- -----------
(Loss) income from operations.......................................... (4,471) 15,558 11,087
Interest expense, net.................................................. 2,625 5,625(2) 8,250
------- ----------- -----------
(Loss) income before income tax (benefit) provision.................... (7,096) 9,933 2,837
Income tax (benefit) provision......................................... (2,555) 3,576 1,021
------- ----------- -----------
Net (loss) income...................................................... $ (4,541) $ 6,357 $ 1,816
------- ----------- -----------
------- ----------- -----------
</TABLE>
The accompanying notes to the unaudited pro forma consolidated statements
of income are an integral part of this statement.
40
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS)
The pro forma financial data have been derived from the application of pro forma
adjustments to the Company's historical financial statements for the period
noted. The Merger has been accounted for as a recapitalization that will have no
impact on the historical basis of assets and liabilities. The pro forma data
assume that there are no dissenting shareholders to the Merger.
(1) The pro forma adjustment to general and administrative expenses reflects the
elimination of annual management fee payable to a director and to an
affiliate of the principal shareholders of the Company. Upon consummation of
the transactions, the Company entered into a Management Agreement with
Lehman whereby the Company has agreed to pay Lehman an annual management
fee.
(2) The pro forma adjustment to interest expense, net, reflects the following:
<TABLE>
<CAPTION>
YEAR ENDED
JAN. 3, NINE MONTHS ENDED
1997 OCTOBER 3, 1997
----------- -----------------
<S> <C> <C>
Interest expense on the Senior Notes.......................... $ 11,000 $ 8,250
Amortization of debt issuance costs (10 years)................ 500 375
Less interest income.......................................... (500) (375)
Less historical net interest of existing debt refinanced...... (2,668) (2,625)
----------- ------
Incremental interest expense.................................. $ 8,332 $ 5,625
----------- ------
----------- ------
</TABLE>
(3) The pro forma adjustments for the fiscal year ended 1996 do not include a
$14,105 unusual charge and related tax benefit. The pro forma adjustments
for the nine months ended October 3, 1997, include the elimination of a
$14,105 unusual charge and related tax benefit. The $14,105 represents the
Company's cost to purchase options issued and outstanding under the
Company's stock option plan.
(4) The pro forma adjustments for the nine months ended October 3, 1997, reflect
the elimination of expenses accounted with the transaction of $1,174.
41
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data below for the three years ended
January 3, 1997 and as of December 29, 1995 and January 3, 1997 have been
derived from the Consolidated Financial Statements of the Company which have
been audited by Ernst & Young LLP, independent auditors, and are included
elsewhere in this Prospectus. The selected consolidated financial data below for
the years ended January 1, 1993 and December 31, 1993 and as of January 1, 1993,
December 31, 1993 and December 30, 1994 have been derived from the Consolidated
Financial Statements of the Company which have also been audited by Ernst &
Young LLP, but which are not included elsewhere herein. The selected financial
data for the nine months ended September 27, 1996 and as of and for the nine
months ended October 3, 1997 have been derived from the Company's Unaudited
Consolidated Financial Statements for those periods included elsewhere in the
Prospectus and the selected financial data as of September 27, 1996 have been
derived from the Company's Unaudited Consolidated Financial Statements for that
period, but are not included elsewhere herein and, in each case, include, in the
opinion of management, all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of the results for the unaudited
interim periods. Results for the nine months ended October 3, 1997 are not
necessarily indicative of the results that may be expected for the entire year.
The information presented below is qualified in its entirety by, and should be
read in conjunction with, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Consolidated Financial Statements
of the Company and related notes included elsewhere in this Prospectus. The data
below reflect the acquisition by the Company of certain assets of Purosil in
March 1993; of SFS in February 1995; of Haskon in June 1995 and of Kentile in
April 1996.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEAR --------------------------
----------------------------------------------------- SEPTEMBER 27, OCTOBER 3,
1992 1993 1994 1995 1996 1996 1997
--------- --------- --------- --------- --------- ------------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Net sales............................ $ 28,195 $ 36,431 $ 44,370 $ 68,411 $ 72,466 $ 54,476 $ 68,785
Cost of sales........................ 18,714 25,355 29,998 49,226 49,689 37,722 48,423
--------- --------- --------- --------- --------- ------------- -----------
Gross profit......................... 9,481 11,076 14,372 19,185 22,777 16,754 20,362
Selling, general and administrative
expenses(1)........................ 8,630 9,215 8,152 10,212 11,610 8,305 24,833
--------- --------- --------- --------- --------- ------------- -----------
Income (Loss) from operations........ 851 1,861 6,220 8,973 11,167 8,449 (4,471)
Interest expense, net................ 2,828 2,897 2,812 3,007 2,668 2,054 2,625
--------- --------- --------- --------- --------- ------------- -----------
Income (loss) before income tax
provision (benefit), cumulative
effect of accounting change,
extraordinary loss and discontinued
operation(2)....................... (1,977) (1,036) 3,408 5,966 8,499 6,395 (7,096)
Income tax provision (benefit)....... (3) 146 1,395 3,393 3,466 2,558 (2,555)
--------- --------- --------- --------- --------- ------------- -----------
Income (loss) from continuing
operations before cumulative effect
of accounting change, extraordinary
loss and discontinued
operation(2)....................... $ (1,974) $ (1,182) $ 2,013 $ 2,573 $ 5,033 $ 3,837 $ (4,541)
--------- --------- --------- --------- --------- ------------- -----------
--------- --------- --------- --------- --------- ------------- -----------
Net income (loss)(2)................. $ (2,180) $ (657) $ 1,502 $ 1,094 $ 4,101 $ 2,905 $ (4,541)
--------- --------- --------- --------- --------- ------------- -----------
--------- --------- --------- --------- --------- ------------- -----------
OTHER DATA:
Ratio of earnings to fixed
charges(3)......................... -- -- 2.1x 2.8x 3.7x 3.8x --x
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
AS OF
AS OF FISCAL YEAR END --------------------------
----------------------------------------------------- SEPTEMBER 27, OCTOBER 3,
1992 1993 1994 1995 1996 1996 1997
--------- --------- --------- --------- --------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
BALANCE SHEET DATA:
Working capital.................... $ 2,096 $ 4,932 $ 4,766 $ 5,402 $ 5,328 $ 6,837 $ 21,501
Total assets....................... 24,469 30,535 28,551 39,729 40,673 38,065 59,252
Long-term obligations, less current
portion.......................... 19,406 20,011 16,937 21,803 18,126 $ 17,008 110,000
Shareholders' equity (deficit)..... (4) (654) 849 340 4,283 $ 2,981 (86,620)
</TABLE>
- --------------------------
(dollars in thousands)
(1) Selling, general and administrative expenses include amortization of
acquisition costs of $1,161 and $850 in 1992 and 1993, respectively.
(2) Net income reflects (i) benefit of cumulative effect of change in accounting
method for income taxes of $551 in 1993, (ii) extraordinary loss on debt
settlement, net of income tax benefit, of $815 in 1995 and (iii) losses, net
of income tax benefit, of $206, $26, $511, $664 and $308 in 1992, 1993,
1994, 1995 and through September 27, 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.
(3) 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 $2,004, $1,048 and $7,120 for the fiscal years 1992, 1993 and the nine
months ended October 3, 1997, respectively.
43
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
INTRODUCTION
The following discussion and analysis should be read in conjunction with
"Selected Historical Consolidated Financial Data" and the audited Consolidated
Financial Statements of the Company and the notes thereto included elsewhere in
this Prospectus.
The Company operates within one industry segment, elastomer products, and is
organized into three product groups: Aerospace Products, which produces
precision silicone seals and other products used on commercial and military
aircraft; Flooring Products, which produces and distributes rubber and vinyl
cove base and other floor covering accessory products; and Commercial Products,
which produces various intermediate and finished silicone and organic rubber
products.
Burke entered the Aerospace Products business through the acquisition of
Purosil assets in 1993. The Company subsequently expanded its Aerospace Products
business by purchasing the assets of two of its largest competitors, SFS and
Haskon, in 1995. These acquisitions were completed in order to broaden Burke's
Aerospace Products line and to incorporate advanced military stealth capability
into this product group. Subsequent to these acquisitions, in December 1995, the
Company integrated all of its aerospace operations in anticipation of increased
demand as communicated by aircraft OEMs.
In general, Aerospace Products revenues are driven by both the building of
new aircraft by OEM manufacturers and the repair and replacement of existing
aircraft (aftermarkets). OEMs typically depend on a select group of suppliers to
provide their seal requirements, working closely with them to design the
customized tooling necessary to satisfy the industry's rigorous product testing
standards. As a result of the Company's consolidation efforts throughout the
mid-'90s, it is now positioned as the leading seals supplier for the domestic
commercial aircraft industry and is OEM-specified on virtually every existing
commercial and military aircraft platform in production.
Aircraft seal revenues for 1996 were approximately evenly split between
sales to OEM manufacturers and the aftermarket. In addition, commercial aircraft
manufacturing has resulted in 70% of 1996 seal revenues being derived from the
commercial market, compared with approximately 30% from the U.S. military.
Aerospace revenues in 1995 were approximately $3.0 million higher than might
otherwise have been expected due to the significant unfilled backlog created by
the inability of SFS and Haskon to deliver product prior to Burke's ownership.
Sales of precision silicone seals comprised approximately 89% of 1996
revenues for the Aerospace Products business. The remaining 11% was derived
primarily from the sale of low-observable seals and tape to the military for use
on stealth aircraft, cruise missiles, and armored vehicles. Revenues of low-
observable seals and tape are derived from both the retrofit of existing
aircraft, such as the B-1 bomber and the initial installation and replacement of
existing low-observable material on aircraft, such as the B-2 bomber.
Historically, revenues in the Flooring Products business have been driven by
both new commercial construction and the continuous repair and remodeling of
existing commercial space. Until recently, operations have been concentrated in
the western United States and Burke has sold primarily rubber cove base molding.
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 has been moderate but
steady due to the strength of the repair and remodel market, which has offset
the depressed commercial construction market in the western United States. In
1996, the Company acquired vinyl cove base production assets, which are expected
to diversify the Flooring Products revenue base, primarily by increasing
distribution of BurkeBase in the midwest and eastern United States.
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
44
<PAGE>
generated by silicone hose sales are driven by both new truck and bus
manufacturing as well as the replacement market. OEM and aftermarket customers
specify and prefer silicone hoses due to their high performance and relatively
minor absolute cost. In addition, silicone hoses are increasingly being
specified on trucks and buses due to the higher performance requirements of new
engine design. Burke roofing and fluid containment system sales have tended to
be relatively steady over time. Roofing and fluid barrier membranes are used in
numerous applications including new and replacement commercial roofs and
reservoirs. The Hypalon product provides significant wear and durability
advantages compared with less expensive products. Revenues from these products
can be materially affected on a quarter-to-quarter basis by the size and timing
of certain reservoir projects.
RESULTS OF OPERATIONS
The following table sets forth certain income statement information for the
Company for the fiscal years ended December 30, 1994, December 29, 1995, and
January 3, 1997 and the nine-month periods ended September 27, 1996 and October
3, 1997:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED NINE MONTHS ENDED
---------------------------------------------------------------------------- ------------------------------
PERCENTAGE PERCENTAGE PERCENTAGE PERCENTAGE
OF OF OF SEPTEMBER 27, OF
1994 NET SALES 1995 NET SALES 1996 NET SALES 1996 NET SALES
--------- ------------- --------- ------------- --------- ------------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Net sales:
Aerospace
Products..... $ 4,787 10.8% $ 23,254 34.0% $ 24,622 34.0% $ 18,495 34.0%
Flooring
Products..... 19,507 44.0 19,693 28.8 20,546 28.4 15,463 28.4
Commercial
Products..... 20,076 45.2 25,464 37.2 27,298 37.6 20,518 37.6
--------- ------ --------- ------ --------- ------ --------------- ------
Total net
sales...... 44,370 100.0 68,411 100.0 72,466 100.0 54,476 100.0
Cost of sales.... 29,998 67.6 49,226 72.0 49,689 68.6 37,722 69.2
--------- ------ --------- ------ --------- ------ --------------- ------
Gross profit..... 14,372 32.4 19,185 28.0 22,777 31.4 16,754 30.8
Selling, general
and
administrative
expenses....... 8,152 18.4 10,212 14.9 11,610 16.0 8,305 15.3
--------- ------ --------- ------ --------- ------ --------------- ------
Income (loss)
from
operations..... 6,220 14.0 8,973 13.1 11,167 15.4 8,449 15.5
Interest expense,
net............ 2,812 6.3 3,007 4.4 2,668 3.7 2,054 3.8
--------- ------ --------- ------ --------- ------ --------------- ------
Income (loss)
before income
tax provision
(benefit),
extraordinary
loss and
discontinued
operation...... 3,408 7.7 5,966 8.7 8,499 11.7 6,395 11.7
Income tax
provision
(benefit)...... 1,395 3.1 3,393 5.0 3,466 4.8 2,558 4.7
--------- ------ --------- ------ --------- ------ --------------- ------
Income (loss)
from continuing
operations
before
extraordinary
loss and
discontinued
operation...... $ 2,013 4.6% $ 2,573 3.7% $ 5,033 6.9% $ 3,837 7.0%
--------- ------ --------- ------ --------- ------ --------------- ------
--------- ------ --------- ------ --------- ------ --------------- ------
Net Income (loss)
............... $ 1,502 3.4% $ 1,094 1.6% $ 4,101 5.7% $ 2,905 5.3%
--------- ------ --------- ------ --------- ------ --------------- ------
--------- ------ --------- ------ --------- ------ --------------- ------
<CAPTION>
PERCENTAGE
OCTOBER 3, OF
1997 NET SALES
----------- -------------
<S> <C> <C>
Net sales:
Aerospace
Products..... $ 23,387 34.0%
Flooring
Products..... 17,886 26.0
Commercial
Products..... 27,512 40.0
----------- ------
Total net
sales...... 68,785 100.0
Cost of sales.... 48,423 70.4
----------- ------
Gross profit..... 20,362 29.6
Selling, general
and
administrative
expenses....... 24,833 36.1
----------- ------
Income (loss)
from
operations..... (4,471) 6.5
Interest expense,
net............ 2,625 3.8
----------- ------
Income (loss)
before income
tax provision
(benefit),
extraordinary
loss and
discontinued
operation...... (7,096) 10.3
Income tax
provision
(benefit)...... (2,555) 3.7
----------- ------
Income (loss)
from continuing
operations
before
extraordinary
loss and
discontinued
operation...... $ (4,541) 6.6%
----------- ------
----------- ------
Net Income (loss)
............... $ (4,541) 6.6%
----------- ------
----------- ------
</TABLE>
45
<PAGE>
NINE MONTHS ENDED SEPTEMBER 27, 1996 VERSUS NINE MONTHS ENDED OCTOBER 3,
1997
NET SALES. Total net sales increased 26.3% from $54.5 million for the nine
months ended September 27, 1996 to $68.8 million for the nine months ended
October 3, 1997. Aerospace Products grew 26.5% as the result of strong expansion
of commercial aircraft build rates. Flooring Products grew 15.7% as the result
of generally stronger demand for construction products in California and the
introduction of vinyl cove base products. Commercial Products grew 34.1% 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 28.4%, from $37.7 million for the
nine months ended September 27, 1996 to $48.4 million for the nine months ended
October 3, 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
30.8% for the nine months ended September 27, 1996 to 29.6% for the nine months
ended October 3, 1997. The decrease was due 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 for the nine months ended
October 3, 1997 compared with the nine months ended September 27, 1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 199.0%, from $8.3 million for the nine months
ended September 27, 1996 to $24.8 million for the nine months ended October 3,
1997. The increase included $14.1 million for the purchase of stock options and
$1.2 million in other expenses related to the Merger. Net of these expenses,
selling, general and administrative expenses increased 15.0%, from $8.3 million
for the nine months ended September 27, 1996 to $9.6 million for the nine months
ended October 3, 1997. The net increase was due primarily to additional expenses
incurred in support of the Company's sales growth. The additional expenses were
primarily for the addition of Flooring and Commercial sales personnel. The net
costs declined as a percentage of sales from 15.3% for the nine months ended
September 27, 1996 to 13.9% for the nine months ended October 3, 1997.
INCOME/(LOSS) FROM OPERATIONS. As a result of the above factors, income
(loss) from operations decreased 152.9%, from income of $8.4 million for the
nine months ended September 27, 1996 to loss of $4.5 million for the nine months
ended October 3, 1997.
INTEREST EXPENSE. Interest expense increased 27.8%, from $2.1 million for
the nine months ended September 27, 1996 to $2.6 million for the nine months
ended October 3, 1997. The increase was due to the issuance of the Senior notes
on August 20, 1997.
INCOME/(LOSS) FROM CONTINUING OPERATIONS. As a result of the above factors,
income/(loss) from continuing operations decreased 218.3% from income of $3.8
million for the nine months ended September 27, 1996 to a loss of $4.5 million
for the nine months ended October 3, 1997.
YEAR ENDED JANUARY 3, 1997 VERSUS YEAR ENDED DECEMBER 29, 1995
NET SALES. Total net sales increased 5.9%, from $68.4 million in 1995 to
$72.5 million in 1996. Aerospace Products grew 5.9%, reflecting the positive
effect of a full year of the deployment of the assets of Haskon acquired in June
1995, which was partially offset by the expiration of a significant supply
contract in 1995. Flooring Products grew 4.3% as the result of the introduction
of new products, price increases (2.6%), and volume increases (1.0%). Commercial
Products grew 7.2% due to orders from a new customer and to increases sales of
the Company's silicone Custom Products, offset by a decrease in Membrane
Products sales due to a customer's deferral of a major liner project.
COST OF SALES. Cost of sales increased 0.9%, from $49.2 million in 1995 to
$49.7 million in 1996. The increase was primarily due to the increase in net
sales over the same period. As a percentage of net sales, gross profit increased
from 28.0% in 1995 to 31.4% in 1996. The increase of 3.4% was due to the full
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integration of assets acquired from SFS and Haskon (1.6%); to decreases in the
cost of raw materials used in the Company's Flooring Products (0.9%); and to
general pricing, operational, and overhead absorption improvements (0.9%). The
Flooring raw material prices returned to normal levels.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 13.7%, from $10.2 million in 1995 to $11.6
million in 1996. The increase was due to general cost increases to selling
expenses associated with expanding Flooring Products into markets in the eastern
United States and a full year of selling expenses associated with the assets of
Haskon acquired in 1995. As a percentage of sales, these costs increased from
14.9% in 1995 to 16.0% in 1996, because of the time lag between the Flooring
expansion spending and the realization of the resultant sales.
INCOME FROM OPERATIONS. As a result of the above factors, income from
operations increased 24.5%, from $9.0 million in 1995 to $11.2 million in 1996.
INTEREST EXPENSE. Interest expense decreased 11.3%, from $3.0 million in
1995 to $2.7 million in 1996. The decrease was due to lower total debt
outstanding.
INCOME FROM CONTINUING OPERATIONS. As a result of the above factors, income
from continuing operations increased 95.6%, from $2.6 million in 1995 to $5.0
million in 1996.
YEAR ENDED DECEMBER 29, 1995 VERSUS YEAR ENDED DECEMBER 30, 1994
NET SALES. Total net sales increased 54.2%, from $44.4 million in 1994 to
$68.4 million in 1995. Aerospace Products grew 385.8%, due to the acquisition of
the assets of SFS and Haskon in February and June 1995, respectively. Flooring
Products grew 1.0% due to price increases and continued demand in the repair and
remodel segment of the construction industry, offset by generally weaker demand
for construction products in California. Commercial Products grew 26.8% due to
the acquisition of the assets of SFS used to produce silicone Custom Products.
COST OF SALES. Cost of sales increased 64.1%, from $30.0 million in 1994 to
$49.2 million in 1995. 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 32.4% in 1994 to 28.0% in 1995. The decrease of 4.1% was due primarily to
the start-up costs associated with the assets of SFS and Haskon acquired in 1995
(3.1%); and to increases in the cost of raw materials used in the Company's
Flooring Products. The raw material prices were abnormally high throughout
calendar 1995.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 25.3%, from $8.2 million in 1994 to $10.2
million in 1995. The increase was due to additional selling expenses associated
with the assets Haskon and SFS acquired in 1995. However, as a percentage of net
sales, these costs declined from 18.4% to 14.9% over the same period.
INCOME FROM OPERATIONS. As a result of the above factors, income from
operations increased 44.3%, from $6.2 million in 1994 to $9.0 million in 1995.
INTEREST EXPENSE. Interest expense increased 6.9%, from $2.8 million in
1994 to $3.0 million in 1995. The increase was due to higher total debt
outstanding, resulting from the acquisition of SFS and Haskon assets in 1995.
INCOME FROM CONTINUING OPERATIONS. As a result of the above factors, income
from continuing operations increased 27.8%, from $2.0 million in 1994 to $2.6
million in 1995.
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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. Net cash provided by operating activities was $8.3 million in 1996.
CAPITAL REQUIREMENTS. The Company expects to spend approximately $1.5
million during 1997 on capital expenditures not directly related to
acquisitions. Cash flow from operations, to the extent available, may also be
used to fund a portion of any acquisition expenditures. The Company is actively
seeking acquisition opportunities. The Company intends to seek additional
capital as necessary to fund potential acquisitions through one or more funding
sources that may include borrowings under the New Credit Facility described
below.
SOURCES OF CAPITAL. In July 1997, a commitment letter to provide senior
credit financing was issued to JFLEI. The New Credit Facility will provide for
$15.0 million of revolving credit borrowings. The New Credit Facility will
mature on the fifth anniversary of the Recapitalization. Interest on loans under
the New Credit Facility will bear interest at rates based upon either, at the
Company's option, Eurodollar Rates plus a margin of 2.50% or upon the Prime Rate
plus a margin of .50%. Loans under the New Credit Facility will be secured by
security interests in substantially all of the assets of the Company and will be
guaranteed by any and all current or future subsidiaries of the Company, which
guarantees will be secured by substantially all of the assets of the
subsidiaries. The New Credit Facility will contain 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 New Credit Facility will also contain a number of financial
covenants that will require the Company to meet certain financial ratios and
tests and provide that a "change of control" will constitute an event of
default. For a more complete description of the New Credit Facility, see "Risk
Factors-- Significant Leverage and Debt Service," "--Ranking of Notes; Asset
Encumbrance," "--Restrictive Covenants" and "Description of New Credit
Facility."
The Company anticipates that its principal use of cash following the
Recapitalization will be working capital requirements, debt service requirements
and capital expenditures as well as expenditures relating to acquisitions and
integrating acquired businesses. Based upon current and anticipated levels of
operations, the Company believes that its cash flow from operations, together
with amounts available under the New Credit Facility, will be adequate to meet
its anticipated requirements for the foreseeable future for working capital,
capital expenditures and interest payments.
In June 1997, the FASB released Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" (FAS 130). FAS 130 establishes
standards for the reporting and display of comprehensive income and its
components in a full set of general purpose financial statements and is
effective for fiscal years beginning after December 15, 1997. The Company
believes that adoption of FAS 130 will not have a material impact on the
Company's consolidated financial statements.
In June 1997, the FASB released Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
(FAS 131). FAS 131 will change the way companies report selected segment
information in annual financial statements and also requires those companies to
report selected segment information in interim financial reports to
stockholders. FAS 131 is effective for fiscal years beginning after December 15,
1997. The Company is currently evaluating the impact of the application of the
new rules on the Company's consolidated financial statements.
INCOME TAX PROVISION
For 1995 and 1996, the Company recorded an income tax provision of 56.9% and
40.8%, respectively, which differs from the federal statutory rate primarily due
to state income taxes (net of federal benefit),
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and for 1995 due to an additional provision for potential Internal Revenue
Service (IRS) audit adjustments. In 1996 the Company settled with the IRS
certain issues relating to the Company's income tax returns for 1988 through
1990. As of January 3, 1997, the Company had fully provided for the taxes and
interest which are payable as a result of the settlement.
In addition to the above settlement, the Company received a "Notice of
Deficiency" from the IRS for 1992 and 1993, also related to the reorganization
of the Company in 1988, resulting in proposed deficiencies of approximately
$1,534,000. Penalties on the proposed deficiencies described above would be
$290,000. The Company filed a tax court petition contesting the proposed tax
deficiencies. The Company believes that it has meritorious legal defenses to the
proposed IRS adjustments. Based upon the Company's analysis of the issues,
management believes that an adequate provision has been made for additional
liabilities that may ultimately result.
For 1994 and 1995, the Company recorded an income tax provision of 40.9% and
56.9%, respectively, which differs from the federal statutory rate primarily due
to state income taxes (net of federal benefit) and, for 1995 only, due to an
additional provision for potential Internal Revenue Service (IRS) audit
adjustments.
For the nine months ended September 27, 1996 the Company recorded an income
tax provision of 40% which differs from the federal statutory rate primarily due
to state income taxes (net of federal benefit). For the nine months ended
October 3, 1997 the Company recorded an income tax benefit of 36% which differs
from the federal statutory rate primarily due to state income taxes (net of
federal benefit). The effective tax rate differed between the nine months ended
September 27, 1996 and the nine months ended October 3, 1997 due to limitations
on state net operating loss carryforwards originating in 1997.
In 1997 the Company settled with the IRS certain issues related to the
Company's income tax returns for 1992 and 1993. As of October 3, 1997, the
Company has fully provided for the taxes and interest which are payable as a
result of the settlement.
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BUSINESS
OVERVIEW
Burke, headquartered in San Jose, California, is a leading, diversified
manufacturer of highly engineered, rubber, silicone and vinyl-based (herein
"elastomer") products. Through its vertically integrated operations and
reputation for quality elastomer-based products, Burke has become (i) the
largest domestic producer of precision silicone seals for commercial and
military aircraft ("Aerospace Products"), (ii) the dominant west coast producer
of rubber cove base and floor covering accessories for commercial and industrial
applications ("Flooring Products") and (iii) a value-added producer of
high-performance silicone hose, roofing and membrane products for the heavy-duty
truck, commercial building and environmental industries, respectively
("Commercial Products").
The Company has grown through new product development and the successful
integration of acquired product lines and production assets. As a result, net
sales increased from $28.2 million in 1992 to $86.8 million for the twelve-month
period ended October 3, 1997. Net sales for the nine months ended October 3,
1997 totaled $68.8 million, up 26.2% from $54.5 million for the same period in
1996.
AEROSPACE PRODUCTS
Burke is the largest domestic producer of precision silicone seals used at
airframe and internal component junctures in commercial and military aircraft.
Burke seals are specified on virtually all major domestically produced
commercial aircraft, including every aircraft series manufactured by Boeing and
on substantially all United States military aircraft including cargo, fighter
and bomber series airplanes and several helicopter models. As a result, Burke's
products have been designed into some of the most successful commercial and
military aircrafts in the world, including the Boeing 737, 747, 757, 767 and
777, the McDonnell Douglas DC and MD series, the Northrop Grumman F-14 and the
Lockheed Martin L1011. Products are engineered to customer specifications for
selected aircraft body and engine models and are generally made from custom
tooling maintained and controlled by Burke for use over the life of the specific
aircraft program. Burke benefits from a lengthy product-demand cycle, which can
remain active for as long as 30 years, driven by new aircraft assembly and
retrofit and maintenance projects. Retrofit and maintenance projects accounted
for approximately two-thirds of the Company's 1996 Aerospace Products sales.
The Aerospace Products business also manufactures low-observable,
radar-absorbing seals and exterior tapes and coatings for stealth military
aircraft and other military applications. These products are currently in use on
the B-2 bomber and will also be used in the F-22, which is being developed to
replace the F-15 as the premier fighter in the United States military arsenal.
Aerospace Products sales increased from $3.6 million in 1993, the year that
Burke first entered the aerospace market with its purchase of assets of Purosil,
to $24.6 million in 1996, accounting for approximately 34.0% of the Company's
total net sales in 1996. Management believes the Aerospace Products business is
well positioned to benefit from the strong increase in commercial aircraft build
rates currently occurring and projected by industry analysts to continue, along
with the associated retrofit, refurbishment, replacement and upgrade projects
that are required over the life of the aircraft.
FLOORING PRODUCTS
Through its Flooring Products business, Burke is the dominant supplier of
rubber cove base (floor border that joins flooring or carpet to a wall),
manufactured under the name BurkeBase, and other rubber-based flooring
accessories for commercial and industrial applications in the western United
States. Its principal product offerings include vinyl cove base and rubber cove
base, tile, stair treads, corners, shapes and other flooring accessories. Demand
for the Company's cove base is driven by new commercial construction,
remodeling, redecorating and general maintenance. During periods of slower
growth in new
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commercial construction, remodeling and redecorating activities tend to
increase, providing stable overall demand for the Company's products. Flooring
Products sales were $20.5 million in 1996, comprising 28.4% of the Company's
total net sales in 1996. In 1996, the Company diversified its Flooring Products
offerings with the introduction of new tiling products and photoluminescent
emergency lighting products marketed under the name BurkeEmerge, and the
acquisition of vinyl cove base production assets. Management believes that the
addition of the vinyl product line will enable it to increase revenues through
the increased penetration of existing markets and the expansion of its product
line to markets where vinyl cove base is more popular than rubber cove base,
such as the midwestern and eastern United States.
COMMERCIAL PRODUCTS
Burke's expertise in the mixing, blending and formulation of silicone and
organic rubber compounds has established its Commercial Products business as a
growing, value-added supplier of elastomer products for use in both intermediate
and end products. The Commercial Products business is comprised of three primary
product lines: (i) high-performance silicone truck hoses for heavy-duty trucks
and buses marketed under the Purosil brand name, (ii) membranes for commercial
roofing and fluid containment systems marketed under the Burkeline trade name
and manufactured from DuPont's patented Hypalon polymer material and (iii)
precision-formulated custom products and sheet goods that utilize Burke's
extensive formulation and production capabilities for use in end-product
elastomer applications. Commercial Products net sales increased from $10.0
million in 1992 to $27.3 million in 1996, and represented 37.6% of the Company's
total net sales in 1996. Management believes that the Commercial Products
business has significant growth potential primarily through the expansion of the
Purosil line of high-end hoses to new customers and channels of distribution and
the development of new applications for the silicone custom product line.
COMPETITIVE STRENGTHS
Burke has secured a strong competitive position in each of its specialized
market segments. Burke is the largest provider of aerospace seals to the
domestic commercial and military aerospace industries and also maintains strong
positions in its flooring, roofing and membrane, truck hose and custom product
lines. These competitive positions are sustained through the following
strengths.
ESTABLISHED CUSTOMER RELATIONSHIPS. The Company enjoys long-term
relationships with many of its customers in each of its markets. These
relationships, whether built by Burke over its long history or assumed in recent
asset acquisitions, provide the Company with a stable base from which to pursue
future expansion and give Burke a significant advantage over potential
competitors seeking to enter the Company's markets. Several of the Burke
trademarks and trade names (BurkeBase, Burkeline, SFS, Haskon and Purosil) are
widely recognized by end users and distributors and are generally associated
with superior levels of quality and customer service in their respective
markets.
DIVERSE REVENUE BASE. The Company's products are used in a wide variety of
industries and applications and a significant share of the Company's revenue is
derived from the repair and replacement market for its products, including
aerospace seals and tape, cove base, truck hoses and fluid containment membrane.
Replacement demand is typically less affected by slower economic periods.
Management believes that this diversity has and will continue to mitigate the
effect of economic fluctuations.
TECHNOLOGICAL LEADERSHIPS IN ELASTOMER-BASED PRODUCTS DEVELOPMENT AND
MANUFACTURE. Burke is widely recognized as a technological leader in
elastomer-based products due to its strong engineering, design and research
capabilities. Burke has 25 specialists in its engineering, design and laboratory
departments devoted to new product development and product cost reduction.
Management believes that its aerospace technical staff is significantly larger
than those of its direct competitors, providing the Company with a competitive
advantage in pursuing and maintaining relationships in the technologically
advanced defense and commercial aerospace industries.
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VERTICALLY INTEGRATED PRODUCTION CAPABILITIES. Burke has vertically
integrated production capabilities that enable it to transform raw organic
rubber and silicone gum into a diverse array of finished products. This
capability allows management more direct control over the Company's product
development, cost structure and quality requirements, providing a competitive
edge in its targeted market segments and enables Burke's Commercial Products
business to selectively participate in market segments as a value-added,
intermediate supplier to other elastomer product producers and users.
EXPERIENCED MANAGEMENT TEAM. The management team has extensive experience
both with the Company and within the industry and encompasses a balance of both
senior leadership and a strong group of young managers. This management team has
successfully orchestrated the acquisition and integration of four independent
operations since 1993, as well as the Company's ongoing vertical integration
efforts.
BUSINESS STRATEGY
Burke intends to capitalize on its aforementioned competitive strengths in a
variety of ways in each of its major businesses. Key components of this strategy
for each of the Company's businesses include:
AEROSPACE PRODUCTS
- PENETRATE INTERNATIONAL MARKET FOR AEROSPACE SEALS. Management believes
that the Company is the only domestic aerospace seal manufacturer with the
production capacity to market beyond the United States. With the Company's
recent acquisitions dramatically increased production capacity and, as a
result, the Company recently sought and was successful, in being
designated as a qualified parts manufacturer for a large subcontractor of
Airbus.
- FOCUS ON VALUE-ADDED MANUFACTURING. Management intends to further increase
its participation in the trend towards integrating higher levels of
processing and finishing to products before shipping to OEMs.
- MAINTAIN STRONG RELATIONSHIPS WITH LEADING PRIME CONTRACTORS. Management
believes that its existing relationships with leading prime military
contractors have positioned the Company to continue to participate in
"next generation" stealth military programs, including the Joint Strike
Fighter currently being developed for NATO, through the sale of
low-observable seals and tape.
FLOORING PRODUCTS
- BROADEN DOMESTIC DISTRIBUTION OF FLOORING PRODUCTS. Although the Company
is the dominant producer of rubber cove base in the western United States,
the Company believes it can successfully expand this product line into
other geographic regions by offering the full complement of its rubber and
newly acquired vinyl flooring products.
- LEVERAGE BRAND NAME RECOGNITION AND EXISTING DISTRIBUTION CHANNELS THROUGH
PRODUCT LINE EXTENSIONS. The Company intends to continue to capitalize on
the BurkeBase trade name by expanding and upgrading its existing product
line. In addition, the Company believes that it can leverage its strong
distribution network for its flooring products through the introduction of
flooring accessories. For example, the Company's new BurkeEmerge product
line of photoluminescent emergency lighting is an alternative to strip
lighting at a 70% lower cost. Emergency lighting is increasingly being
utilized due to heightened public awareness of the dangers that can result
from unlit corridors and confusing exit signs.
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COMMERCIAL PRODUCTS
- INCREASE PENETRATION OF PUROSIL SILICONE HOSES. The Company believes the
growth opportunities for its Purosil silicone hoses have not yet fully
been exploited, particularly in the heavy-duty truck and bus aftermarket.
New initiative includes increasing customer share at Mack Truck and other
targeted accounts as well as initiating production of silicone hoses for a
major new customer.
- PROMOTE ADDITIONAL HYPALON APPLICATIONS. Management is continuing to work
with DuPont to promote Hypalon as a durable and environmentally sound
liner product suitable for new water-containment applications.
In addition to these internal growth strategies, the Company intends to seek
selective acquisitions where it can expand and strengthen existing product lines
and its distribution and technological capabilities. The Company believes that
certain market niches in which it competes are highly fragmented, with a number
of manufacturers that would make attractive acquisition candidates.
INDUSTRY OVERVIEW
Virtually every industry contains applications for elastomeric products.
These products are used wherever there is a need for materials that are
flexible, yet retain their original shape and other properties. Elastomeric
products tend to be a small portion of the total cost of any product, yet can be
critical to a successful design. The Company believes that demand for
elastomeric products will continue to grow as the performance requirements of
various products are increased.
The Company serves a number of industries with significant usage of
highly-engineered elastomer-based products, including organic rubber, silicone
rubber, and vinyl. Customers in these industries value quality, on-time
performance, and the ability to provide technical problem-solving capabilities.
The increasingly complex product design efforts of companies in these and other
industries provides ongoing and new opportunities for elastomeric product
applications. The Company believes that its technical resources, experience, and
reputation provide it with a competitive advantage in seeking to provide
products to these industries.
HISTORY
The Burke Rubber Company was founded in 1942 as a family-owned manufacturer
of custom industrial rubber products. By the early 1950s, Burke manufactured a
proprietary line of rubber floor tile and cove base as well as custom-molded
rubber products. The Burke product line subsequently grew to include flexible
membrane products for industrial uses, as well as engineered elastomer-based
products for defense-related applications. In 1970, Burke developed an improved
roofing and fluid barrier technology based upon DuPont 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 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 and Massachusetts-based Haskon. Purosil, SFS and Haskon had
each been an independent producer of precision silicone aerospace components,
and together had over 85 years of service to the commercial and military
aerospace industry. In the Flooring Products division, the Company expanded its
product lines through the purchase of Kentile's vinyl cove base production
assets in April 1996.
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Burke's integration of these acquisitions has led to a dominant position in
the aerospace seals market, opened new markets for its Flooring Business,
improved operating efficiencies, consolidated overhead and strengthened
technical capabilities.
PRODUCTS AND MARKETS
Burke is a leader in a number of markets where the Company's vertically
integrated production capabilities and design, engineering and manufacturing
expertise result in a strong competitive position. The Company currently serves
markets for aerospace components, floor covering accessories and a variety of
other commercial products.
AEROSPACE PRODUCTS
Operating out of Santa Fe Springs, California and Taunton, Massachusetts,
Burke, through its Aerospace Products business, is the leading domestic
manufacturer of two principal product lines: highly engineered elastomer-based
seals for commercial and military aircraft and low-observable, radar-absorbing
materials for stealth military applications. Burke's non-stealth aerospace
components are marketed under the SFS and Haskon trade names.
PRODUCTS
Burke's major aerospace seals products include: aerodynamic seals for
commercial and military airframes, firewall seals for aircraft engines and
nacelles, aircraft door and hatch seals, inflatable seals for cockpit canopies
and large openings, aircraft window seals, and aircraft conductive seals for
electromagnetic interference survivable conditions. Burke's product line ranges
from the most basic extruded seals, costing an average of $30 to $40, to
exceptionally complex seals which may cost in excess of $10,000. Burke's design
and engineering teams have a history of developing solutions for difficult
sealing and shielding problems. Burke's silicone seals are also reinforced (if
required) with a variety of materials including Kevlar, Dacron, Nomex, ceramic
cloth, fiberglass, conductive fabrics, metal mesh, nylon and other materials
which accommodate their demanding applications.
During the late 1980s and early 1990s, SFS invested significant capital
towards the research and development of radar-absorbing and signature-masking
composite materials. This initial research and development established SFS as
the technological leader in this niche defense-related area. Burke has continued
the development of this technology since its acquisition of SFS in 1995.
Generally, Burke works on an exclusive basis with the United States military to
test and develop these highly engineered and technical materials. Once a
contract has been awarded, Burke has historically become the sole supplier to
the United States government as an approved defense contractor. Based on its
history and the Company's proven record in this area, management believes that
Burke will remain a critical partner in product development opportunities in
this sector. Burke maintains a classified area within the Santa Fe Springs
facility where stealth technology products are developed, manufactured and
tested.
MARKETS AND CUSTOMERS
Burke's silicone seals are sold directly to manufacturers of commercial and
military aircraft, aerospace component distributors and the United States
government. Burke has maintained its leading position in this market through its
advanced in-house design, engineering, technical and production capabilities
coupled with superior customer service. The engineering staff at Burke works
directly with OEMs to design custom silicone sealing applications. Burke's
aerospace products are designed by Burke engineers in accordance with precise
OEM specifications and quality requirements. Products are rigorously tested
against ISO and OEM standards by Burke and its customers before final approval.
In 1996, the top five customers of the Aerospace Products division accounted for
$16.5 million in net sales, representing 22.8% and 67.1%, respectively, of the
Company's total and the Aerospace Product division's net sales in that year.
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Boeing is the single largest customer of Aerospace Products and, management
believes Burke is likewise the leading supplier of these products to Boeing.
Boeing currently controls over 60% of the worldwide commercial passenger
aircraft market and is enjoying a dramatic expansion in its backlog and orders.
In addition to Boeing, the Company produces seals for every major commercial
aircraft manufacturer in the world and for substantially all major military
manufactures in the United States, including McDonnell Douglas, Lockheed Martin,
Northrop Grumman, Airbus Industries, Pratt & Whitney, General Electric,
Gulfstream, Rohr, Bombardier and Textron. As a result, Burke's products have
been designed into some of the most successful commercial and military aircrafts
in the world, including the Boeing 737, 747, 767 and 777, the McDonnell Douglas
DC and MD series, the Northrop Grumman F-14 and the Lockheed Martin L1011.
Burke's Advanced Aerospace Products business has successfully introduced
several technologies in use by branches of the United States Navy, Air Force and
Army. These include radar-absorbing seals, tapes and other composite materials
utilized on the B-2 bomber, the F-22 fighter and naval surface ships.
Ground-based applications are also being developed in conjunction with United
Defense. The Burke radar-absorbing material technology has potentially much
broader applications than are currently in use, and the Company is presently
involved in initiatives that management believes will greatly expand the market
for its Advanced Aerospace Products business.
The Northrop Grumman B-2 radar-resistant tape program is the largest of
Burke's existing government contracts. Burke's revenues from this contract are
generated both by new aircraft production and by replacement tape applied as
part of the repair or scheduled maintenance of the aircraft. Burke has also been
qualified to supply the F-22 program. The F-22 is the latest generation United
States military fighter aircraft and is designed to replace the F-15 as the
premier fighter in the United States military arsenal.
The Advanced Aerospace Products business is also in the second phase of
redesigning the original "over-wing-fairing" seal for the B-1 bomber. This
redesign will proceed with the sale by the Company of working models of the seal
to the United States government in late 1997 or early 1998, followed by the sale
of refurbishment seal sets for each of the 95 existing B-1 bombers. The Company
is also in discussions with Boeing and Lockheed Martin to supply seals for the
new Joint Strike Fighter program. Both Boeing and Lockheed Martin have been
selected as the finalists for this program which is ultimately expected to
procure approximately 3,000 multi-service aircraft for the United States Air
Force, Marine Corps and Navy and the United Kingdom Royal Navy.
COMPETITION
Burke is the largest domestic supplier of highly-engineered silicone seals
for the aerospace OEM market and aftermarket. Burke's domestic competitors are
primarily small, privately-held companies which generally lack Burke's track
record, long-term OEM relationships and capabilities. These competitors include
Kirkhill Rubber Company, Chase-Walton Elastomers, Inc. and Elastomeric Silicone
Products. Management believes that each of Burke's competitors had silicone
aerospace seals revenues that were significantly smaller than the Company's
revenues from those products in 1996. Additionally, the Company has two
principle 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, but have not made significant
inroads in the United States commercial aerospace market.
Management believes that Burke's long-standing customer relationships,
unique design capabilities and superior product quality will continue to support
its position as the leading supplier of engineered silicone seals within this
fragmented market.
Burke is one of only a few companies with the combination of knowledge and
manufacturing capabilities required to develop, test and manufacture engineered
elastomer-based products to military specifications. Many of Burke's Advanced
Aerospace Products are classified in nature, and in many cases
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project leaders return to previous classified product suppliers for a
preliminary assessment of future development opportunity.
GROWTH AND OPPORTUNITIES
The strong expansion in commercial aircraft build rates is expected to drive
long-term growth within Burke's Aerospace Products business. Boeing and other
aircraft producers continue to build backlog and to experience increased demand
for new aircraft. According to industry sources, at the end of 1996, Boeing,
Airbus and McDonnell Douglas had a combined backlog of 2,370 aircraft. According
to Boeing's 1997 Current Market Outlook, Boeing will deliver 340 new aircraft
and will ramp its build rate up to 40 aircraft per month, its highest level
ever, by the end of this year. This surge in deliveries is the beginning of what
many industry analysts believe will be a prolonged industry upturn during which
industry analysts project 16,160 airplanes will be delivered by the major
manufacturers over the next 20 years.
The demand for new aircraft is being driven by increases in passenger miles
traveled and an aging aircraft fleet worldwide. The Aerospace Industries
Association reports that approximately 3,900 existing aircraft will require
replacement over the next 20 years due to age, regulations and prohibitive
maintenance costs. The two largest commercial aircraft manufacturers, Boeing and
Airbus, have recently released their annual market forecasts which corroborate
this view. Management believes that the continuing need for aircraft replacement
parts and upgrades will provide ongoing sales opportunities for Burke over the
life of the aircraft due to Burke's proprietary, in-house tooling for specified
seals and related components. As an OEM-specified supplier of multiple seals and
related components to a variety of aircraft, Burke should benefit from a
substantial installed base for future retrofit and refurbishment projects.
Defense-related applications are also expected to provide significant,
ongoing growth. Lockheed Martin is the primary contractor for the F-22 program
and has been selected as a finalist, along with Boeing, to develop the Joint
Strike Fighter for the United States military and the United Kingdom Royal Navy.
Management believes that Burke's existing supplier relationships with both of
these prime contractors will provide opportunities to participate in these and
other future program developments.
Burke management is also participating in a trend towards more value-added
manufacturing for aerospace OEMs by integrating higher levels of processing and
finishing to components before shipping to OEMs. Burke is encouraging this
higher value-added, higher margin practice with several of its customers in an
effort to strengthen its position as a long-term key supplier.
Burke is currently cooperating with United Defense to develop and test
products that utilize the Company's signature-masking stealth capabilities for
conventional ground-based military applications. Management is optimistic that
one or more of these concepts will receive federal funding and become important
products for Burke. Management has committed significant technical, engineering
and production resources to the Advanced Products division and believes that
programs from this division have the potential to generate substantial revenues
and profitability going forward.
FLOORING PRODUCTS
Burke is the leading producer and distributor of specialty rubber flooring
accessory products for use in commercial markets in the western United States.
Burke's trademark BurkeBase has enjoyed a dominant market share in that region
since the early 1950s and is well known throughout the industry. In addition,
Burke has extended its BurkeBase flooring product lines beyond rubber products
through its 1996 acquisition of the vinyl cove base production assets of
Kentile. Kentile was a nationally recognized producer of vinyl cove base and
flooring products which were sold into the commercial construction and
refurbishment markets. Burke purchased the cove base manufacturing assets and
subsequently relocated them to its San Jose, California facility. The
integration of these assets significantly enhances Burke's national market
position in flooring accessories given vinyl's broad appeal in geographic
regions where rubber products have traditionally been less popular.
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<PAGE>
PRODUCTS
Burke's flooring product line consists of a variety of commercial rubber and
vinyl flooring products and accessories including vinyl cove base, and rubber
core base flooring tiles, stair treads, corners, shapes, special application
adhesives and newly developed luminescent emergency lighting accessories sold
under the BurkeEmerge trademark. Burke flooring and flooring accessory products
are generally recognized by architects, builders, and contractors as the
highest-quality commercial rubber flooring and flooring accessory products
available in terms of construction, durability and ease of installation. In its
principal markets, BurkeBase is utilized in most commercial applications using
resilient tile flooring and virtually all commercial applications involving
carpeting. Other Burke flooring products are employed in commercial and
institutional settings where durability and resilience are of primary
importance.
The addition of commercial vinyl cove base production capabilities from the
acquisition of the Kentile assets in 1996 is an important complement to Burke's
traditional product offerings. Rubber flooring products are generally more
expensive than vinyl products due to their material and manufacturing cost but
yield a longer-lasting product. However, vinyl flooring products are extremely
popular for less demanding applications and are the predominant commercial
flooring construction material in geographic regions outside of the western
United States. The addition of a vinyl cove base product line will create a
lower-cost, complementary offering targeted at less demanding, more
cost-sensitive applications.
New product developments, including profile stair treads, tiles and other
shapes, are becoming increasingly important components of the Flooring Products
business as well. For example, Burke previously sourced its profile tile from an
offshore manufacturer of specialty flooring products. However, in 1996 the
Company invested in production machinery and tooling necessary to manufacture
profile tile in the San Jose facility. This investment will enable Burke to
service this market in a more responsive and price-competitive manner.
Utilizing a proprietary, patent-pending system developed by Burke, the
BurkeEmerge safety strips are photoluminescent runners which can be attached to
cove bases in corridors, on stairwell treads and hand rails, around doors,
windows and signs and in basements, providing up to eight hours of illumination
and leading people to building exits in the event of a power failure. Unlike
conventional emergency lighting, BurkeEmerge requires no batteries or other
electrical power source. These safety strips serve a market for internal
emergency exit aids that has grown due to heightened public awareness of the
dangers that can result from unlit corridors and confusing exit signage.
BurkeEmerge is available in a variety of colors and can be easily installed over
existing cove base, making it suitable for new construction as well as emergency
retrofitting applications.
MARKETS AND CUSTOMERS
Burke's 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. BurkeBase products are mostly found in commercial
and industrial buildings in the western United States, where the Company enjoys
a dominant market share, including an estimated 80% share of the commercial
rubber cove base market in California. In addition to the San Jose manufacturing
facility, the Company has distribution facilities in Santa Fe Springs,
California and in Bensonville, Illinois, and has hired additional sales
personnel to expand the Company's historically regional focus. As vinyl cove
base is more widely used than rubber cove base at the national level, the
introduction of a Burke vinyl cove base product is expected to create
significant opportunities beyond Burke's traditional product line and geographic
territories. In 1996, the top five customers of the Flooring Products division
accounted for $6.8 million in net sales, representing 9.4% and 33.2%,
respectively, of the Company's total and the Flooring Product division's net
sales in that year.
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COMPETITION
While there are a number of companies, both large and small, servicing the
floor covering market, Burke is the largest producer of rubber cove base in the
western United States. Burke's focus over many years on this specialized niche
has created significant brand awareness and customer loyalty. The Company's
primary competitors in rubber flooring accessories products include Roppe
Corporation, Johnsonite, Flexco and Vinyl Plastics Incorporated.
GROWTH AND OPPORTUNITIES
While Burke enjoys the leading share of the western United States rubber
cove base market, management believes there are opportunities to increase its
national presence through promotional and incentive-based distributor programs
and through the introduction of its vinyl product line. The addition of vinyl
cove base products should have a significant impact on the Company's penetration
into eastern United States markets where vinyl has historically been preferred.
Burke's distributor organization is being strengthened as new distributors
either take on Burke as a new supplier due to its new vinyl production
capabilities or, in an effort to consolidate their supplier base, allow Burke,
as its existing rubber flooring products supplier, to displace other vinyl
flooring products suppliers.
A relatively small portion of Burke's Flooring Products sales are currently
made outside of the western United States, although the market for rubber cove
base nationwide is estimated by management at approximately $100 million.
Management believes that its new vinyl product line and midwestern distribution
center will increase Burke's scope and presence in the midwestern and eastern
regions. These initiatives, along with Burke-produced profile tile and
BurkeEmerge safety luminescent products, are expected to support the ongoing
growth within and beyond Burke's traditional markets.
COMMERCIAL PRODUCTS
Burke's Commercial Products business serves end markets with both
intermediate and finished silicone and organic rubber-based compounds and
products.
PRODUCTS
SILICONE HOSE PRODUCTS. Burke manufactures and markets a wide range of
private label and Purosil-branded engineered silicone hose products for high-
pressure, heat-sensitive applications. These high-performance products are sold
primarily to OEMs and the aftermarket for heavy-duty trucks and buses. Burke was
the first silicone hose producer in the industry to become ISO 9002 certified
and is preparing for QS 9000 certification. The Company guarantees the
performance of certain higher quality silicone truck hoses for 1,000,000 miles
and experiences negligible product returns and warranty claims each year. The
Company also manufactures silicone hose products for applications in the
powerboat, potable water and food service industries.
New product development is an important focus within this group. Purosil has
responded to recent market demand with newly designed charged-activated-coupling
and knitted hose products for specific applications within the Class 8 truck
market. These additions are expected to strengthen the silicone hose product
line and increase Burke's penetration of the OEM market.
MEMBRANE PRODUCTS. Burke's Membrane Products business utilizes the
Company's elastomer-based manufacturing expertise to produce high-end,
single-ply commercial roof-covering systems and flexible liner membranes.
Commercial roofing systems are sold into the new roofing and re-roofing markets
under the Burkeline trade name and have been installed in large and small
commercial and institutional facilities around the world. The Company's Membrane
Products are also used as reservoir liners and floating potable and waste water
covers.
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Burke's roofing and liner membrane systems are designed with DuPont's
patented Hypalon polymer material, which is an extremely durable and flexible
material, widely regarded as the highest-quality single-ply product available in
the commercial roofing and membrane market. Burke's Membrane products typically
incorporate structural fabric laminated between thin layers of Hypalon.
Burkeline roofing systems are installed by Burke-approved contractors and
technical assistants and are fully warrantied for up to 20 years.
Membrane liners and covers are used primarily for protective purposes in
potable water and wastewater projects. The liners and covers are most often used
to protect against contamination of potable water during its storage and
transfer. Hypalon is one of the few polymers which meets environmental standards
regarding sanctioned potable water contact materials. Burke's in-house technical
and engineering groups work directly with municipal engineers and with
distributors and fabricators to assist in the design, testing and selection of
the final product. Burke also manufactures and provides a full line of
custom-made shrouds, gas vents, adhesives and other components necessary to
produce a complete system package.
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 product markets. The group focuses on
identifying high-margin products that complement its existing product lines and
utilize excess production capacity. These custom products are typically complex
blending and compounding formulations serving as intermediate or finished
products for manufacturers of specialty rubber products and include oil drilling
equipment components, road tape, rocket motor insulation and surface ship bow
domes.
MARKETS AND CUSTOMERS
Management believes that the Company is the only approved supplier of
silicone hoses to Mack Trucks. Burke's automotive hose products are also
designed and specified into model builds of other major Class 8 truck OEMs
including Peterbilt and Freightliner.
Burke's membrane roofing products are sold both to distributors and directly
to end-users who favor higher-quality roofing systems and who select Burke based
on its reputation for quality. These roofing systems are typically employed in
high value-added applications where quality, as measured by durability and ease
of maintenance, is critical.
Burke's liner membrane products are used in applications which are typically
outsourced by municipalities on a bid basis and take several months to complete.
Burke's covers and liners are sold to distributors and fabricators who heat weld
the Hypalon-constructed sheets together to create a final product. It is not
unusual for Burke to work with multiple distributors who are bidding for the
same municipal project.
Most of Burke's customers of the custom products unit are repeat users and
range from large industrial companies to niche manufacturers producing
specialized elastomeric products. Burke has developed long-standing
relationships with a broad base of customers as a supplier of both intermediate
and finished products whose technical complexities are suited to its unique
capabilities. Burke markets these products using direct and independent sales
representatives in both the United States and Europe. In 1996, the top five
customers of the Commercial Products division accounted for $7.4 million in net
sales, representing 10.2% and 27.1%, respectively, of the Company's total and
the Custom Product division's net sales in that year.
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COMPETITION
The marketplace for engineered silicone hose applications is supplied by
four principal companies: Flexfab Horizons International, Thermopol
Incorporated, Gates Rubber Company and the Company. In both roofing and liner
systems, Burke competes with other Hypalon-based product manufacturers and with
lower-cost alternatives. Leading manufacturers of these alternative systems
include JPS Elastomerics Corp. and Carlisle Companies, Inc. Each has significant
single-ply membrane roofing businesses and emphasize their membrane products
manufactured from alternative materials as lower-cost, higher-volume products.
Their Hypalon offerings represent a small portion of their aggregate sales.
There are a number of manufacturers that compete in custom-mixing and
product formulation business, although management believes that only a few match
Burke's comprehensive capabilities in terms of its research, design, materials
compounding, engineering and laboratory testing resources. Burke's custom
products product line has developed a reputation for solving complex formulation
problems and is staffed with experienced compounding professionals.
GROWTH AND OPPORTUNITIES
Management believes that the Commercial Products division has significant
growth potential. The Company's Purosil line of silicone truck and industrial
hose is expected to command an increased share of the market based on its
development of new clients and new distribution channels. Management is also
examining the potential for product line extensions in this area of the
business. Management also foresees significant growth potential in the membrane
products line as it works with DuPont to promote Hypalon as a durable and
environmentally sound liner product for new applications. Moreover, management
continues to look for opportunities to capitalize on the Company's vertical
integration, wide customer base and technological leadership to identify new
high-margin custom elastomer-based products.
SALES AND MARKETING
Burke's sales and marketing personnel are organized by product lines. Based
on the nature of the markets served and the established distribution channels in
a particular segment, products are sold either directly to end-users or through
distributors and independent sales representatives. Burke's Aerospace Products
business has long-standing direct relationships with OEMs and aftermarket
suppliers to the aerospace industry and supports these relationships by
integrating its engineering and operating groups during the design, tooling and
production phases of a customer's project. Burke solidifies its relationships
through ongoing technical support throughout the life of a project.
Burke's Flooring Products business sells through a direct sales effort and
through flooring products distributors. The addition of a vinyl-based product
line will enable Burke to 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 displace other
vinyl suppliers with distributors that already carry Burke's rubber flooring
products line. The Flooring Products business currently utilizes 14 direct sales
representatives who manage direct sales and orchestrate the Company's national
marketing efforts through approximately 90 commercial flooring products
distributor locations.
Burke's Commercial Products business utilizes several different sales and
marketing approaches due to the scope of its product offering. Purosil's
high-performance silicone hoses are sold directly to OEMs in the heavy-duty
truck and bus market. The Company also manufactures a number of "standard"
product hoses which are marketed through sales representatives and a national
network of distributors. The other commercial products that Burke produces are
primarily sold through specialized in-house representatives adept at identifying
potential customers who can benefit from Burke's vertically integrated
manufacturing, compound formulation and engineering capabilities.
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RAW MATERIALS
Principal raw materials purchased by the Company for use in its products
include various custom and standard grades of rubber, silicone gum and vinyl as
well as the Hypalon polymer material. The Company has historically not
experienced any significant supply restrictions and has generally been able to
pass through increases in the price of these materials to customers. In 1995,
however, the Company experienced a significant price increase in one of the raw
materials used in the manufacture of one of its flooring products. Due to the
competitive nature of the flooring products business and the Company's
proprietary formula for this product, the Company was unable to fully pass this
price increase along to its consumers and its gross margins for this product
were adversely affected. Although the Company does not currently anticipate that
it will experience any similar price increases for this or any other raw
material used by the Company in the near future, there can be no assurance that
such price increases will not occur and that the Company's results of operations
will not be adversely affected thereby.
MANUFACTURING AND VERTICAL INTEGRATION
Burke's operations are vertically integrated for the production of both
silicone and organic rubber-based products. The Company's production process
commences with the receipt of raw materials, followed by a variety of production
steps which generally include mixing, milling, calendering (or extrusion or
stripping), forming and molding and, in the case of silicone, roto-curing.
Management believes Burke's vertical integration provides a key competitive
advantage within the markets it serves.
FACILITIES
San Jose, California serves as the corporate headquarters as well as the
manufacturing site for the Flooring Products business and the organic rubber
portion of the Commercial Products business. Santa Fe Springs, California is the
manufacturing headquarters for Burke's silicone production activities and houses
most of its Aerospace Products and all of its silicone Commercial Products
businesses. Along with the industrial hose production, the Aerospace Products
business classified development and production areas are also located at the
Santa Fe Springs facility. The Taunton, Massachusetts facility is the
manufacturing site for Burke's Haskon aerospace operations. This location
provides Burke with an alternative eastern United States manufacturing presence
for its aerospace customers.
As of July 4, 1997, the Company 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.............. 25,000 Leased Mixing
Santa Fe Springs, CA.............. 25,000 Leased Distribution
Taunton, MA....................... 85,000 Leased Manufacturing, Engineering, Distribution, Offices
Bensonville, IL................... 15,000 Leased Distribution
</TABLE>
These facilities produce molded, extruded and calendered forms of organic
rubber and silicone which are then fabricated by machine or by skilled labor
into finished products. The Company's engineering, design and research and
development departments play a significant role in the initial product design
and compound formulation used in the production process. Burke has sophisticated
laboratories in each of its manufacturing facilities which allow the Company to
perform most of its necessary testing in-house. In addition to the facilities
identified above, the Company leases a 113,000 square foot facility in Modesto,
California, which is subleased to the purchaser of the Company's custom-molded
products business in connection with the sale of that business in 1996. The
Company believes that its facilities are in good
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condition and that the facilities, together with anticipated capital
improvements and additions, are adequate for its operating needs for the
foreseeable future.
BACKLOG AND WARRANTY
The Company's backlog consists of cancelable orders and is dependent upon
trends in consumer demand throughout the year. Customer order patterns vary from
year to year, largely because of annual differences in consumer end-product
demand, marketing strategies, overall economic and weather conditions. Orders
for the Company's products are generally subject to cancellation until shipment.
As a result, comparison of backlog as of any date in a given year with backlog
at the same date in a prior year is not necessarily indicative of sales trends.
Moreover, the Company does not believe that backlog is necessarily indicative of
the Company's future results of operations or prospects.
The Company's warranty policy is to accept returns of products with defects
in materials or workmanship. The Company will also accept returns of incorrectly
shipped goods where the Company has been notified on a timely basis and, in
certain cases, to maintain customer goodwill. In accordance with normal industry
practice, the Company ordinarily accepts returns only from its customers and
does not ordinarily accept returns directly from consumers. Certain of the
products returned to the Company by its customers, however, may have been
returned to those customers by consumers. The Company generally warrants its
roofing products for two years, for which the related costs are not significant.
In addition, the Company sells extended warranties on roofing products for ten
to twenty years. During the three-year period ended January 3, 1997, the Company
incurred insignificant warranty costs with respect to its roofing products.
EMPLOYEES
The Company employed at October 3, 1997, 890 employees at its three
locations, including 775 involved in manufacturing and manufacturing support and
83 involved in product sales. Employees at the Company's three locations receive
comparable insurance and benefit programs. Burke's employees at the San Jose and
Taunton locations are represented by the International Association of Machinists
and Electrical Workers Unions, respectively. The collective bargaining agreement
for the Taunton location was renegotiated in June 1997 for a three-year term and
the agreement for the San Jose location will expire in October 1997. While 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, there can be no assurance that the collective bargaining
agreement for the San Jose location will be renegotiated on terms satisfactory
to the Company and its employees.
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>
GATT
PATENT NO. TITLE EXPIRY
- ------------------------ -------------------------------------------------------- ---------
<S> <C> <C>
4,608,792............... Roof membrane holdown system 11/12/08
4,603,790............... Tensioned reservoir cover, rainwater run-off enhancement 3/11/05
system
</TABLE>
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TRADEMARKS
<TABLE>
<CAPTION>
MARK EXPIRATION
- ---------------------------------------------------------------------------------- -----------
<S> <C>
VAC-Q-ROOF........................................................................ 12/1/98
ROULEAU........................................................................... 12/27/08
BURKEBASE......................................................................... 6/4/05
SURETITE.......................................................................... 7/4/01
BURKE INDUSTRIES.................................................................. 4/19/07
ARGONAUT.......................................................................... 4/1/09
</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, the 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. See "The Transactions." Based in part on the investigations
conducted and the indemnification provisions of the Merger Agreement with
respect to environmental matters, the Company believes, although there can be no
assurance, that its liabilities relating to these environmental matters will not
have a material adverse effect on its future financial position or results of
operations. The Company does not maintain a reserve for environmental
liabilities.
LEGAL PROCEEDINGS
The Company is routinely involved in legal proceedings related to the
ordinary course of its business. Management does not believe any such matters
will have a material adverse effect on the Company. The Company maintains
property, general liability and product liability insurance in amounts which it
believes are consistent with industry practices and adequate for its operations.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth the name, age and position of each of the
persons who became directors and executive officers of the Company upon
completion of the Prior Offering. Each director will hold office until the next
annual meeting of the shareholders or until his successor has been elected and
qualified. Officers will be elected by the Board of Directors and will serve at
the discretion of the Board.
<TABLE>
<CAPTION>
NAME AGE POSITIONS
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Rocco C. Genovese.................................... 60 Vice Chairman of the Board, President and Chief
Executive Officer
Reed C. Wolthausen................................... 50 Director, Treasurer, Senior Vice President and
General Manager--Silicone Products
David E. Worthington................................. 44 Vice President--Finance
Robert F. Pitman..................................... 42 Vice President and Technical Director--San Jose
Craig A. Carnes...................................... 37 Vice President--Sales and Marketing--Flooring
Products
Ronald A. Stieben.................................... 50 Vice President--Sales and Marketing--Silicone
Products
Robert G. Engle...................................... 56 Vice President--Operations--Santa Fe Springs
Hisham Alameddine.................................... 39 Vice President--Operations--San Jose
John F. Lehman....................................... 54 Director
Donald Glickman...................................... 64 Director
George Sawyer........................................ 66 Director
Keith Oster.......................................... 36 Director
Oliver C. Boileau, Jr................................ 70 Director
Thomas G. Pownall.................................... 75 Director
Bruce D. Gorchow..................................... 39 Director
</TABLE>
ROCCO C. GENOVESE, Vice Chairman, President and Chief Executive Officer, has
been with the Company for 41 years. Mr. Genovese joined Burke in 1955 and has
held a number of operations and sales positions within the Company since that
time. Mr. Genovese assumed his current role as Chairman, President and Chief
Executive Officer in 1989. He is active in all aspects of Burke's business and
is a participant in several industry associations.
REED C. WOLTHAUSEN, Treasurer, Senior Vice President and General
Manager--Silicone Products, has been with the Company for eight years. Initially
serving as the Company's Chief Financial Officer, Mr. Wolthausen is now the
Company's Treasurer and manages Burke's silicone businesses. Prior to joining
Burke, he served as Chief Financial Officer for Micronix Corp. and as Controller
for Velo-Bind, Inc.
DAVID E. WORTHINGTON, Vice President--Finance, has been with the Company for
six years. Mr. Worthington joined Burke as Corporate Controller in 1990 and
served in that capacity until 1997 when he was promoted to his current position.
Prior to joining the Company, he served as Chief Financial Officer for
Electro-Technology Corporation.
ROBERT F. PITMAN, Vice President and Technical Director--San Jose, has been
with the Company since 1980 and currently oversees all technical and product
development for the San Jose-based businesses as well as sales and marketing for
the San Jose portion of the Commercial Products business. During his tenure with
Burke, Mr. Pitman has held a number of positions including Director of Technical
Services and Material/Process Development Engineer. He has served in his current
position since 1994.
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<PAGE>
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 nations 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.
RONALD A. STIEBEN, Vice President--Sales and Marketing--Silicone Products,
has worked for the Company for two years. Prior to joining Burke, Mr. Stieben
worked for 16 years at Kirkhill Rubber Company, one of Burke's competitors. He
served as Vice President of Sales for Kirkhill for five years before joining
Burke in 1995.
ROBERT G. ENGLE, Vice President--Operations--Santa Fe Springs, joined Burke
as Industrial Engineering Manager in 1986 and has since held the positions of
Engineering Manager and Vice President of Manufacturing. Before joining Burke,
Mr. Engle served as Manager of Engineering Services and Chief Industrial
Engineer for Norton Company.
HISHAM ALAMEDDINE, Vice President--Operations--San Jose, has been with the
Company for five years. Before serving in his current position, Mr. Alameddine
served as Director of Engineering Services for the Company. Prior to joining
Burke, Mr. Alameddine was the Vice President of Manufacturing for Sonfarrel,
Inc. and has held senior operations positions with two other companies.
JOHN F. LEHMAN, became a director of the Company upon consummation of the
Recapitalization, is a Managing Principal of Lehman. Prior to founding Lehman in
1990, Dr. Lehman was an investment banker with Paine Webber, Inc. from 1988 to
1990, and served as a Managing Director in Corporate Finance. Dr. Lehman served
for six years as Secretary of the Navy, was a member of the National Security
Council Staff, served as a delegate to the Mutual Balanced Force Reductions
negotiations and was the Deputy Director of the Arms Control and Disarmament
Agency. Dr. Lehman served as Chairman of the Board of Directors of Sperry
Marine, Inc., and is a member of the Board of Directors of Sedgwick Group plc,
Ball Corporation and ISO Inc., and is currently Vice Chairman of the Princess
Grace Foundation, a director of OpiSail Foundation and a trustee of Spence
School.
DONALD GLICKMAN, who became a director of the Company upon consummation of
the Recapitalization, is a Managing Principal of Lehman. For the past five
years, Mr. Glickman has also been the President of Donald Glickman Company,
Inc., which together with Lehman, acquires as principal significant corporations
in the aerospace, marine, and defense industries. Prior to joining Donald
Glickman Company, Inc., Mr. Glickman was a principal of the Peter J. Solomon
Company, a Managing Director of Shearson Lehman Brothers Merchant Banking Group
and Senior Vice President and Regional Head of The First National Bank of
Chicago. Mr. Glickman served as an armored calvary officer in the Seventh U.S.
Army. Mr. Glickman is currently a director of Cal-Tex Industries, Inc. and Monro
Muffler Brake, Inc. and is a trustee of MassMutual Corporate Investors,
MassMutual Participation Investors and Wolf Trap Foundation for the Performing
Arts.
GEORGE SAWYER, became a director of the Company upon consummation of the
Recapitalization, is a Managing Principal of Lehman and has been affiliated with
Lehman for the past five years. From 1993-1995, Mr. Sawyer served as the
President and Chief Executive Officer of Sperry Marine Inc. Prior to that, Mr.
Sawyer held a number of prominent positions in private industry and in the U.S.
government, including serving as the President of John J. McMullen Associates,
the President and Chief Operating Officer of TRE Corporation, the Vice President
of International Operations for Bechtel Corporation and the Assistant Secretary
of the Navy for Shipbuilding and Logistics under Mr. Lehman.
KEITH OSTER, became a director of the Company upon consummation of the
Recapitalization, is a Principal of Lehman. Mr. Oster joined Lehman in 1992 and
is principally responsible for financial structuring and analysis. Prior to
joining Lehman, Mr. Oster was with the Carlyle Group, where he was
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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.
OLIVER C. BOILEAU, JR., became a director of the Company upon consummation
of the Recapitalization, joined The Boeing Company in 1953 as a research
engineer. He progressed through several technical and management positions and
was named Vice President in 1968 and then President of Boeing Aerospace in 1973.
In 1980, he joined General Dynamics Corporation as President and a member of the
Board of Directors. In January 1988, Mr. Boileau was promoted to Vice Chairman
and then retired in May 1988. Mr. Boileau joined Northrop Grumman Corporation in
December 1989 as Vice President and President and General Manager of the B-2
Division. He also served as President and Chief Operating Officer of the Grumman
Corporation, a subsidiary of Northrop Grumman, and as a member of the Board of
Directors of Northrop Grumman. Mr. Boileau retired from Northrop Grumman in
1995. He is an Honorary Fellow of the American Institute of Aeronautics and
Astronautics, a member of the National Academy of Engineering, the Board of
Trustees of St. Louis University, and Chairman of the Massachusetts Institute of
Technology-Lincoln Laboratory Advisory Board.
THOMAS G. POWNALL, became a director of the Company upon consummation of the
Recapitalization, is a member of the investment advisory board of Lehman. Mr.
Pownall was Chairman of the Board of Directors from 1983 until 1992 and Chief
Executive Officer of Martin Marietta Corporation from 1982 until his retirement
in 1988. Mr. Pownall joined Martin Marietta Corporation in 1963 as President of
its Aerospace Advanced Planning unit, became President of Aerospace Operations
and, in succession, Vice President and President and Chief Operating Officer of
the corporation. Mr. Pownall is also a director of the Titan Corporation and
Director Emeritus of Sundstrand Corporation, serves as a member of the advisory
boards of Ferris, Baker Watts Incorporated and Sedgwich New York Metropolitan
and as a director of the U.S. Naval Academy Foundation and a trustee of
Salem-Teikyo University.
BRUCE D. GORCHOW, became a director of the Company upon consummation of the
Recapitalization, is a member of the investment advisory board of Lehman. Since
1991, Mr. Gorchow has been Executive Vice President and head of the Private
Finance Group of PPM America, Inc. Mr. Gorchow is also a Director of Global
Imaging Systems, Inc., Leiner Health Products, Inc., Tomah Products, Inc. and is
an investment director of several investment limited partnerships. Mr. Gorchow
also represents PPM America, Inc. on the boards of ten of its portfolio
companies. Prior to his position at PPM America, Mr. Gorchow was a Vice
President at Equitable Capital Management, Inc.
CERTAIN RIGHTS OF HOLDERS OF REDEEMABLE PREFERRED STOCK
Under certain circumstances, the holders of the Redeemable Preferred Stock
may have the right to elect a majority of the directors of Company. See
"Description of Redeemable Preferred Stock and Warrants--Redeemable Preferred
Stock--Voting Rights."
COMMITTEES OF THE BOARD OF DIRECTORS
It is expected that the Board of Directors will establish an Audit Committee
and a Compensation Committee. The membership of these committees has not yet
been determined. The Compensation Committee will make recommendations concerning
the salaries and incentive compensation of employees of and consultants to the
Company, and will oversee and administer the Company's stock option plans. The
Audit Committee will be responsible for reviewing the results and scope of
audits and other services provided by the Company's independent auditors.
EXECUTIVE COMPENSATION
The information set forth in this section relates to the Chief Executive
Officer of the Company and the four most highly compensated executive officers
of the Company as of January 3, 1997. It is expected
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that, following the consummation of the Transactions, the Company generally will
provide its executives with compensation (including cash compensation and
benefits) comparable to the compensation provided to them prior to the
Recapitalization, with such additions or modifications as may be negotiated by
the Company and management.
COMPENSATION SUMMARY
The following summary compensation table sets forth for the fiscal years
ended January 3, 1997, December 29, 1995 and December 30, 1994, the historical
compensation for services to the Company of the Chief Executive Officer and the
four most highly compensated executive officers (the "Named Executive Officers")
as of January 3, 1997:
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION
COMPENSATION(1) -------------
-------------------- SECURITIES ALL OTHER
FISCAL SALARY BONUS UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($)(2) OPTIONS ($)(3)
- ----------------------------------------------------- ----------- --------- --------- ------------- -----------------
<S> <C> <C> <C> <C> <C>
Rocco C. Genovese ................................... 180,050 150,000 750
President and Chief 1996 1995 189,614 120,000 336,000 -- 750
Executive Officer 1994 170,000 75,000 100,000 750
Reed C. Wolthausen .................................. 141,378 100,000 750
Senior Vice President and 1996 1995 133,664 60,000 224,000 -- 750
General Manager--Silicone Products 1994 115,050 40,000 25,000 750
Ronald A. Stieben(4) ................................ 130,000 -- -- 750
Vice President--Sales and 1996 1995 82,500 -- 25,000 480
Marketing--Silicone Products 1994 -- -- -- --
Robert F. Pitman .................................... 90,750 27,500 -- 750
Vice President and 1996 1995 84,273 22,500 -- 750
Technical Director--San Jose 1994 81,249 21,500 20,000 750
90,794 25,000 -- 750
David E. Worthington ................................ 1996 1995 87,791 20,000 -- 750
Vice President--Finance 1994 83,799 10,000 10,000 750
</TABLE>
- ------------------------
(1) Perquisites and other personal benefits paid in 1996 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 as permitted by the rules of the Commission.
(2) Annual bonuses are indicated for the year in which they were earned and
accrued. Annual bonuses for any year are generally paid in the following
fiscal year.
(3) The Company's contributions to the Company's 401(k) plan on behalf of the
Named Executive Officers.
(4) Mr. Stieben was hired by the Company on May 15, 1995.
1989 STOCK OPTION PLAN AND STOCK OPTION GRANTS
Prior to consummation of the Recapitalization, the Company maintained the
1989 Stock Option Plan, pursuant to which incentive and nonqualified options to
purchase an aggregate of 1,182,000 shares of Common Stock were vested and
outstanding at July 4, 1997. In addition, in 1996 the Board of Directors granted
nonqualified options to purchase an aggregate of 360,000 shares of Common Stock
to certain
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<PAGE>
executive officers not pursuant to a formal plan. In connection with the
Recapitalization, all vested options outstanding as of the consummation of the
Recapitalization were converted into the right to receive the Recapitalization
Consideration less the applicable exercise price.
The following table summarizes options granted in 1996 to the Named
Executive Officers.
OPTIONS GRANTED IN 1996
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS(1)
------------------------------------------------------------------
PERCENTAGE OF
TOTAL OPTIONS EXERCISE
SHARES UNDERLYING GRANTED TO PRICE PER EXPIRATION
NAME OPTIONS EMPLOYEES SHARE DATE
- ------------------------------------------------- ----------------- --------------------- ----------- -----------
<S> <C> <C> <C> <C>
Rocco C. Genovese................................ 336,000 54.4% $ 1.500 June 2006
Reed C. Wolthausen............................... 224,000 36.2% 1.500 June 2006
</TABLE>
- ------------------------
(1) All vested options outstanding immediately prior to the Recapitalization
will be canceled and converted into the right to receive the
Recapitalization consideration less the applicable exercise price.
The following table summarizes information with respect to the year-end
values of all options held by Named Executive Officers.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL IN-THE-MONEY OPTIONS
SHARES ACQUIRED VALUE REALIZED YEAR-END (#) AT FISCAL YEAR-END
NAME ON EXERCISE (#) ($) EXERCISABLE/UNEXERCISABLE ($)
- ------------------------------------------ ----------------- --------------- ----------------------- --------------------
<S> <C> <C> <C> <C>
Rocco C. Genovese......................... 0 0 611,000/0 $ 295,000
Reed C. Wolthausen........................ 0 0 354,000/0 $ 139,750
Ronald A. Stieben......................... 0 0 20,000/5,000 $ 0
Robert F. Pitman.......................... 0 0 63,750/0 $ 68,531
David E. Worthington...................... 0 0 45,000/0 $ 48,375
</TABLE>
COMPENSATION OF DIRECTORS
It is anticipated that none of the directors who are officers of the Company
will receive any compensation directly for their service on the Company's Board
of Directors. All other directors will receive customary directors' fees for
their services. In addition, the Company has agreed to pay Lehman certain fees
for various management, consulting and financial planning services, including
assistance in strategic planning, providing market and financial analyses,
negotiating and structuring financing and exploring expansion opportunities. See
"Certain Relationships and Related Transactions."
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<PAGE>
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 July 4, 1997, assuming the Transactions
occurred on that date, by (i) each director, (ii) each of the executive officers
of the Company, (iii) all executive officers and directors as a group and (iv)
each person expected by the Company to be the beneficial owner of more than 5%
of the outstanding Common Stock of the Company immediately after consummation of
the Recapitalization.
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF SHARES
NAME OF INDIVIDUAL OR ENTITY(1) SHARES(2) OUTSTANDING(3)
- ------------------------------------------------------------------------------ ---------- --------------
<S> <C> <C> <C>
JFLEI(4)...................................................................... 3,134,298 65.0%
John F. Lehman(5)............................................................. 3,134,298 65.0
George Sawyer(5).............................................................. 3,134,298 65.0
Donald Glickman(5)............................................................ 3,134,298 65.0
Keith Oster(5)................................................................ 3,134,298 65.0
Rocco C. Genovese............................................................. 241,000 5.0
Reed C. Wolthausen............................................................ 193,602 4.0
David E. Worthington.......................................................... 14,500 *
Robert F. Pitman.............................................................. 8,600 *
Craig A. Carnes............................................................... 5,300 *
Ronald A. Stieben............................................................. 1,100 *
Robert F. Engle............................................................... 5,300 *
Hisham Alameddine............................................................. 4,300 *
Oliver C. Boileau, Jr.(6)..................................................... -- --
Thomas G. Pownall(7).......................................................... -- --
Bruce D. Gorchow(8)........................................................... -- --
Jackson National(9)........................................................... 428,444 8.9
MassMutual(9)................................................................. 428,444 8.9
Paribas(9).................................................................... 107,112 2.2
All directors and executive officers as a group (15 persons).................. 3,608,000 74.9%
</TABLE>
- ------------------------
* Less than 1%
(1) The address of JFLEI and Messrs. Lehman, Sawyer, Glickman and Oster is 2001
Jefferson Davis Highway, Suite 607, Arlington, Virginia 22202. The address
of Jackson National and Mr. Gorchow is 225 West Wacker Drive, Chicago,
Illinois 60606. The address of MassMutual is 1295 State Street, Springfield,
Massachusetts 01111. The address of Paribas is 787 Seventh Avenue, New York,
New York 10019.
(2) As used in this table, beneficial ownership means the sole or shared power
to vote, or to direct the voting of a security, or the sole or shared power
to dispose, or direct the disposition of, a security.
(3) Computed based upon the total number of shares of the Company's Common Stock
outstanding and the number of shares of the Company's Common Stock
underlying options or warrants held by that person exercisable within 60
days after consummation of the Transactions. In accordance with Rule 13(d)-3
of the Exchange Act, any Common Stock that will not be outstanding at the
consummation of the Transactions that is subject to options or warrants
exercisable within 60 days is deemed to be outstanding for the purpose of
computing the percentage of outstanding shares of the Company's Common Stock
owned by the person holding such options or warrants, but is not deemed to
be outstanding for the purpose of computing the percentage of outstanding
shares of the Company's Common Stock owned by any other person.
(4) JFLEI is a Delaware limited partnership managed by Lehman, which is an
affiliate of the general partner of JFLEI. Each of Messrs. Lehman, Glickman,
Sawyer and Oster, either directly (whether through ownership interest or
position) or through one or more intermediaries, may be deemed to control
Lehman and such general partner. Lehman and such general partner may be
deemed to control the voting and disposition of the shares of the Company
common stock owned by JFLEI. Accordingly, for certain purposes, Messrs.
Lehman, Glickman, Sawyer, Oster may be deemed to be beneficial owners of the
shares of the Company's Common Stock owned by JFLEI.
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<PAGE>
(5) Includes the shares beneficially owned by JFLEI, of which Messrs. Lehman,
Glickman, Sawyer and Oster are affiliates.
(6) Mr. Boileau is a limited partner of JFLEI.
(7) Mr. Pownall is a limited partner of JFLEI and is on the investment advisory
board of Lehman.
(8) Mr. Gorchow is on the investment advisory board of Lehman.
(9) All shares are obtainable upon the exercise of the Warrants. See "The
Transactions" and "Description of Redeemable Preferred Stock and Warrants."
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
MANAGEMENT PARTICIPATION IN THE TRANSACTIONS
COMMON STOCK. The executive officers and directors of the Company will
receive a total of approximately $13.8 million, representing the
Recapitalization Consideration. Certain executive officers and directors of the
Company will also retain the Continuing Shares. See "The Transactions" and
"Security Ownership of Certain Beneficial Owners and Management."
TREATMENT OF STOCK OPTIONS. Certain of the directors and executive officers
of the Company held options to purchase the Company's Common Stock that were
terminated upon the effectiveness of the Merger and, as to a portion of which,
such persons received cash pursuant to the terms of the Merger Agreement. Prior
to the effective date of the Merger, the Company agreed, pursuant to the terms
of the Merger Agreement, to take all necessary action to cancel all outstanding
options to purchase the Company's Common Stock, whether or not exercisable. As
of July 4, 1997, there were options vested and outstanding to purchase an
aggregate of 1,542,000 shares of the Company's Common Stock at a weighted
average exercise price of $0.840 per share, which options were held by 28
persons.
MANAGEMENT AGREEMENT
Pursuant to the terms of a ten-year Management Agreement (the "Management
Agreement") entered into between Lehman and the Company, (i) upon consummation
of the Transactions, the Company paid Lehman a fee in the amount of $1.5 million
and (ii) the Company agreed to pay Lehman an annual management fee equal to
$500,000.
SHAREHOLDERS AGREEMENT
In connection with the Recapitalization, the Company, JFLEI, the Continuing
Shareholders and, in their capacity as holders of the Warrants, Jackson
National, Paribas and MassMutual (collectively, the "Shareholders") entered into
a Shareholders Agreement (the "Shareholders Agreement"), the principal terms of
which are summarized below:
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 entity Shareholders (other than
JFLEI), the partners of such partnership, (iii) in the case of entity
Shareholders (other than JFLEI), affiliates of such entity, or to transferees of
shares sold in transactions complying with the applicable provisions of the
Shareholder or Company Right of First Offer or the Tag-Along or Drag-Along
Rights (as each term is defined below) or in a Registered Offering (as defined
below).
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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 elect to 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; provided
that the price may not be less than 90% of the price set forth in the First
Offer Notice. Any sale pursuant to a Third-Party Offer must be consummated
within 180 days after the expiration of the Company's Right of First Refusal and
will be subject to applicable Tag-Along Rights.
SUBSCRIPTION OFFER WITH RESPECT TO PRIMARY ISSUANCES. The Shareholders
Agreement provides that the Company may not issue equity securities, or
securities convertible into equity securities 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 the proposed purchaser.
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 and
all of the Warrants 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 Offer or the Tag-Along
or Drag-Along Rights.
LEGENDS. The shares of Common Stock subject to the Shareholders Agreement
will bear a legend related to the Right of First Offer and the Tag-Along and
Drag-Along Rights, which legends will be removed when the shares of Common Stock
are, pursuant to the terms of the Shareholders Agreement, no longer subject to
the restrictions on transfer imposed by the Shareholders Agreement.
REGISTRATION RIGHTS. JFLEI and certain other shareholders are entitled to
one "demand" and unlimited piggyback registration rights, subject to additional
customary rights and limitations.
The term of the Shareholders Agreement will expire on the earliest of (i) 10
years from the consummation of the Recapitalization, (ii) the date on which none
of the Shareholders nor any of their
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<PAGE>
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.
REGISTRATION RIGHTS FOR WARRANTHOLDERS
The holders of the shares issuable upon exercise of the Warrants will be
entitled to one "demand" registration right at any time on or after the later of
(i) August 20, 2002 and (ii) the 181st day after completion of the initial
public offering by the Company of its Common Stock, subject to additional
customary rights and limitations. In addition, holders of the shares issuable
upon exercise of the Warrants will be entitled to unlimited "piggyback"
registration rights after the date of the Company's initial public offering of
its Common Stock, subject to customary rights and limitations. See "Description
of Redeemable Preferred Stock and Warrants--Registration Rights for Warrant
Shares."
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.
DESCRIPTION OF NOTES
Except as otherwise indicated below, the following summary applies to both
the Old Notes and the New Notes. As used herein, the term "Notes" shall mean the
Old Notes and the New Notes, unless otherwise indicated.
The form and terms of the New Notes are substantially identical to the form
and terms of the Old Notes, except that the New Notes (i) will be registered
under the Securities Act, (ii) will not provide for payment of penalty interest
as Liquidated Damages, which terminate upon consummation of the Exchange Offer,
and (iii) will not bear any legends restricting transfer thereof. The New Notes
will be issued solely in exchange for an equal principal amount of Old Notes. As
of the date hereof, $110.0 million aggregate principal amount of Old Notes is
outstanding. See "The Exchange Offer."
GENERAL
The Old Notes were issued and the New Notes will be issued pursuant to an
Indenture (the "Indenture") between the Company, the Subsidiary Guarantors
referred to below and United States Trust Company of New York, as trustee (the
"Trustee"). The terms of the Notes include those stated in the Indenture and
those made part of the Indenture by reference to the Trust Indenture Act of
1939, as amended (the "Trust Indenture Act"). The Notes are subject to all such
terms, and Holders of Notes are referred to the Indenture and the Trust
Indenture Act for a statement thereof. The following summary of certain
provisions of the Indenture is materially complete but is qualified in its
entirety by reference to the Indenture, including the definitions therein of
certain terms used below. A copy of the Indenture is available as set forth
under "Additional Information." The definitions of certain terms used in the
following summary are set forth below under the caption "Certain Definitions."
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<PAGE>
PRINCIPAL, MATURITY AND INTEREST
The Notes will mature on August 15, 2007, will initially be limited to
$110.0 million aggregate principal amount and will be senior unsecured
obligations of the Company. The Indenture provides for the issuance of up to
$75.0 million aggregate principal amount of additional Notes having identical
terms and conditions to the Notes offered hereby (the "Additional Notes"),
subject to compliance with the covenants contained in the Indenture. Any
Additional Notes will be part of the same issue as the New Notes offered hereby
and will vote on all matters with the New Notes offered hereby. For purposes of
this "Description of the Notes," reference to the Notes does not include
Additional New Notes. Except as otherwise described below, each Note will bear
interest at 10% per annum from August 20, 1997 or from the most recent interest
payment date to which interest has been paid or duly provided for, payable
semiannually on February 15 and August 15 in each year, commencing February 15,
1998, until the principal thereof is paid or duly provided for, to the person in
whose name the Note (or any predecessor Note) is registered at the close of
business on the February 1 or August 1 next preceding such interest payment
date. Interest will be computed on the basis of a 360-day year comprised of
twelve 30-day months.
The principal of and premium, if any, and interest on the Notes will be
payable, and the Notes will be exchangeable and transferable, at the office or
agency of the Company in The City of New York maintained for such purposes
(which initially will be the office of the Trustee located at 111 Broadway,
Lower Level, New York, N.Y., 10006) or, at the option of the Company, interest
may be paid by check mailed to the address of the person entitled thereto as
such address appears in the security register; PROVIDED that all payments with
respect to Global Notes and Certificated Notes (as such terms are defined below
under the caption "--Book Entry, Delivery and Form") the holders of which have
given wire transfer instructions to the Company will be required to be made by
wire transfer of immediately available funds to the accounts specified by the
holders thereof. The Notes will be issued only in registered form without
coupons and only in denominations of $1,000 and any integral multiples thereof.
No service charge will be made for any registration of transfer or exchange or
redemption of Notes, but the Company may require payment in certain
circumstances of a sum sufficient to cover any tax or other governmental charge
that may be imposed in connection therewith.
Old Notes that remain outstanding after the consummation of the Exchange
Offer and New Notes issued in connection with the Exchange Offer will be treated
as a single class of securities under the Indenture.
The Notes will not be entitled to the benefit of any sinking fund.
NOTE GUARANTEES
Payment of the principal of (and premium, if any) and interest on the Notes,
when and as the same become due and payable, will be guaranteed, jointly and
severally, on a senior unsecured basis (the "Note Guarantees") by the Subsidiary
Guarantors referred to below. The obligations of the Subsidiary Guarantors under
the Note Guarantees will be limited so as not to constitute a fraudulent
conveyance under applicable law. See "Risk Factors--Fraudulent Conveyance and
Preference Considerations."
The Company's Restricted Subsidiaries will be Subsidiary Guarantors and will
consist of Burke Rubber Company, Inc., Burke Flooring Products, Inc. and Burke
Custom Processing, Inc. However, under certain circumstances, the Company will
be able to designate current or future Subsidiaries as Unrestricted
Subsidiaries. Unrestricted Subsidiaries will not be subject to the restrictive
covenants set forth in the Indenture. The Indenture will require that each
Restricted Subsidiary organized within the United States and certain other
Restricted Subsidiaries issue a Note Guarantee. See "Certain
Covenants--Limitations on Guarantees of Indebtedness by Restricted
Subsidiaries."
The Indenture provides that, in the event of any sale, exchange or transfer
(including by way of merger of such Restricted Subsidiary) to any person not an
Affiliate of the Company of all of the
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Company's and the Restricted Subsidiaries' Capital Stock in, or all or
substantially all the assets of, such Restricted Subsidiary (which sale,
exchange or transfer is not prohibited by the Indenture), then such Subsidiary
Guarantor will be deemed automatically and unconditionally released and
discharged from all of its obligations under its Note Guarantee without any
further action on the part of the Trustee or any holder of the Notes; provided
that the Net Proceeds of such sale, transfer or other disposition are applied in
accordance with the "Limitation on Certain Asset Sales" covenant to the extent
required thereby. In addition, any Subsidiary Guarantor that is designated as an
Unrestricted Subsidiary in accordance with the terms of the Indenture may be
released and relieved of its obligations under its Note Guarantee.
RANKING
The Notes will be senior unsecured obligations of the Company and will rank
PARI PASSU in right of payment with all other existing and future senior
obligations of the Company. Loans under the Bank Credit Agreement will be
secured by substantially all of the Company's assets. Accordingly, while the
Notes rank PARI PASSU in right of payment with the loans under the Bank Credit
Agreement, the Notes will be effectively subordinated to the loans outstanding
under the Bank Credit Agreement to the extent of the value of the assets
securing such loans. Subject to certain limitations, the Company and its
Restricted Subsidiaries may incur additional Indebtedness in the future.
Each Note Guarantee will be a senior unsecured obligation of the respective
Subsidiary Guarantor, ranking PARI PASSU in right of payment with all existing
and future senior obligations of such Subsidiary Guarantor. Loans under the Bank
Credit Agreement will be guaranteed by the Company's Subsidiaries, which
guarantees will be secured by substantially all of the assets of the Company's
Subsidiaries. Accordingly, while a Note Guarantee will rank PARI PASSU in right
of payment with such Subsidiary's guarantee under the Bank Credit Agreement,
such Note Guarantee will be effectively subordinated to such Subsidiary's
guarantee under the Bank Credit Agreement to the extent of the value of the
assets securing such guarantee.
REDEMPTION
OPTIONAL REDEMPTION. The Notes will be redeemable, at the option of the
Company, as a whole or from time to time in part, at any time on or after August
15, 2002, on not less than 30 nor more than 60 days' prior notice at the
redemption prices (expressed as percentages of principal amount) set forth
below, if redeemed during the 12-month period beginning on August 15 of the
years indicated below (subject to the right of holders of record on the relevant
record date to receive interest due on an interest payment date):
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
- --------------------------------------------------------------------------------- -----------
<S> <C>
2002............................................................................. 105.000%
2003............................................................................. 103.333
2004............................................................................. 101.667
</TABLE>
and thereafter at 100% of the principal amount, together with accrued interest,
if any, to the redemption date.
In addition, at any time or from time to time prior to August 15, 2000, the
Company may redeem up to 35% of the sum of (i) the initial aggregate principal
amount of the Notes and (ii) the initial aggregate principal amount of any
Additional Notes on one or more occasions with the net proceeds of one or more
Public Equity Offerings at a redemption price equal to 110% of the principal
amount thereof, plus accrued interest, if any, and Liquidated Damages, if any,
to the redemption date (subject to the right of holders of record on the
relevant record date to receive interest due on an interest payment date);
PROVIDED that, immediately after giving effect to such redemption, at least 65%
of the sum of (x) the initial aggregate principal amount of the Notes and (y)
the initial aggregate principal amount of any Additional Notes
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remains outstanding; PROVIDED FURTHER that such redemptions shall occur within
45 days of the date of closing of each Public Equity Offering.
If less than all the Notes are to be redeemed, the particular Notes to be
redeemed will be selected not more than 60 days prior to the redemption date by
the Trustee by such method as the Trustee deems fair and appropriate.
OPTIONAL REDEMPTION UPON CHANGE OF CONTROL. Upon the occurrence of a Change
of Control prior to August 15, 2002, the Notes will be redeemable, in whole or
in part, at the option of the Company, upon not less than 30 nor more than 60
days prior notice to each holder of Notes to be redeemed, at a redemption price
equal to the sum of (i) the then outstanding principal amount thereof plus (ii)
accrued an unpaid interest thereon and Liquidated Damages, if any, to the
redemption date plus (iii) the Applicable Premium. The following definitions are
used to determine the Applicable Premium:
"Applicable Premium" will be defined, with respect to a Note, as the greater
of (i) 5% of the then outstanding principal amount of such Note and (ii) the
excess of (A) the present value of the remaining required interest and principal
payments due on such Note (exclusive of accrued and unpaid interest), computed
using a discount rate equal to the Treasury Rate plus 100 basis points, over (B)
the then outstanding principal amount of such Note.
"Treasury Rate" will be defined as the yield to maturity at the time of
computation of United States Treasury securities with a constant maturity (as
compiled and published in the most recent Federal Reserve Statistical Release
H.15 (519) which has become publicly available at least two Business Days prior
to the date fixed for prepayment (or, if such Statistical Release is no longer
published, any publicly available source of similar market data)) most nearly
equal to the then remaining Average Life to Stated Maturity of the Notes;
PROVIDED; HOWEVER, that if the Average Life to Stated Maturity of the Notes is
not equal to the constant maturity of a United States Treasury security for
which a weekly average yield is given, the Treasury Rate shall be obtained by
linear interpolation (calculated to the nearest one-twelfth of a year) from the
weekly average yields of United States Treasury securities for which such yields
are given, except that if the Average Life to Stated Maturity of the Notes is
less than one year, the weekly average yield on actually traded United States
Treasury securities adjusted to a constant maturity of one year shall be used.
PURCHASE OF NOTES UPON CHANGE OF CONTROL OR ASSET SALE. Each holder of the
Notes will have certain rights to require the Company to purchase such holder's
Notes upon the occurrence of a Change of Control. See "Certain
Covenants--Purchase of Notes upon Change of Control" below. Under certain
circumstances, the Company will be required to make an offer to purchase all or
a portion of the Notes with proceeds received from an Asset Sale. See "--Certain
Covenants--Limitation on Certain Asset Sales" below.
CERTAIN COVENANTS
The Indenture will contain, among others, the following covenants:
LIMITATION ON INDEBTEDNESS AND ISSUANCE OF DISQUALIFIED STOCK. The Company
will not, and will not permit any Restricted Subsidiary to, create, issue,
assume, guarantee or in any manner become directly or indirectly liable for the
payment of, or otherwise incur (collectively, "incur"), any Indebtedness
(including Acquired Indebtedness and the issuance of Disqualified Stock), except
that the Company or any Subsidiary Guarantor may incur Indebtedness if, at the
time of such event, the Fixed Charge Coverage Ratio for the immediately
preceding four full fiscal quarters for which internal financial statements are
available, taken as one accounting period, would have been equal to at least 2.0
to 1.0.
In making the foregoing calculation for any four-quarter period that
includes the Closing Date, pro forma effect will be given to the Prior Offering
and the Recapitalization, as if such transactions had occurred at the beginning
of such four-quarter period. In addition (but without duplication), in making
the foregoing calculation, pro forma effect will be given to: (i) the incurrence
of such Indebtedness and (if
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applicable) the application of the net proceeds therefrom, including to
refinance other Indebtedness, as if such Indebtedness was incurred and the
application of such proceeds occurred at the beginning of such four-quarter
period, (ii) the incurrence, repayment or retirement of any other Indebtedness
by the Company or its Restricted Subsidiaries since the first day of such
four-quarter period as if such Indebtedness was incurred, repaid or retired at
the beginning of such four-quarter period and (iii) the acquisition (whether by
purchase, merger or otherwise) or disposition (whether by sale, merger or
otherwise) of any company, entity or business acquired or disposed of by the
Company or its Restricted Subsidiaries, as the case may be, since the first day
of such four-quarter period, in each case as if such acquisition or disposition
(and the reduction or increase of any associated Fixed Charge obligations and
the change in Consolidated EBITDA resulting therefrom) had occurred at the
beginning of such four-quarter period. If since the beginning of such period any
Person (that subsequently became a Restricted Subsidiary or was merged with or
into the Company or any Restricted Subsidiary since the beginning of such
period) shall have made any acquisition (whether by purchase, merger or
otherwise) or disposition that would have required adjustment pursuant to this
definition, then the Fixed Charge Coverage Ratio shall be calculated giving PRO
FORMA effect thereto as if such acquisition or disposition had occurred at the
beginning of the applicable four-quarter period. In making a computation under
the foregoing clause (i) or (ii), (A) the amount of Indebtedness under a
revolving credit facility will be computed based on the average daily balance of
such Indebtedness during such four-quarter period, (B) if such Indebtedness
bears, at the option of the Company, a fixed or floating rate of interest,
interest thereon will be computed by applying, at the option of the Company,
either the fixed or floating rate and (C) the amount of any Indebtedness that
bears interest at a floating rate will be calculated as if the rate in effect on
the date of determination had been the applicable rate for the entire period
(taking into account any Hedging Obligations applicable to such Indebtedness if
such Hedging Obligations have a remaining term at the date of determination in
excess of 12 months). For purposes of this definition, whenever PRO FORMA effect
is to be given to a transaction, the PRO FORMA calculations shall be made in
good faith by the chief financial officer of the Company.
Notwithstanding the foregoing, the Company may, and may permit its
Restricted Subsidiaries to, incur the following Indebtedness ("Permitted
Indebtedness"):
(i) Indebtedness of the Company or any Restricted Subsidiary under the
Bank Credit Agreement or one or more other credit facilities (and the
incurrence by any Restricted Subsidiary of guarantees thereof) in an
aggregate principal amount at any one time outstanding not to exceed the
greater of (x) $15 million or (y) the amount of the Borrowing Base, less any
amounts applied to the permanent reduction of such credit facilities
pursuant to the "--Limitation on Certain Asset Sales" covenant;
(ii) Indebtedness of the Company or any Restricted Subsidiary
outstanding on the Closing Date and listed on a schedule to the Indenture
(other than Indebtedness described under clause (i) above);
(iii) Indebtedness owed by the Company to any Wholly Owned Restricted
Subsidiary or owed by any Restricted Subsidiary to the Company or a Wholly
Owned Restricted Subsidiary (provided that such Indebtedness is held by the
Company or such Restricted Subsidiary); PROVIDED, HOWEVER, that any
Indebtedness of the Company owing to any such Restricted Subsidiary is
unsecured and subordinated in right of payment from and after such time as
the Notes shall become due and payable (whether at Stated Maturity,
acceleration, or otherwise) to the payment and performance of the Company's
obligations under the Notes;
(iv) Indebtedness represented by the Notes (other than the Additional
Notes) and the Note Guarantees (including any Note Guarantees issued
pursuant to "--Limitation on Guarantees of Indebtedness by Restricted
Subsidiaries");
(v) Indebtedness of the Company or any Restricted Subsidiary under
Hedging Obligations incurred in the ordinary course of business;
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(vi) Indebtedness of the Company or any Restricted Subsidiary consisting
of guarantees, indemnities or obligations in respect of purchase price
adjustments in connection with the acquisition or disposition of assets,
including, without limitation, shares of Capital Stock;
(vii) either (A) Capitalized Lease Obligations of the Company or any
Restricted Subsidiary or (B) Indebtedness under purchase money mortgages or
secured by purchase money security interests, in each case incurred for the
purpose of financing or refinancing all or any part of the purchase price or
cost of construction or improvement of any property (real or personal) or
other assets that are used or useful in the business of the Company or such
Restricted Subsidiary (whether through the direct purchase of assets or the
Capital Stock of any Person owning such assets and whether such Indebtedness
is owed to the seller or Person carrying out such construction or
improvement or to any third party), so long as (x) such Indebtedness is not
secured by any property or assets of the Company or any Restricted
Subsidiary other than the property and assets so acquired, constructed or
improved and (y) such Indebtedness is created within 90 days of the
acquisition or completion of construction or improvement of the related
property; provided that the aggregate amount of Indebtedness under clauses
(A) and (B) does not exceed $7.5 million at any one time outstanding;
(viii) Indebtedness of the Company or any Restricted Subsidiary not
permitted by any other clause of this definition, in an aggregate principal
amount not to exceed $10 million at any one time outstanding;
(ix) Indebtedness under (or constituting reimbursement obligations with
respect) to letters of credit issued in the ordinary course of business,
including without limitation letters of credit in respect of workers'
compensation claims or self-insurance, or other Indebtedness with respect to
reimbursement type obligations regarding workers' compensation claims;
PROVIDED, HOWEVER, that upon the drawing of such letters of credit or other
obligations, such obligations are reimbursed within five days following such
drawing; and
(x) any renewals, extensions, substitutions, refinancings or
replacements (each, for purposes of this clause, a "refinancing") of any
outstanding Indebtedness, other than Indebtedness incurred pursuant to
clause (i), (iii), (v), (vi), (vii), (viii) or (ix) of this definition,
including any successive refinancings thereof, so long as (A) any such new
Indebtedness is in a principal amount that does not exceed the principal
amount so refinanced, plus the amount of any premium required to be paid in
connection with such refinancing pursuant to the terms of the Indebtedness
refinanced or the amount of any premium reasonably determined by the Company
as necessary to accomplish such refinancing, plus the amount of the expenses
of the Company incurred in connection with such refinancing, (B) in the case
of any refinancing of Subordinated Indebtedness, such new Indebtedness is
made subordinate to the Notes at least to the same extent as the
Indebtedness being refinanced and (C) such refinancing Indebtedness does not
have an Average Life less than the Average Life of the Indebtedness being
refinanced and does not have a final scheduled maturity earlier than the
final scheduled maturity, or permit redemption at the option of the holder
earlier than the earliest date of redemption at the option of the holder, of
the Indebtedness being refinanced.
LIMITATION ON RESTRICTED PAYMENTS. The Company will not, and will not
permit any Restricted Subsidiary to, directly or indirectly, take any of the
following actions:
(a) declare or pay any dividend or make any other payment or
distribution on account of the Company's or any of its Restricted
Subsidiaries' Capital Stock (including, without limitation any payment in
connection with any merger or consolidation involving the Company) or to the
direct or indirect holders of the Company's or any of its Restricted
Subsidiaries' Capital Stock in their capacity as such, other than (i)
dividends, payments or distributions payable solely in Qualified Equity
Interests, (ii) dividends, payments or distributions by a Restricted
Subsidiary payable to the Company or another Restricted Subsidiary or (iii)
pro rata dividends, payments or distributions on common stock of Restricted
Subsidiaries held by minority stockholders, provided that such dividends,
payments
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or distributions do not in the aggregate exceed the minority stockholders'
pro rata share of such Restricted Subsidiaries' net income from the first
day of the Company's fiscal quarter during which the Closing Date occurs;
(b) purchase, redeem or otherwise acquire or retire for value, directly
or indirectly, any shares of Capital Stock, or any options, warrants or
other rights to acquire such shares of Capital Stock of (i) the Company or
(ii) any Restricted Subsidiary held by any Affiliate of the Company (other
than, in either case, any such Capital Stock owned by the Company or any of
its Restricted Subsidiaries);
(c) make any principal payment on, or repurchase, redeem, defease or
otherwise acquire or retire for value, prior to any scheduled principal
payment, sinking fund payment or maturity, any Subordinated Indebtedness;
and
(d) make any Investment (other than a Permitted Investment) in any
person (such payments or other actions described in (but not excluded from)
clauses (a) through (d) being referred to as "Restricted Payments"), unless
at the time of, and immediately after giving effect to, the proposed
Restricted Payment:
(i) no Default or Event of Default has occurred and is continuing,
(ii) the Company could incur at least $1.00 of additional
Indebtedness pursuant to the first paragraph of the "Limitation on
Indebtedness and Issuance of Disqualified Stock" covenant and
(iii) the aggregate amount of all Restricted Payments made after the
Closing Date does not exceed the sum of:
(A) 50% of the aggregate Consolidated Adjusted Net Income of the
Company during the period (taken as one accounting period) from the
first day of the Company's first fiscal quarter commencing after the
Closing Date to the last day of the Company's most recently ended
fiscal quarter for which internal financial statements are available
at the time of such proposed Restricted Payment (or, if such
aggregate cumulative Consolidated Adjusted Net Income is a loss,
minus 100% of such amount); plus
(B) 100% of the aggregate net cash proceeds received by the
Company after the Closing Date from (x) the issuance or sale (other
than to a Restricted Subsidiary) of either (1) Qualified Equity
Interests of the Company or (2) Indebtedness or Disqualified Stock
(other than the Series A Preferred Stock and any refinancings
thereof) that has been converted into or exchanged for Qualified
Equity Interests of the Company, together with the aggregate net cash
proceeds received by the Company at the time of such conversion or
exchange or (y) cash capital contributions received by the Company
after the Closing Date with respect to Qualified Equity Interests;
plus
(C) $3 million.
Notwithstanding the foregoing, the Company and its Restricted Subsidiaries
may take the following actions, so long as (other than with respect to the
action described in clause (a) below) no Default or Event of Default has
occurred and is continuing or would occur:
(a) the payment of any dividend within 60 days after the date of
declaration thereof, if at the declaration date such payment would not have
been prohibited by the foregoing provisions;
(b) the repurchase, redemption or other acquisition or retirement for
value of any shares of Capital Stock of the Company, in exchange for, or out
of the net cash proceeds of a substantially concurrent issuance and sale
(other than to a Subsidiary) of, Qualified Equity Interests of the Company;
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(c) the purchase, redemption, defeasance or other acquisition or
retirement for value of any Subordinated Indebtedness in exchange for, or
out of the net cash proceeds of a substantially concurrent issuance and sale
(other than to a Subsidiary) of, shares of Qualified Equity Interests of the
Company;
(d) the purchase, redemption, defeasance or other acquisition or
retirement for value of Subordinated Indebtedness in exchange for, or out of
the net cash proceeds of a substantially concurrent issuance or sale (other
than to a Restricted Subsidiary) of, Subordinated Indebtedness, so long as
the Company or a Restricted Subsidiary would be permitted to refinance such
original Subordinated Indebtedness with such new Subordinated Indebtedness
pursuant to clause (x) of the definition of Permitted Indebtedness;
(e) the purchase, redemption, acquisition, cancellation or other
retirement for value of shares of Capital Stock of the Company, options or
warrants to acquire any such shares or related stock appreciation rights
held by officers, directors or employees of the Company or its Subsidiaries
or former officers, directors or employees (or their respective estates or
beneficiaries under their estates) of the Company or its Subsidiaries or by
any plan for their benefit, in each case, upon death, disability, retirement
or termination of employment or pursuant to the terms of any benefit plan or
any other agreement under which such shares of stock or options, warrants or
rights were issued; provided that the aggregate cash consideration paid for
such purchase, redemption, acquisition, cancellation or other retirement of
such shares of Capital Stock or options, warrants or rights after the
Closing Date does not exceed in any fiscal year the sum of (i) $500,000,
(ii) the cash proceeds received by the Company after the Closing Date from
the sale of Qualified Equity Interests to employees, directors or officers
of the Company and its Subsidiaries that occurs in such fiscal year and
(iii) amounts referred to in clauses (i) through (ii) that remain unused
from the immediately preceding fiscal year; and
(f)(i)the payment of any regular quarterly dividends in respect of the
Series A Preferred Stock in the form of additional shares of Series A
Preferred Stock having the terms and conditions set forth in the Certificate
of Determination for the Series A Preferred Stock as in effect on the
Closing Date; and (ii) commencing October 15, 2000, the payment of regular
quarterly cash dividends (in the amount no greater than that provided for in
the Certificate of Determination for the Series A Preferred Stock as in
effect on the Closing Date), out of funds legally available therefor, on any
of the shares of Series A Preferred Stock issued and outstanding on the
Closing Date and on any shares of Series A Preferred Stock issued in payment
of dividends made or subsequently issued in payment of dividends thereon in
respect of such shares of Series A Preferred Stock outstanding on the
Closing Date, PROVIDED that, at the time of and immediately after giving
effect to the payment of such cash dividend, the Fixed Charge Coverage
Ratio, giving pro forma effect to the payment of such dividend as if it had
occurred at the beginning of the four full fiscal quarters immediately
preceding the date on which the dividend is to be paid, would have been
equal to at least 2.25 to 1.0.
The actions described in clauses (b), (c), (e) and (f)(ii) of this paragraph
will be Restricted Payments that will be permitted to be taken in accordance
with this paragraph but will be considered Restricted Payments for purposes of
clause (iii) of the first paragraph of this covenant and the actions described
in clauses (a), (d) and (f)(i) of this paragraph will be Restricted Payments
that will be permitted to be taken in accordance with this paragraph but will
not be considered Restricted Payments for purposes of clause (iii) of the first
paragraph of this covenant.
For the purpose of making any calculations under the Indenture (i) if a
Restricted Subsidiary is designated an Unrestricted Subsidiary, the Company will
be deemed to have made an Investment in an amount equal to the fair market value
of the net assets of such Restricted Subsidiary at the time of such designation
as determined by the Board of Directors of the Company, whose good faith
determination will be conclusive, (ii) any property transferred to or from an
Unrestricted Subsidiary will be valued at fair market value at the time of such
transfer, as determined by the Board of Directors of the Company, whose
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good faith determination will be conclusive and (iii) subject to the foregoing,
the amount of any Restricted Payment, if other than cash, will be determined by
the Board of Directors of the Company, whose good faith determination will be
conclusive.
If the aggregate amount of all Restricted Payments calculated under the
foregoing provision includes an Investment (other than a Permitted Investment)
in an Unrestricted Subsidiary or other person that thereafter becomes a
Restricted Subsidiary, the aggregate amount of all Restricted Payments
calculated under the foregoing provision will be reduced by the lesser of (x)
the net asset value of such Subsidiary at the time it becomes a Restricted
Subsidiary and (y) the initial amount of such Restricted Payment.
If an Investment resulted in the making of a Restricted Payment, the
aggregate amount of all Restricted Payments calculated under the foregoing
provision will be reduced by the amount of any net reduction in such Investment
(resulting from the payment of interest or dividends, loan repayment, transfer
of assets or otherwise), to the extent such net reduction is not included in the
Company's Consolidated Adjusted Net Income; provided that the total amount by
which the aggregate amount of all Restricted Payments may be reduced may not
exceed the lesser of (x) the cash proceeds received by the Company and its
Restricted Subsidiaries in connection with such net reduction and (y) the
initial amount of such Restricted Payment.
In computing the Consolidated Adjusted Net Income of the Company for
purposes of the foregoing clause (iii)(A), (i) the Company may use audited
financial statements for the portions of the relevant period for which audited
financial statements are available on the date of determination and unaudited
financial statements and other current financial data based on the books and
records of the Company for the remaining portion of such period and (ii) the
Company will be permitted to rely in good faith on the financial statements and
other financial data derived from its books and records that are available on
the date of determination. If the Company makes a Restricted Payment that, at
the time of the making of such Restricted Payment, would in the good faith
determination of the Company be permitted under the requirements of the
Indenture, such Restricted Payment will be deemed to have been made in
compliance with the Indenture notwithstanding any subsequent adjustments made in
good faith to the Company's financial statements affecting Consolidated Adjusted
Net Income of the Company for any period.
PURCHASE OF NOTES UPON A CHANGE OF CONTROL. If a Change of Control occurs
at any time, then, unless irrevocable notice of redemption for all of the Notes
is given within 30 days after the occurrence of such Change of Control in
accordance with the provisions of "--Optional Redemption Upon a Change of
Control," each holder of Notes or Additional Notes will have the right to
require that the Company purchase such holder's Notes or Additional Notes, as
applicable, in whole or in part in integral multiples of $1,000, at a purchase
price in cash equal to 101% of and Liquidated Damages, if any, the principal
amount of such Notes or Additional Notes, plus accrued and unpaid interest, if
any, to the date of purchase, pursuant to the offer described below (the "Change
of Control Offer") and the other procedures set forth in the Indenture.
Within 30 days following any Change of Control, the Company will notify the
Trustee thereof and give written notice of such Change of Control to each holder
of Notes or Additional Notes by first-class mail, postage prepaid, at its
address appearing in the security register, stating, among other things, (i) the
purchase price and the purchase date, which will be a Business Day no earlier
than 30 days nor later than 60 days from the date such notice is mailed or such
later date as is necessary to comply with requirements under the Exchange Act;
(ii) that any Note or Additional Note not tendered will continue to accrue
interest; (iii) that, unless the Company defaults in the payment of the purchase
price, any Notes or Additional Notes accepted for payment pursuant to the Change
of Control Offer will cease to accrue interest after the Change of Control
purchase date; and (iv) certain other procedures that a holder of Notes or
Additional Notes must follow to accept a Change of Control Offer or to withdraw
such acceptance.
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Neither the Board of Directors of the Company nor the Trustee may waive the
covenant relating to the holders' right to redeem the Notes upon a "Change of
Control". However, if a Change of Control Offer is made, there can be no
assurance that the Company will have available funds sufficient to pay the
purchase price for all of the Notes and Additional Notes that might be tendered
by holders of the Notes and Additional Notes seeking to accept the Change of
Control Offer. The failure of the Company to make or consummate the Change of
Control Offer or pay the applicable Change of Control purchase price when due
would result in an Event of Default and would give the Trustee and the holders
of the Notes and Additional Notes the rights described under "--Events of
Default".
One of the events that constitutes a Change of Control under the Indenture,
subject to exceptions, is the disposition of "all or substantially all" of the
Company's assets. This term has not been interpreted under New York law (which
is the governing law of the Indenture) to represent a specific quantitative
test. As a consequence, in the event holders of the Notes or Additional Notes
elect to require the Company to purchase the Notes or Additional Notes and the
Company elects to contest such election, there can be no assurance as to how a
court interpreting New York law would interpret the phrase in many
circumstances.
The existence of a holder's right to require the Company to purchase such
holder's Notes or Additional Notes upon a Change of Control may deter a third
party from acquiring the Company in a transaction that constitutes a Change of
Control.
The definition of "Change of Control" in the Indenture is limited in scope.
The provisions of the Indenture do not afford holders of Notes or Additional
Notes the right to require the Company to repurchase such Notes or Additional
Notes in the event of a highly leveraged transaction or certain transactions
with the Company's management or its affiliates, including a reorganization,
restructuring, merger or similar transaction involving the Company (including,
in certain circumstances, an acquisition of the Company by management or its
affiliates) that may adversely affect holders of the Notes or Additional Notes,
if such transaction is not a transaction defined as a Change of Control. See
"Certain Definitions" below for the definition of "--Change of Control". A
transaction involving the Company's management or its affiliates, or a
transaction involving a recapitalization of the Company, would result in a
Change of Control if it is the type of transaction specified in such definition.
The Company will comply with the applicable tender offer rules including
Rule 14e-1 under the Exchange Act, and any other applicable securities laws and
regulations in connection with a Change of Control Offer. To the extent that
provisions of any applicable securities laws or regulations conflict with
provisions of this covenant, the Company will comply with such securities laws
and regulations and will not be deemed to have breached its obligations under
this covenant by virtue thereof.
The Company's New Credit Agreement will contain prohibitions of certain
events that would constitute a Change of Control and provides that such events
constitute events of defaults thereunder.
LIMITATION ON CERTAIN ASSET SALES. (a) The Company will not, and will not
permit any Restricted Subsidiary to, engage in any Asset Sale unless (i) the
consideration received by the Company or such Restricted Subsidiary for such
Asset Sale is not less than the fair market value of the assets sold (as
determined by the Board of Directors of the Company, whose good faith
determination will be conclusive) and (ii) the consideration received by the
Company or the relevant Restricted Subsidiary in respect of such Asset Sale
consists of at least 75% cash or cash equivalents (including, for purposes of
this clause (ii), the principal amount of any Indebtedness for money borrowed
(as reflected on the Company's consolidated balance sheet) of the Company or any
Restricted Subsidiary that (x) is assumed by any transferee of any such assets
or other property in such Asset Sale or (y) with respect to the sale or other
disposition of all of the Capital Stock of any Restricted Subsidiary, remains
the liability of such Subsidiary subsequent to such sale or other disposition,
but only to the extent that such assumption, sale or other disposition, as the
case may be, is effected on a basis under which there is no further recourse to
the Company or any of its Restricted Subsidiaries with respect to such
liability).
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(b) If the Company or any Restricted Subsidiary engages in an Asset Sale,
the Company may, at its option, within 12 months after such Asset Sale, (i)
apply all or a portion of the Net Cash Proceeds to the reduction of amounts
outstanding under the Bank Credit Agreement or to the permanent repayment of
other senior Indebtedness of the Company or a Restricted Subsidiary, or (ii)
invest (or enter into a legally binding agreement to invest) all or a portion of
such Net Cash Proceeds in the making of capital expenditures, the acquisition of
a controlling interest in a Permitted Business or acquisition of other long-term
assets, in each case, that will be used or useful in the Permitted Businesses of
the Company or its Restricted Subsidiaries, as the case may be. Pending the
final application of any such Net Cash Proceeds, the Company may temporarily
reduce revolving credit Indebtedness to the extent not prohibited by the
Indenture. If any such legally binding agreement to invest such Net Cash
Proceeds is terminated, the Company may, within 90 days of such termination or
within 12 months of such Asset Sale, whichever is later, invest such Net Cash
Proceeds as provided in clause (i) or (ii) (without regard to the parenthetical
contained in such clause (ii)) above. The amount of such Net Cash Proceeds not
so used as set forth above in this paragraph (b) constitutes "Excess Proceeds."
(c) When the aggregate amount of Excess Proceeds exceeds $5 million, the
Company will, within 30 days thereafter, make an offer to purchase from all
holders of Notes and Additional Notes, on a pro rata basis, in accordance with
the procedures set forth in the Indenture, the maximum principal amount
(expressed as a multiple of $1,000) of Notes and Additional Notes that may be
purchased with the Excess Proceeds, at a purchase price in cash equal to 100% of
the principal amount thereof, plus accrued interest, if any, and Liquidated
Damages, if any, to the date such offer to purchase is consummated. To the
extent that the aggregate principal amount of Notes and Additional Notes
tendered pursuant to such offer to purchase is less than the Excess Proceeds,
the Company or its Restricted Subsidiaries may use such deficiency for general
corporate purposes. If the aggregate principal amount of Notes and Additional
Notes validly tendered and not withdrawn by holders thereof exceeds the Excess
Proceeds, the Notes and Additional Notes to be purchased will be selected on a
pro rata basis. Upon completion of such offer to purchase, the amount of Excess
Proceeds will be reset to zero.
(d) The Company will comply with the applicable tender offer rules including
Rule-14e under the Exchange Act, and any other applicable securities laws and
regulations in connection with an offer made pursuant to clause (c) above. To
the extent that provisions of any applicable securities laws or regulations
conflict with provisions of this covenant, the Company will comply with such
securities laws and regulations and will not be deemed to have breached its
obligations under this covenant by virtue thereof.
LIMITATION ON TRANSACTIONS WITH AFFILIATES. The Company will not, and will
not permit any Restricted Subsidiary to, directly or indirectly, enter into or
suffer to exist any transaction with, or for the benefit of, any Affiliate of
the Company or any beneficial owner of 10% or more of any class of the Capital
Stock of the Company at any time outstanding ("Interested Persons"), unless (a)
such transaction is on terms that are no less favorable to the Company or such
Restricted Subsidiary, as the case may be, than those that could have been
obtained in an arm's length transaction with third parties who are not
Interested Persons and (b) the Company delivers to the Trustee (i) with respect
to any transaction or series of related transactions entered into after the
Closing Date involving aggregate payments in excess of $1.0 million, a
resolution of the Board of Directors of the Company set forth in an officers'
certificate certifying that such transaction or transactions complies with
clause (a) above and that such transaction or transactions have been approved by
the Board of Directors (including a majority of the Disinterested Directors) of
the Company and (ii) with respect to a transaction or series of related
transactions involving aggregate payments equal to or greater than $5 million, a
written opinion as to the fairness to the Company or such Restricted Subsidiary
of such transaction or series of transactions from a financial point of view
issued by an independent investment banking, accounting or valuation firm of
national standing.
The foregoing covenant will not restrict
(A) transactions among the Company and/or its Restricted Subsidiaries;
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(B) transactions (including Permitted Investments) permitted by the
provisions of the "--Limitations on Restricted Payments" covenant;
(C) employment agreements on customary terms and the payment of regular and
customary compensation to employees, officers or directors in the ordinary
course of business;
(D) the payment to the Principals or their Related Parties and Affiliates,
of annual management and advisory fees and related expenses, provided that the
amount of any such fees and expenses shall not exceed $500,000 per fiscal year,
provided further that any such fees shall only commence accruing on October 1,
1998 and shall be payable in arrears on a quarterly basis commencing on January
1, 1999;
(E) loans or advances to officers or employees of the Company or any of its
Restricted Subsidiaries in the ordinary course of business not to exceed
$250,000 in the aggregate at any one time outstanding;
(F) the payment of all fees and expenses related to the Recapitalization;
and
(G) any agreement to which the Company or any Restricted Subsidiary is a
party as in effect as of the date of the Indenture as set forth in a schedule
thereto or any amendment thereto (as long as any such amendment is not
disadvantageous to the Holders in any material respect) or any transaction
contemplated thereby.
LIMITATION ON DIVIDENDS AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED
SUBSIDIARIES. The Company will not, and will not permit any Restricted
Subsidiary to, directly or indirectly, create or otherwise cause or suffer to
exist or become effective any consensual encumbrance or restriction of any kind
on the ability of any Restricted Subsidiary to (a) pay dividends, in cash or
otherwise, or make any other distributions on or in respect of its Capital
Stock, (b) pay any Indebtedness owed to the Company or any other Restricted
Subsidiary, (c) make loans or advances to the Company or any other Restricted
Subsidiary or (d) transfer any of its properties or assets to the Company or any
other Restricted Subsidiary, except for such encumbrances or restrictions
existing under or by reason of:
(i) any agreement in effect on the Closing Date;
(ii) any agreement or other instrument of a person acquired by the
Company or any Restricted Subsidiary in existence at the time of such
acquisition (but not created in contemplation thereof), which encumbrance or
restriction is not applicable to any person, or the properties or assets of
any person, other than the person, or the property or assets of the person,
so acquired;
(iii) any security or pledge agreements or leases (or similar agreements)
containing customary restrictions on transfers of the assets encumbered
thereby or leased or on the leasehold interest represented thereby;
(iv) any contracts for the sale of assets, including, without
limitation, any restriction with respect to a Restricted Subsidiary imposed
pursuant to an agreement entered into for the sale or disposition of all or
substantially all of the Capital Stock or assets of such Restricted
Subsidiary, pending the closing of such sale or disposition, PROVIDED that
any such restriction relates solely to the assets that are the subject of
such agreement;
(v) restrictions on cash or other deposits or net worth imposed by
leases entered into in the ordinary course of business; and
(vi) any encumbrances or restrictions imposed by any amendments,
modifications, restatements, renewals, increases, supplements, refundings,
replacements or refinancings of the contracts, instruments or obligations
referred to in clauses (i) and (ii), PROVIDED that any encumbrances or
restrictions imposed by such amendments, modifications, restatements,
renewals, increases, supplements, refundings, replacements or refinancings
are not materially more restrictive than those contained in the contract,
instrument or obligation prior to such amendment, modification, restatement,
renewal, increase, supplement, refunding, replacement or refinancing.
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LIMITATION ON ISSUANCES AND SALES OF PREFERRED STOCK OF RESTRICTED
SUBSIDIARIES. The Company will not permit any Restricted Subsidiary to issue
any Preferred Stock.
PAYMENTS FOR CONSENT. The Indenture will provide that neither the Company
nor any of its Restricted Subsidiaries will, directly or indirectly, pay or
cause to be paid any consideration, whether by way of interest, fee or
otherwise, to any Holder of any Notes for or as an inducement to any consent,
waiver or amendment of any of the terms or provisions of the Indenture or the
Notes unless such consideration is offered to be paid or is paid to all Holders
of the Notes that consent, waive or agree to amend in the time frame set forth
in the solicitation documents relating to such consent, waiver or agreement.
LIMITATION ON GUARANTEES OF INDEBTEDNESS BY RESTRICTED SUBSIDIARIES. The
Company will not permit any Restricted Subsidiary that is not a Subsidiary
Guarantor, directly or indirectly, to guarantee, assume or in any other manner
become liable for the payment of any Indebtedness of the Company or any
Indebtedness of any other Restricted Subsidiary, unless (a) such Restricted
Subsidiary simultaneously executes and delivers a supplemental indenture and a
Note Guarantee providing for a guarantee of payment of the Notes by such
Restricted Subsidiary and (b) with respect to any guarantee of Subordinated
Indebtedness by a Restricted Subsidiary, any such guarantee is subordinated to
such Restricted Subsidiary's guarantee with respect to the Notes at least to the
same extent as such Subordinated Indebtedness is subordinated to the Notes.
Any Note Guarantee by a Restricted Subsidiary of the Notes pursuant to the
preceding paragraph will provide by its terms that it will be automatically and
unconditionally released and discharged upon (i) any sale, exchange or transfer
to any person not an Affiliate of the Company of all of the Company's and the
Restricted Subsidiaries' Capital Stock in, or all or substantially all the
assets of, such Restricted Subsidiary (which sale, exchange or transfer is not
prohibited by the Indenture), (ii) the release or discharge of the guarantee
that resulted in the creation of such guarantee of the Notes, except a discharge
or release by or as a result of payment under such guarantee or (iii) the
designation of such Restricted Subsidiary as an Unrestricted Subsidiary in
accordance with the terms of the Indenture.
ISSUANCES OF GUARANTEES BY CERTAIN NEW RESTRICTED SUBSIDIARIES. The Company
will provide to the Trustee, on the date that any Person becomes a Restricted
Subsidiary, a supplemental indenture to the Indenture, executed by such new
Restricted Subsidiary, providing for a full and unconditional guarantee on a
senior basis by such new Restricted Subsidiary of the Company's obligations
under the Notes and the Indenture to the same extent as that set forth in the
Indenture, PROVIDED that any such Restricted Subsidiary that is organized
outside the United States shall not be required to provide a Note Guarantee so
long as such Restricted Subsidiary has not guaranteed any other Indebtedness of
the Company or any other Restricted Subsidiary.
LINE OF BUSINESS. The Company will not and will not cause or permit any of
its Restricted Subsidiaries to engage in any businesses other than the
businesses in which the Company is engaged on the Closing Date and any
businesses reasonably related or complimentary to one or more of its businesses
on the Closing Date (as determined in good faith by the Company's Board of
Directors).
UNRESTRICTED SUBSIDIARIES. (a) The Board of Directors of the Company may
designate any Subsidiary (including any newly acquired or newly formed
Subsidiary) to be an Unrestricted Subsidiary so long as (i) neither the Company
nor any Restricted Subsidiary is directly or indirectly liable for any
Indebtedness of such Subsidiary, (ii) no default with respect to any
Indebtedness of such Subsidiary would permit (upon notice, lapse of time or
otherwise) any holder of any other Indebtedness of the Company or any Restricted
Subsidiary to declare a default on such other Indebtedness or cause the payment
thereof to be accelerated or payable prior to its stated maturity, (iii) any
Investment in such Subsidiary made as a result of designating such Subsidiary an
Unrestricted Subsidiary will not violate the provisions of the "Limitation on
Restricted Payments" covenant, (iv) neither the Company nor any Restricted
Subsidiary has a contract, agreement, arrangement, understanding or obligation
of any kind, whether written or oral, with such
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Subsidiary other than those that might be obtained at the time from persons who
are not Affiliates of the Company and (v) neither the Company nor any Restricted
Subsidiary has any obligation to subscribe for additional shares of Capital
Stock or other equity interest in such Subsidiary, or to maintain or preserve
such Subsidiary's financial condition or to cause such Subsidiary to achieve
certain levels of operating results.
(b) The Board of Directors of the Company may designate any Unrestricted
Subsidiary as a Restricted Subsidiary; PROVIDED that (i) no Default or Event of
Default has occurred and is continuing following such designation and (ii) the
Company could incur at least $1.00 of additional Debt (other than Permitted
Debt) pursuant to the first paragraph of the "--Limitation on Indebtedness and
Issuance of Disqualified Stock" covenant (treating any Debt of such Unrestricted
Subsidiary as the incurrence of Debt by a Restricted Subsidiary).
LIMITATION ON LIENS. The Company will not, and will not permit any
Restricted Subsidiary to, directly or indirectly, create, incur, assume or
suffer to exist any Lien of any kind on or with respect to any of its property
or assets, including any shares of stock or debt of any Restricted Subsidiary,
whether owned at the Closing Date or thereafter acquired, or any income, profits
or proceeds therefrom, or assign or otherwise convey any right to receive income
thereon, unless (a) in the case of any Lien securing Subordinated Indebtedness,
the Notes are secured by a Lien on such property, assets or proceeds that is
senior in priority to such Lien and (b) in the case of any other Lien, the Notes
are equally and ratably secured with the obligation or liability secured by such
Lien.
Notwithstanding the foregoing, the Company may, and may permit any
Subsidiary to, incur the following Liens ("Permitted Liens"):
(i) Liens (other than Liens securing Indebtedness under the Bank Credit
Agreement) existing as of the Closing Date;
(ii) Liens on property or assets of the Company or any Restricted
Subsidiary securing Indebtedness under the Bank Credit Agreement or one or
more other credit facilities in a principal amount not to exceed the
principal amount of the outstanding Indebtedness permitted by clause (i) of
the definition of "Permitted Indebtedness";
(iii) Liens on any property or assets of a Restricted Subsidiary granted
in favor of the Company or any Wholly Owned Restricted Subsidiary;
(iv) Liens securing the Notes or any Note Guarantee;
(v) any interest or title of a lessor under any Capitalized Lease
Obligation or Sale and Leaseback Transaction that was not entered into in
violation of the "--Limitation on Indebtedness and Issuance of Disqualified
Stock" covenant;
(vi) Liens securing Acquired Indebtedness created prior to (and not in
connection with or in contemplation of) the incurrence of such Indebtedness
by the Company or any Restricted Subsidiary; PROVIDED that such Lien does
not extend to any property or assets of the Company or any Restricted
Subsidiary other than the property and assets acquired in connection with
the incurrence of such Acquired Indebtedness;
(vii) Liens securing Hedging Obligations permitted to be incurred
pursuant to clause (v) of the definition of "Permitted Indebtedness";
(viii) Liens securing Indebtedness permitted to be incurred under
paragraph (vii) of the definition of "Permitted Indebtedness" in the
covenant described under the caption "--Limitation on Indebtedness and
Issuance of Disqualified Stock";
(ix) statutory Liens or landlords', carriers', warehouseman's,
mechanics', suppliers', materialmen's, repairmen's or other like Liens
arising in the ordinary course of business and with respect to
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amounts not yet delinquent or being contested in good faith by appropriate
proceedings and, if required by GAAP, a reserve or other appropriate
provision has been made therefor;
(x) Liens for taxes, assessments, government charges or claims that are
not yet delinquent or being contested in good faith by appropriate
proceedings promptly instituted and diligently conducted and, if required by
GAAP, a reserve or other appropriate provision has been made therefor;
(xi) Liens incurred or deposits made to secure the performance of
tenders, bids, leases, statutory obligations, surety and appeal bonds,
government contracts, performance bonds and other obligations of a like
nature incurred in the ordinary course of business (other than contracts for
the payment of money);
(xii) easements, rights-of-way, restrictions and other similar charges or
encumbrances not interfering in any material respect with the business of
the Company or any Restricted Subsidiary incurred in the ordinary course of
business;
(xiii) Liens arising by reason of any judgment, decree or order of any
court, so long as such Lien is adequately bonded and any appropriate legal
proceedings that may have been duly initiated for the review of such
judgment, decree or order have not been finally terminated or the period
within which such proceedings may be initiated has not expired;
(xiv) Liens securing reimbursement obligations with respect to letters of
credit that encumber documents and other property relating to such letters
of credit and the products and proceeds thereof;
(xv) Liens upon specific items of inventory or other goods and proceeds
of the Company or any Restricted Subsidiary securing its obligations in
respect of bankers' acceptances issued or created for the account of any
person to facilitate the purchase, shipment or storage of such inventory or
other goods;
(xvi) Liens in favor of customs and revenue authorities arising as a
matter of law to secure payment of customs duties in connection with the
importation of goods;
(xvii) Liens incurred in the ordinary course of business of the Company or
any Restricted Subsidiary of the Company with respect to obligations that do
not exceed $500,000 at any one time outstanding and that (a) are not
incurred in connection with the borrowing of money or the obtaining of
advances or credit (other than trade credit in the ordinary course of
business) and (b) do not in the aggregate materially detract from the value
of the property or materially impair the use thereof in the operation of the
businesses of the Company or such Restricted Subsidiary;
(xviii) leases or subleases to third parties;
(xix) Liens in connection with workers' compensation obligations of the
Company and its Restricted Subsidiaries incurred in the ordinary course; and
(xx) any extension, renewal or replacement, in whole or in part, of any
Lien described in the foregoing clauses (i) through (xix); provided that any
such extension, renewal or replacement is no more restrictive in any
material respect than the Lien so extended, renewed or replaced and does not
extend to any additional property or assets.
REPORTS. At all times from and after the earlier of (i) the date of the
commencement of the Exchange Offer (the "Registration") and (ii) the date 120
days after the Closing Date, in either case, whether or not the Company is then
required to file reports with the Commission, the Company will file with the
Commission (to the extent accepted by the Commission) all such annual reports,
quarterly reports and other documents that the Company would be required to file
if it were subject to Sections 13(a) or 15(d) under the Exchange Act. The
Company will also be required (a) to supply to the Trustee and each holder of
Notes, or supply to the Trustee for forwarding to each such holder, without cost
to such holder, copies of such reports and other documents within 15 days after
the date on which the Company files such
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reports and documents with the Commission or the date on which the Company would
be required to file such reports and documents if the Company were so required
and (b) if filing such reports and documents with the Commission is not accepted
by the Commission or is prohibited under the Exchange Act, to supply at the
Company's cost copies of such reports and documents to any prospective holder of
Notes promptly upon written request. In addition, at all times prior to the
earlier of the date of the Registration and the date 120 days after the Closing
Date, the Company will, at its cost, deliver to each holder of the Notes
quarterly and annual reports substantially equivalent to those that would be
required by the Exchange Act. Furthermore, at all times prior to the date of
Registration, the Company will supply at the Company's cost copies of such
reports and documents to any prospective holder of Notes promptly upon written
request.
CONSOLIDATION, MERGER AND SALE OF ASSETS
The Company may not, in a single transaction or series of related
transactions, consolidate or merge with or into (other than the consolidation or
merger of a Restricted Subsidiary with another Restricted Subsidiary or into the
Company) (whether or not the Company or such Restricted Subsidiary is the
surviving corporation), or directly and/or indirectly through its Restricted
Subsidiaries, sell, assign, transfer, lease, convey or otherwise dispose of all
or substantially all of its properties or assets (determined on a consolidated
basis for the Company and its Restricted Subsidiaries taken as a whole) in one
or more related transactions to, another corporation, person or entity or permit
any of its Restricted Subsidiaries to enter into any such transaction or series
of transactions if such transaction or series of transactions, in the aggregate,
would result in the sale, assignment, transfer, lease, conveyance or other
disposition of all or substantially all of the properties or assets of the
Company and its Restricted Subsidiaries (determined on a consolidated basis for
the Company and its Restricted Subsidiaries taken as a whole) unless:
(a) either (i) the Company, in the case of a transaction involving the
Company, or such Restricted Subsidiary, in the case of a transaction
involving a Restricted Subsidiary, is the surviving corporation or (ii) in
the case of a transaction involving the Company, the entity or the person
formed by or surviving any such consolidation or merger (if other than the
Company) or to which such sale, assignment, transfer, lease, conveyance or
other disposition shall have been made (the "Surviving Entity") is a
corporation organized or existing under the laws of the United States, any
state thereof or the District of Columbia and assumes all the obligations of
the Company under the Notes and the Indenture pursuant to a supplemental
indenture in a form reasonably satisfactory to the Trustee;
(b) immediately after giving effect to such transaction and treating any
obligation of the Company or a Restricted Subsidiary in connection with or
as a result of such transaction as having been incurred as of the time of
such transaction, no Default or Event of Default has occurred and is
continuing;
(c) the Company (or the Surviving Entity if the Company is not the
continuing obligor under the Indenture) could, at the time of such
transaction and after giving pro forma effect thereto as if such transaction
had occurred at the beginning of the applicable four-quarter period, incur
at least $1.00 of additional Indebtedness (other than Permitted
Indebtedness) pursuant to the first paragraph of the "--Limitation on
Indebtedness and Issuance of Disqualified Stock" covenant;
(d) if the Company is not the continuing obligor under the Indenture,
each Subsidiary Guarantor, unless it is the other party to the transaction
described above, has by supplemental indenture confirmed that its Note
Guarantee applies to the Surviving Entity's obligations under the Indenture
and the Notes;
(e) if any of the property or assets of the Company or any of its
Restricted Subsidiaries would thereupon become subject to any Lien, the
provisions of the "Limitation on Liens" covenant are complied with;
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(f) immediately after giving effect to such transaction on a pro forma
basis, the Consolidated Net Worth of the Company (or of the Surviving Entity
if the Company is not the continuing obligor under the Indenture) is equal
to or greater than the Consolidated Net Worth of the Company immediately
prior to such transaction; and
(g) the Company delivers, or causes to be delivered, to the Trustee, in
form and substance reasonably satisfactory to the Trustee, an officers'
certificate and an opinion of counsel, each stating that such transaction
complies with the requirements of the Indenture.
The Indenture will provide that no Subsidiary Guarantor may consolidate with
or merge with or into any other person or convey, sell, assign, transfer, lease
or otherwise disposed of its properties and assets substantially as an entirely
to any other person (other than the Company or another Subsidiary Guarantor)
unless: (a) such Subsidiary Guarantor is released from its Note Guarantees
pursuant to the terms of the Indenture (see "Note Guarantees" above) or (b)(i)
subject to the provisions of the following paragraph, the person formed by or
surviving such consolidation or merger (if other than such Subsidiary Guarantor)
or to which such properties and assets are transferred assumes all of the
obligations of such Subsidiary Guarantor under the Indenture and its Note
Guarantee, pursuant to a supplemental indenture in form and substance
satisfactory to the Trustee and (ii) immediately after giving effect to such
transaction, no Default or Event of Default has occurred and is continuing.
For purposes of the foregoing, the transfer (by lease, assignment, sale or
otherwise, in a single transaction or series of transactions) of all or
substantially all of the properties or assets of one or more Restricted
Subsidiaries the Capital Stock of which constitutes all or substantially all of
the properties and assets of the Company, shall be deemed to be the transfer of
all or substantially all of the properties and assets of the Company.
In the event of any transaction described in and complying with the
conditions listed in the first paragraph of this covenant in which the Company
is not the continuing obligor under the Indenture, the Surviving Entity will
succeed to, and be substituted for, and may exercise every right and power of,
the Company under the Indenture, and thereafter the Company will, except in the
case of a lease, be discharged from all its obligations and covenants under the
Indenture and Notes.
EVENTS OF DEFAULT
The following will be "Events of Default" under the Indenture:
(a) default in the payment of any interest or Liquidated Damages, if
any, on any Note when it becomes due and payable, and continuance of such
default for a period of 30 days;
(b) default in the payment of the principal of (or premium, if any, on)
any Note when due;
(c) failure to perform or comply with the Indenture provisions described
under the captions "--Consolidation, Merger and Sale of Assets,"
"--Covenants--Limitation on Indebtedness and Issuance of Disqualified Stock"
and "--Limitation on Restricted Payments" or failure to make a Change of
Control Offer or an Excess Proceeds Offer, in each case, within the time
periods specified in the Indenture;
(d) default in the performance, or breach, of any covenant or agreement
of the Company or any Subsidiary Guarantor contained in the Indenture or any
Note Guarantee (other than a default in the performance, or breach, of a
covenant or agreement that is specifically dealt with elsewhere herein), and
continuance of such default or breach for a period of 60 days after written
notice has been given to the Company by the Trustee or to the Company and
the Trustee by the holders of at least 25% in aggregate principal amount of
the Notes then outstanding;
(e) (i) an event of default has occurred under any mortgage, bond,
indenture, loan agreement or other document evidencing an issue of
Indebtedness of the Company or any Restricted Subsidiary,
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which issue has an aggregate outstanding principal amount of not less than
$5 million ("Specified Indebtedness"), and such default has resulted in such
Indebtedness becoming, whether by declaration or otherwise, due and payable
prior to the date on which it would otherwise become due and payable or (ii)
a default in any payment when due at final maturity of any such Specified
Indebtedness;
(f) failure by the Company or any of its Restricted Subsidiaries to pay
one or more final judgments the uninsured portion of which exceeds in the
aggregate $5 million, which judgment or judgments are not paid, discharged
or stayed for a period of 60 days;
(g) any Note Guarantee ceases to be in full force and effect or is
declared null and void or any such Subsidiary Guarantor denies that it has
any further liability under any Note Guarantee, or gives notice to such
effect (other than by reason of the termination of the Indenture or the
release of any such Note Guarantee in accordance with the Indenture); or
(h) the occurrence of certain events of bankruptcy, insolvency or
reorganization with respect to the Company or any Significant Subsidiary.
If an Event of Default (other than as specified in clause (h) above) occurs
and is continuing, the Trustee or the holders of not less than 25% in aggregate
principal amount of the Notes then outstanding may, and the Trustee at the
request of such holders will, declare the principal of and accrued interest and
Liquidated Damages, if any, on all of the outstanding Notes immediately due and
payable and, upon any such declaration, such principal and such interest will
become due and payable immediately.
If an Event of Default specified in clause (h) above occurs and is
continuing, then the principal of and accrued interest and Liquidated Damages,
if any, on all of the outstanding Notes will IPSO FACTO become and be
immediately due and payable without any declaration or other act on the part of
the Trustee or any holder of Notes.
At any time after a declaration of acceleration under the Indenture, but
before a judgment or decree for payment of the money due has been obtained by
the Trustee, the holders of a majority in aggregate principal amount of the
outstanding Notes, by written notice to the Company and the Trustee, may rescind
such declaration and its consequences if (i) the Company has paid or deposited
with the Trustee a sum sufficient to pay (A) all overdue interest on all Notes,
(B) all unpaid principal of (and premium, if any, on) any outstanding Notes that
has become due otherwise than by such declaration of acceleration and interest
thereon at the rate borne by the Notes, (C) to the extent that payment of such
interest is lawful, interest upon overdue interest and overdue principal at the
rate borne by the Notes and (D) all sums paid or advanced by the Trustee under
the Indenture and the reasonable compensation, expenses, disbursements and
advances of the Trustee, its agents and counsel; and (ii) all Events of Default,
other than the non-payment of amounts of principal of (or premium, if any, on)
or interest on the Notes that have become due solely by such declaration of
acceleration, have been cured or waived. No such rescission will affect any
subsequent default or impair any right consequent thereon.
No holder of any of the Notes has any right to institute any proceeding with
respect to the Indenture or any remedy thereunder, unless the holders of at
least 25% in aggregate principal amount of the outstanding Notes have made
written request, and offered reasonable indemnity, to the Trustee to institute
such proceeding within 60 days after receipt of such notice and the Trustee,
within such 60-day period, has not received directions inconsistent with such
written request by holders of a majority in aggregate principal amount of the
outstanding Notes. Such limitations do not apply, however, to a suit instituted
by a holder of a Note for the enforcement of the payment of the principal of,
premium, if any, or interest on such Senior Note on or after the respective due
dates expressed in such Note.
The holders of not less than a majority in aggregate principal amount of the
outstanding Notes may, on behalf of the holders of all of the Notes, waive any
past defaults under the Indenture, except a default in the payment of the
principal of (and premium, if any) or interest on any Note, or in respect of a
covenant
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or provision that under the Indenture cannot be modified or amended without the
consent of the holder of each Note outstanding.
If a Default or an Event of Default occurs and is continuing and is known to
the Trustee, the Trustee will mail to each holder of the Notes notice of the
Default or Event of Default within 90 days after the occurrence thereof.
However, except in the case of a Default or an Event of Default in payment of
principal of (and premium, if any, on) or interest on any Notes, the Trustee may
withhold the notice to the holders of the Notes if a committee of its trust
officers in good faith determines that withholding such notice is in the
interests of the holders of the Notes.
The Company is required to furnish to the Trustee annual statements as to
the performance by the Company and the Subsidiary Guarantors of their
obligations under the Indenture and as to any default in such performance. The
Company is also required to notify the Trustee within five days of any Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the Company,
as such, shall have any liability for any obligations of the Company under the
Notes or the Indenture or for any claim based on, in respect of, or by reason
of, such obligations or their creation. Each Holder of Notes by accepting a Note
waives and releases all such liability. The waiver and release are part of the
consideration for issuance of the Notes. Such waiver may not be effective to
waive liabilities under the federal securities laws and it is the view of the
Commission that such waiver is against public policy.
DEFEASANCE OR COVENANT DEFEASANCE OF INDENTURE
The Company may, at its option and at any time, terminate the obligations of
the Company and the Subsidiary Guarantor with respect to the outstanding Notes,
the Note Guarantees and the Indenture ("defeasance"). Such defeasance means that
the Company will be deemed to have paid and discharged the entire Indebtedness
represented by the outstanding Notes, except for (i) the rights of holders of
outstanding Notes to receive payments in respect of the principal of (and
premium, if any, on) and interest and Liquidated Damages, if any, on such Notes
when such payments are due, (ii) the Company's obligations to issue temporary
Notes, register the transfer or exchange of any Notes, replace mutilated,
destroyed, lost or stolen Notes, maintain an office or agency for payments in
respect of the Notes and segregate and hold such payments in trust, (iii) the
rights, powers, trusts, duties and immunities of the Trustee and (iv) the
defeasance provisions of the Indenture. In addition, the Company may, at its
option and at any time, elect to terminate the obligations of the Company and
any Subsidiary Guarantor with respect to certain covenants set forth in the
Indenture, including those described under "--Certain Covenants" above, and any
omission to comply with such obligations would not constitute a Default or an
Event of Default with respect to the Notes ("covenant defeasance").
In order to exercise either defeasance or covenant defeasance, (a) the
Company must irrevocably deposit or cause to be deposited with the Trustee, as
trust funds in trust, specifically pledged as security for, and dedicated solely
to, the benefit of the holders of the Notes, money in an amount, or U.S.
Government Obligations (as defined in the Indenture) that through the scheduled
payment of principal and interest thereon will provide money in an amount, or a
combination thereof, sufficient, in the opinion of a nationally recognized firm
of independent public accountants, to pay and discharge the principal of (and
premium, if any, on) and interest on the outstanding Notes at maturity (or upon
redemption, if applicable) of such principal or installment of interest; (b) no
Default or Event of Default has occurred and is continuing on the date of such
deposit or, insofar as an event of bankruptcy under clause (h) of "Events of
Default" above is concerned, at any time during the period ending on the 91st
day after the date of such deposit; (c) such defeasance or covenant defeasance
may not result in a breach or violation of, or constitute a default under, the
Indenture or any material agreement or instrument to which the Company or any
Subsidiary Guarantor is a party or by which it is bound; (d) in the case of
defeasance, the Company
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must deliver to the Trustee an opinion of counsel stating that the Company has
received from, or there has been published by, the Internal Revenue Service a
ruling, or since the date hereof, there has been a change in applicable federal
income tax law, to the effect, and based thereon such opinion must confirm that,
the holders of the outstanding Notes will not recognize income, gain or loss for
federal income tax purposes as a result of such defeasance and will be subject
to federal income tax on the same amounts, in the same manner and at the same
times as would have been the case if such defeasance had not occurred; (e) in
the case of covenant defeasance, the Company must have delivered to the Trustee
an opinion of counsel to the effect that the Holders of the Notes outstanding
will not recognize income, gain or loss for federal income tax purposes as a
result of such covenant defeasance and will be subject to federal income tax on
the same amounts, in the same manner and at the same times as would have been
the case if such covenant defeasance had not occurred; and (f) the Company must
have delivered to the Trustee an officers' certificate and an opinion of
counsel, each stating that all conditions precedent provided for relating to
either the defeasance or the covenant defeasance, as the case may be, have been
complied with.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange Notes in accordance with the Indenture.
The Company, the Registrar and the Trustee may require a Holder, among other
things, to furnish appropriate endorsements and transfer documents as well as
certifications, legal opinions and other information and the Company may require
a Holder to pay any taxes and fees required by law or permitted by the
Indenture. The Company is not required to transfer or exchange any Note selected
for redemption. Also, the Company is not required to transfer or exchange any
Note for a period of 15 days before a selection of Notes to be redeemed.
SATISFACTION AND DISCHARGE
Upon the request of the Company, the Indenture will cease to be of further
effect (except as to surviving rights of registration of transfer or exchange of
the Notes, as expressly provided for in the Indenture) and the Trustee, at the
expense of the Company, will execute proper instruments acknowledging
satisfaction and discharge of the Indenture when (a) either (i) all the Notes
theretofore authenticated and delivered (other than destroyed, lost or stolen
Notes that have been replaced or paid and Notes that have been subject to
defeasance under "--Defeasance or Covenant Defeasance of Indenture") have been
delivered to the Trustee for cancellation or (ii) all Notes not theretofore
delivered to the Trustee for cancellation (A) have become due and payable, (B)
will become due and payable at maturity within one year or (C) are to be called
for redemption within one year under arrangements satisfactory to the Trustee
for the giving of notice of redemption by the Trustee in the name, and at the
expense, of the Company, and the Company has irrevocably deposited or caused to
be deposited with the Trustee funds in trust for the purpose in an amount
sufficient to pay and discharge the entire Indebtedness on such Notes not
theretofore delivered to the Trustee for cancellation, for principal (and
premium, if any, on) and interest on the Notes to the date of such deposit (in
the case of Notes that have become due and payable) or to the Stated Maturity or
redemption date, as the case may be; (b) the Company has paid or caused to be
paid all sums payable under the Indenture by the Company; and (c) the Company
has delivered to the Trustee an officers' certificate and an opinion of counsel,
each stating that all conditions precedent provided in the Indenture relating to
the satisfaction and discharge of the Indenture have been complied with.
AMENDMENTS AND WAIVERS
Modifications and amendments of the Indenture, the Notes and any Note
Guarantee may be made by the Company, any affected Subsidiary Guarantor and the
Trustee with the consent of the holders of a majority in aggregate outstanding
principal amount of the Notes (including, without limitation, consents obtained
in connection with a purchase of, or tender offer or exchange offer for, Notes);
provided,
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however, that no such modification or amendment may, without the consent of the
holder of each outstanding Note affected thereby,
(a) change the Stated Maturity of the principal of, or any installment of
interest on, any Note, or reduce the principal amount thereof or the rate of
interest thereon or any premium payable upon the redemption thereof, or change
the coin or currency in which any Note or any premium or the interest thereon is
payable, or impair the right to institute suit for the enforcement of any such
payment after the Stated Maturity thereof (or, in the case of redemption, on or
after the redemption date);
(b) reduce the percentage in principal amount of outstanding Notes, the
consent of whose holders is required for any waiver of compliance with certain
provisions of, or certain defaults and their consequences provided for under,
the Indenture;
(c) waive a default in the payment of principal of, or premium, if any, or
interest on the Notes; or
(d) release any Subsidiary Guarantor that is a Significant Subsidiary from
any of its obligations under its Note Guarantee or the Indenture other than in
accordance with the terms of the Indenture.
The holders of a majority in aggregate principal amount of the Notes
outstanding may waive compliance with certain restrictive covenants and
provisions of the Indenture.
Without the consent of any holders, the Company and the Trustee, at any time
and from time to time, may enter into one or more indentures supplemental to the
Indenture for any of the following purposes: (1) to evidence the succession of
another person to the Company or any Subsidiary Guarantor and the assumption by
any such successor of the covenants of the Company or any Subsidiary Guarantor
in the Indenture and in the Notes; or (2) to add to the covenants of the Company
or any Subsidiary Guarantor for the benefit of the holders, or to surrender any
right or power herein conferred upon the Company or any Subsidiary Guarantor; or
(3) to add additional Events of Defaults; or (4) to provide for uncertificated
Notes in addition to or in place of the Certificated Notes; or (5) to evidence
and provide for the acceptance of appointment under the Indenture by a successor
Trustee; or (6) to secure the Notes or any Note Guarantee; or (7) to cure any
ambiguity, to correct or supplement any provision in the Indenture that may be
defective or inconsistent with any other provision in the Indenture, or to make
any other provisions with respect to matters or questions arising under the
Indenture, provided that such actions pursuant to this clause do not adversely
affect the interests of the holders in any material respect; or (8) to comply
with any requirements of the Commission in order to effect and maintain the
qualification of the Indenture under the Trust Indenture Act; or (9) to release
any Subsidiary Guarantor from its Note Guarantee in accordance with the
provisions of the Indenture (including in connection with a sale of all of the
Capital Stock of such Subsidiary Guarantor).
THE TRUSTEE
United States Trust Company of New York, the Trustee under the Indenture,
will be the initial paying agent and registrar for the Notes. The Trustee's
current address is 111 Broadway, Lower Level, New York, New York 10006.
The Indenture provides that, except during the continuance of an Event of
Default, the Trustee will perform only such duties as are specifically set forth
in the Indenture. Under the Indenture, the holders of a majority in outstanding
principal amount of the Notes will have the right to direct the time, method and
place of conducting any proceeding for exercising any remedy available to the
Trustee, subject to certain exceptions. If an Event of Default has occurred and
is continuing, the Trustee will exercise such rights and powers vested in it
under the Indenture and use the same degree of care and skill in its exercise as
a prudent person would exercise under the circumstances in the conduct of such
person's own affairs.
The Indenture and provisions of the Trust Indenture Act of 1939, as amended,
incorporated by reference therein, contain limitations on the rights of the
Trustee thereunder, should it become a creditor
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of the Company, to obtain payment of claims in certain cases or to realize on
certain property received by it in respect of any such claims, as security or
otherwise. The Trustee is permitted to engage in other transactions; provided,
however, that, if it acquires any conflicting interest (as defined), it must
eliminate such conflict upon the occurrence of an Event of Default or else
resign.
GOVERNING LAW
The Indenture and the Notes will be governed by, and construed in accordance
with, the laws of the State of New York.
ADDITIONAL INFORMATION
Anyone who receives this Prospectus may obtain a copy of the Indenture
without charge by writing to Burke Industries, Inc., 2250 South Tenth Street,
San Jose, CA 95112, Attention: Chief Financial Officer.
BOOK-ENTRY, DELIVERY AND FORM
The New Notes will initially be issued in the form of one Global Note (the
"Global Note"). The Global Note will be deposited on the Closing Date with, or
on behalf of, The Depository Trust Company (the "Depositary") and registered in
the name of Cede & Co., as nominee of the Depositary (such nominee being
referred to herein as the "Global Note Holder").
The Depositary is a limited-purpose trust company that was created to hold
securities for its participating organizations (collectively, the "Participants"
or the "Depositary's Participants") and to facilitate the clearance and
settlement of transactions in such securities between Participants through
electronic book-entry changes in accounts of its Participants. The Depositary's
Participants include securities brokers and dealers, banks and trust companies,
clearing corporations and certain other organizations. Access to the
Depositary's system is also available to other entities such as banks, brokers,
dealers and trust companies (collectively, the "Indirect Participants" or the
"Depositary's Indirect Participants") that clear through or maintain a custodial
relationship with a Participant, either directly or indirectly. Persons who are
not Participants may beneficially own securities held by or on behalf of the
Depositary only through the Depositary's Participants or the Depositary's
Indirect Participants.
The Company expects that pursuant to procedures established by the
Depositary (i) upon deposit of the Global Note, the Depositary will credit the
accounts of Participants exchanging Old Notes for New Notes with portions of the
principal amount of the Global Note and (ii) ownership of the Notes evidenced by
the Global Note will be shown on, and the transfer of ownership thereof will be
effected only through, records maintained by the Depositary (with respect to the
interests of the Depositary's Participants), the Depositary's Participants and
the Depositary's Indirect Participants. Prospective purchasers are advised that
the laws of some states require that certain persons take physical delivery in
definitive form of securities that they own. Consequently, the ability to own,
transfer or pledge Notes evidenced by the Global Note will be limited to such
extent.
So long as the Global Note Holder is the registered owner of any Notes, the
Global Note Holder will be considered the sole Holder under the Indenture of any
Notes evidenced by the Global Note. Beneficial owners of Notes evidenced by the
Global Note will not be considered the owners or Holders thereof under the
Indenture for any purpose, including with respect to the giving of any
directions, instructions or approvals to the Trustee thereunder. Neither the
Company nor the Trustee will have any responsibility or liability for any aspect
of the records of the Depositary or for maintaining, supervising or reviewing
any records of the Depositary relating to the Notes.
Payments in respect of the principal of, premium, if any, and interest on
any Notes registered in the name of the Global Note Holder on the applicable
record date will be payable by the Trustee to or at the direction of the Global
Note Holder in its capacity as the registered Holder under the Indenture. Under
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the terms of the Indenture, the Company and the Trustee may treat the persons in
whose names Notes, including the Global Note, are registered as the owners
thereof for the purpose of receiving such payments. Consequently, neither the
Company nor the Trustee has or will have any responsibility or liability for the
payment of such amounts to beneficial owners of Notes. The Company believes,
however, that it is currently the policy of the Depositary to immediately credit
the accounts of the relevant Participants with such payments, in amounts
proportionate to their respective holdings of beneficial interests in the
relevant security as shown on the records of the Depositary. Payments by the
Depositary's Participants and the Depositary's Indirect Participants to the
beneficial owners of Notes will be governed by standing instructions and
customary practice and will be the responsibility of the Depositary's
Participants or the Depositary's Indirect Participants.
CERTIFICATED NOTES
Any beneficial owner of Notes evidenced by the Global Note may obtain Notes
in the form of registered definitive Notes ("Certificated New Notes"). If the
Company notifies the Trustee in writing that the Depositary is no longer willing
or able to act as a depositary and the Company is unable to locate a qualified
successor within 90 days then, upon surrender by the Global Note Holder of its
Global Note, Notes in such form will be issued to each person that the Global
Note Holder and the Depositary identify as being the beneficial owner of the
related Notes.
Neither the Company nor the Trustee will be liable for any delay by the
Global Note Holder or the Depositary in identifying the beneficial owners of
Notes and the Company and the Trustee may conclusively rely on, and will be
protected in relying on, instructions from the Global Note Holder or the
Depositary for all purposes.
SAME-DAY SETTLEMENT AND PAYMENT
The Indenture will require that payments in respect of the Notes represented
by the Global Note (including principal, premium, if any, and interest) be made
by wire transfer of immediately available funds to the accounts specified by the
Global Note Holder. With respect to Certificated Notes, the Company will make
all payments of principal, premium, if any, and interest by wire transfer of
immediately available funds to the accounts specified by the Holders thereof or,
if no such account is specified, by mailing a check to each such Holder's
registered address. Secondary trading in long-term notes and debentures of
corporate issuers is generally settled in clearinghouse or next-day funds. In
contrast, the Notes represented by the Global Note are eligible to trade in the
PORTAL market and to trade in the Depositary's Same-Day Funds Settlement System,
and any permitted secondary market trading activity in such Notes will,
therefore, be required by the Depositary to be settled in immediately available
funds. The Company expects that secondary trading in the Certificated Notes will
also be settled in immediately available funds.
CERTAIN DEFINITIONS
"Acquired Indebtedness" means Indebtedness of a person (a) existing at the
time such person is merged with or into the Company or becomes a Subsidiary or
(b) assumed in connection with the acquisition of assets from such person.
"Affiliate" means, with respect to any specified person, any other person
directly or indirectly controlling or controlled by or under direct or indirect
common control with such specified person or (b) any other person that owns,
directly or indirectly, 10% or more of such specified person's Capital Stock or
any executive officer or director of any such specified person or other person
or, with respect to any natural person, any person having a relationship with
such person by blood, marriage or adoption not more remote than first cousin.
For the purposes of this definition, "control", when used with respect to any
specified person, means the power to direct the management and policies of such
person, directly or
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indirectly, whether through the ownership of voting securities, by contract or
otherwise; and the terms "controlling" and "controlled" have meanings
correlative to the foregoing.
"Asset Sale" means (i) the sale, lease, conveyance or other disposition of
any assets (including, without limitation, by way of merger, consolidation or
Sale and Leaseback Transaction or similar arrangement) (collectively, a
"transfer") by the Company or any Restricted Subsidiary other than in the
ordinary course of business, whether in a single transaction or a series of
related transactions (a) that have a fair market value in excess of $1.0 million
or (b) for aggregate net proceeds in excess of $1.0 million. For the purposes of
this definition, the term "Asset Sale" does not include (i) any transfer of
properties or assets that is governed by the provisions of the Indenture
described under "--Consolidation, Merger and Sale of Assets", (ii) any transfer
of properties or assets between or among the Company and its Restricted
Subsidiaries pursuant to transactions that do not violate any other provision of
the Indenture, (iii) any transfer of properties or assets representing obsolete
or permanently retired equipment and facilities, (iv) a Restricted Payment or
Permitted Investment that is permitted by the covenant described above under the
caption "--Certain Covenants--Limitation on Restricted Payments" (including,
without limitation, any formation of or contribution of assets to a joint
venture), (v) leases or subleases, in the ordinary course of business, to third
parties of real property owned in fee or leased by the Company or its
Subsidiaries, (vi) the sale of Permitted Investments referred to in clause (a)
of the definition thereof or (vii) any exchange of like kind property pursuant
to Section 1031 of the Internal Revenue of 1986, as amended.
"Attributable Debt" in respect of a sale and leaseback transaction means, at
the time of determination, the present value (discounted at the rate of interest
implicit in such transaction, determined in accordance with GAAP) of the
obligation of the lessee for net rental payments during the remainder of the
lease included in such sale and leaseback transaction (including any period for
which such lease has been extended or may, at the option of the lessor, be
extended).
"Average Life" means, as of the date of determination with respect to any
Indebtedness or Disqualified Stock, the quotient obtained by dividing (a) the
sum of the products of (i) the number of years from the date of determination to
the date or dates of each successive scheduled principal or liquidation value
payment of such Indebtedness or Disqualified Stock, respectively, multiplied by
(ii) the amount of each such principal or liquidation value payment by (b) the
sum of all such principal or liquidation value payments.
"Bank Credit Agreement" means the loan and security agreement entered into
among the Company, the Banks and NationsBank, N.A., as agent, on or prior to the
Closing Date, as such agreement may be amended, restated, supplemented,
refinanced, replaced or otherwise modified from time to time (including any such
refinancing or replacement agented by a different institution).
"Banks" means the banks and other financial institutions that from time to
time are lenders under the Bank Credit Agreement.
"Borrowing Base" means, as of any date, an amount equal to the sum of (a)
85% of the face amount of all accounts receivable owned by the Company and its
Restricted Subsidiaries as of such date that are not more than 90 days past due,
and (b) 60% of the book value of all inventory owned by the Company and its
Subsidiaries as of such date, all calculated on a consolidated basis and in
accordance with GAAP. To the extent that information is not available as to the
amount of accounts receivable or inventory as of a specific date, the Company
may utilize the most recent available information provided to the Banks under
the Bank Credit Agreement for purpose of calculating the Borrowing Base.
"Capital Stock" of any person means any and all shares, interests,
partnership interests, participations, rights in or other equivalents (however
designated) of such person's equity interest (however designated), whether now
outstanding or issued after the Closing Date.
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"Capitalized Lease Obligation" means, with respect to any person, an
obligation incurred or assumed under or in connection with any capital lease of
real or personal property that, in accordance with GAAP, has been recorded as a
capitalized lease.
"Change of Control" means the occurrence of any of the following events:
(a) the consummation of any transaction (including, without limitation,
any merger or consolidation) (i) prior to a Public Equity Offering by the
Company, the result of which is that the Principals and their Related
Parties become the "beneficial owner" (as such term is defined in Rule 13d-3
and Rule 13d-5 under the Exchange Act, except that a person shall be deemed
to have "beneficial ownership" of all securities that such person has the
right to acquire, whether such right is currently exercisable or is
exercisable only upon the occurrence of a subsequent condition) of less than
50% of the Voting Stock of the Company (measured by voting power rather than
the number of shares) or (ii) after a Public Equity Offering of the Company,
any "person" (as such term is used in Section 13(d)(3) of the Exchange Act),
other than the Principals and their Related Parties, becomes the beneficial
owner (as defined above), directly or indirectly, of 35% or more of the
Voting Stock of the Company and such person is or becomes, directly or
indirectly, the beneficial owner of a greater percentage of the voting power
of the Voting Stock of the Company, calculated on a fully diluted basis,
than the percentage beneficially owned by the Principals and their Related
Parties;
(b) the Company, either individually or in conjunction with one or more
Subsidiaries, sells, assigns, conveys, transfers, leases or otherwise
disposes of, or the Subsidiaries sell, assign, convey, transfer, lease or
otherwise dispose of, all or substantially all of the properties of the
Company and the Subsidiaries, taken as a whole (either in one transaction or
a series of related transactions), including Capital Stock of the
Subsidiaries, to any person (other than the Company or a Restricted
Subsidiary);
(c) during any consecutive two-year period, individuals who at the
beginning of such period constituted the Board of Directors of the Company
(together with any new directors whose election by such Board of Directors
or whose nomination for election by the stockholders of the Company was
approved by a vote of a majority of the directors then still in office who
were either directors at the beginning of such period or whose election or
nomination for election was previously so approved) cease for any reason to
constitute a majority of the Board of Directors of the Company then in
office; or
(d) the Company is liquidated or dissolved or adopts a plan of
liquidation or dissolution, other than in a transaction that complies with
the provisions described under "--Consolidation, Merger and Sale of Assets".
"Consolidated Adjusted Net Income" means, for any period, the net income (or
net loss) of the Company and its Restricted Subsidiaries for such period as
determined on a consolidated basis in accordance with GAAP, adjusted to the
extent included in calculating such net income or loss by excluding (a) any net
after-tax extraordinary or non-recurring gains or losses (less all fees and
expenses relating thereto), (b) any net after-tax gains or losses (less all fees
and expenses relating thereto) attributable to Asset Sales, (c) the portion of
net income (or loss) of any person (other than the Company or a Restricted
Subsidiary), including Unrestricted Subsidiaries, in which the Company or any
Restricted Subsidiary has an ownership interest, except to the extent of the
amount of dividends or other distributions actually paid to the Company or any
Restricted Subsidiary in cash during such period, (d) solely for purposes of the
covenant described under "--Certain Covenants--Limitation on Restricted
Payments," the net income (or loss) of any person combined with the Company or
any Restricted Subsidiary on a "pooling of interests" basis attributable to any
period prior to the date of combination, and (e) the net income (but not the net
loss) of any Restricted Subsidiary to the extent that the declaration or payment
of dividends or similar distributions by such Restricted Subsidiary is at the
date of determination restricted, directly or indirectly, except to the extent
that such net income is actually paid to the Company or a Restricted Subsidiary
thereof by loans, advances, intercompany transfers, principal repayments or
otherwise; PROVIDED that, if any
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Restricted Subsidiary is not a Wholly Owned Restricted Subsidiary, Consolidated
Adjusted Net Income will be reduced (to the extent not otherwise reduced in
accordance with GAAP) by an amount equal to (A) the amount of the Consolidated
Adjusted Net Income otherwise attributable to such Restricted Subsidiary
multiplied by (B) the quotient of (1) the number of shares of outstanding common
stock of such Restricted Subsidiary not owned on the last day of such period by
the Company or any of its Restricted Subsidiaries divided by (2) the total
number of shares of outstanding common stock of such Restricted Subsidiary on
the last day of such period.
"Consolidated EBITDA" means, for any period, the sum of, without
duplication, Consolidated Adjusted Net Income for such period, plus (or, in the
case of clause (d) below, plus or minus) the following items to the extent
included in computing Consolidated Adjusted Net Income for such period: (a)
Fixed Charges for such period, plus (b) the provision for federal, state, local
and foreign taxes based on income or profits of the Company and its Restricted
Subsidiaries for such period, plus (c) the aggregate depreciation and
amortization expense of the Company and its Restricted Subsidiaries for such
period, plus (d) any other non-cash charges for such period, and minus non-cash
credits for such period, other than non-cash charges or credits resulting from
changes in prepaid assets or accrued liabilities in the ordinary course of
business; provided that fixed charges, income tax expense, depreciation and
amortization expense and non-cash charges and credits of a Restricted Subsidiary
will be included in Consolidated EBITDA only to the extent (and in the same
proportion) that the net income of such Subsidiary was included in calculating
Consolidated Adjusted Net Income for such period.
"Consolidated Net Worth" means, at any date of determination, stockholders'
equity of the Company and its Restricted Subsidiaries as set forth on the most
recently available quarterly or annual consolidated balance sheet of the Company
and its Restricted Subsidiaries, less any amounts attributable to Disqualified
Stock or any equity security convertible into or exchangeable for Indebtedness,
the cost of treasury stock and the principal amount of any promissory notes
receivable from the sale of the Capital Stock of the Company or any of its
Restricted Subsidiaries and less to the extent included in calculating such
stockholders' equity of the Company and its Restricted Subsidiaries, the
stockholders' equity attributable to Unrestricted Subsidiaries, each item to be
determined in conformity with GAAP (excluding the effects of foreign currency
adjustments under Financial Accounting Standards Board Statement of Financial
Accounting Standards No. 52).
"Default" means any event that is, or after notice or passage of time or
both would be, an Event of Default.
"Disinterested Director" means, with respect to any transaction or series of
transactions in respect of which the Board of Directors is required to deliver a
resolution of the Board of Directors, to make a finding or otherwise take action
under the Indenture, a member of the Board of Directors who does not derive any
material direct or indirect financial benefit from such transaction or series of
transactions.
"Disqualified Stock" means any class or series of Capital Stock that, either
by its terms, by the terms of any security into which it is convertible or
exchangeable or by contract or otherwise (i) is or upon the happening of an
event or passage of time would be, required to be redeemed prior to the final
Stated Maturity of the Notes, (ii) is redeemable at the option of the holder
thereof, at any time prior to such final Stated Maturity or (iii) at the option
of the holder thereof is convertible into or exchangeable for debt securities at
any time prior to such final Stated Maturity; provided that any Capital Stock
that would not constitute Disqualified Stock but for provisions therein giving
holders thereof the right to cause the issuer thereof to repurchase or redeem
such Capital Stock upon the occurrence of an "asset sale" or "change of control"
occurring prior to the Stated Maturity of the Notes will not constitute
Disqualified Stock if the "asset sale" or "change of control" provisions
applicable to such Capital Stock are no more favorable to the holders of such
Capital Stock than the provisions contained in the "--Certain
Covenants--Limitation on Certain Asset Sales" and "--Redemption--Purchase of
Notes upon a Change of Control or Asset Sale" covenants described herein and
such Capital Stock specifically provides that the issuer will not repurchase
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or redeem any such stock pursuant to such provision prior to the Company's
repurchase of such Notes as are required to be repurchased pursuant to the
"--Certain Covenants--Limitation on Certain Asset Sales" and
"--Redemption--Purchase of Notes upon a Change of Control or Asset Sale"
covenants described herein.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Fixed Charge Coverage Ratio" means, for any period, the ratio of
Consolidated EBITDA for such period to Fixed Charges for such period.
"Fixed Charges" means, for any period, without duplication, the sum of (a)
the amount that, in conformity with GAAP, would be set forth opposite the
caption "interest expense" (or any like caption) on a consolidated statement of
operations of the Company and its Restricted Subsidiaries for such period,
including, without limitation, (i) amortization of debt discount, (ii) the net
cost of interest rate contracts (including amortization of discounts), (iii) the
interest portion of any deferred payment obligation, (iv) amortization of debt
issuance costs and (v) the interest component of Capitalized Lease Obligations,
plus (b) cash dividends paid on Preferred Stock and Disqualified Stock by the
Company and any Restricted Subsidiary (to any person other than the Company and
its Restricted Subsidiaries), computed on a tax effected basis, plus (c) all
interest on any Indebtedness of any person guaranteed by the Company or any of
its Restricted Subsidiaries or secured by a lien on the assets of the Company or
any of its Restricted Subsidiaries; PROVIDED, HOWEVER, that Fixed Charges will
not include any gain or loss from extinguishment of debt, including the
write-off of debt issuance costs.
"Generally Accepted Accounting Principles" or "GAAP" means generally
accepted accounting principles in the United States, as in effect on the date of
the Indenture.
"Hedging Obligations" means the obligations of any person under (i) interest
rate swap agreements, interest rate cap agreements and interest rate collar
agreements and (ii) other agreements or arrangements designed to protect such
person against fluctuations in interest rates or the value of foreign
currencies.
"Indebtedness" means (without duplication), with respect to any person,
whether recourse is to all or a portion of the assets of such person and whether
or not contingent, (a) every obligation of such person for money borrowed, (b)
every obligation of such person evidenced by bonds, debentures, notes or other
similar instruments, (c) every reimbursement obligation of such person with
respect to letters of credit, bankers' acceptances or similar facilities issued
for the account of such person, (d) every obligation of such person issued or
assumed as the deferred purchase price of property or services, (e) the
Attributable Debt in respect of every Capitalized Lease Obligation of such
person, (f) all Disqualified Stock of such person valued at its maximum fixed
repurchase price, plus accrued and unpaid dividends, (g) all obligations of such
person under or in respect of Hedging Obligations and (h) every obligation of
the type referred to in clauses (a) through (g) of another person and all
dividends of another person the payment of which, in either case, such person
has guaranteed. For purposes of this definition, the "maximum fixed repurchase
price" of any Disqualified Stock that does not have a fixed repurchase price
will be calculated in accordance with the terms of such Disqualified Stock as if
such Disqualified Stock were purchased on any date on which Indebtedness is
required to be determined pursuant to the Indenture, and if such price is based
upon, or measured by, the fair market value of such Disqualified Stock, such
fair market value will be determined in good faith by the board of directors of
the issuer of such Disqualified Stock. Notwithstanding the foregoing, (i) trade
accounts payable and accrued liabilities arising in the ordinary course of
business, (ii) any liability for federal, state or local taxes or other taxes
owed by such person and (iii) obligations with respect to performance and surety
bonds and completion guarantees in the ordinary course of business will not be
considered Indebtedness for purposes of this definition.
"Investment" in any person means, (i) directly or indirectly, any advance,
loan or other extension of credit (including, without limitation, by way of
guarantee or similar arrangement) or capital contribution to such person, the
purchase or other acquisition of any stock, bonds, notes, debentures or other
securities
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issued by such person, the acquisition (by purchase or otherwise) of all or
substantially all of the business or assets of such person, or the making of any
investment in such person, (ii) the designation of any Restricted Subsidiary as
an Unrestricted Subsidiary and (iii) the fair market value of the Capital Stock
(or any other Investment), held by the Company or any of its Restricted
Subsidiaries, of (or in) any person that has ceased to be a Restricted
Subsidiary. Investments exclude extensions of trade credit on commercially
reasonable terms in accordance with normal trade practices.
"Lien" means any mortgage, charge, pledge, lien (statutory or otherwise),
privilege, security interest, hypothecation, assignment for security, claim, or
preference or priority or other encumbrance upon or with respect to any property
of any kind, real or personal, movable or immovable, now owned or hereafter
acquired. A person will be deemed to own subject to a Lien any property that
such person has acquired or holds subject to the interest of a vendor or lessor
under any conditional sale agreement, capital lease or other title retention
agreement, PROVIDED that an operating lease shall not constitute a Lien.
"Net Cash Proceeds" means, with respect to any Asset Sale, the proceeds
thereof in the form of cash or cash equivalents, including payments in respect
of deferred payment obligations when received in the form of, or stock or other
assets when disposed for, cash or cash equivalents (except to the extent that
such obligations are financed or sold with recourse to the Company or any
Restricted Subsidiary), net of (a) brokerage commissions and other fees and
expenses (including fees and expenses of legal counsel and investment banks)
related to such Asset Sale, (b) provisions for all taxes payable as a result of
such Asset Sale, (c) payments made to retire or otherwise prepay Indebtedness
where such Indebtedness is secured by the assets that are the subject of such
Asset Sale or otherwise required to be prepaid in connection therewith, (d)
amounts required to be paid to any person (other than the Company or any
Restricted Subsidiary) owning a beneficial interest (by way of Capital Stock of
the Person owning such assets or otherwise) in the assets that are subject to
the Asset Sale and (e) appropriate amounts to be provided by the Company or any
Restricted Subsidiary, as the case may be, as a reserve required in accordance
with GAAP against any liabilities associated with such Asset Sale and retained
by the seller after such Asset Sale, including pension and other post-employment
benefit liabilities, liabilities related to environmental matters and
liabilities under any indemnification obligations associated with such Asset
Sale.
"Permitted Business" means any business in which the Company or a Restricted
Subsidiary is permitted to engage under the covenant described under the caption
"--Certain Covenants--Line of Business." "Permitted Investments" means any of
the following:
(a) Investments in (i) securities with a maturity at the time of
acquisition of one year or less issued or directly and fully guaranteed or
insured by the United States or any agency or instrumentality thereof
(provided that the full faith and credit of the United States is pledged in
support thereof); (ii) certificates of deposit, Eurodollar deposits or
bankers' acceptances with a maturity at the time of acquisition of one year
or less of any financial institution that is a member of the Federal Reserve
System having combined capital and surplus of not less than $500,000,000;
(iii) any shares of money market mutual or similar funds having assets in
excess of $500,000,000; and (iv) commercial paper with a maturity at the
time of acquisition of one year or less issued by a corporation that is not
an Affiliate of the Company and is organized under the laws of any state of
the United States or the District of Columbia and having a rating (A) from
Moody's Investors Service, Inc. of at least P-1 or (B) from Standard &
Poor's Ratings Services of at least A-1;
(b) Investments by the Company or any Restricted Subsidiary in another
person, if as a result of such Investment (i) such other person becomes a
Wholly Owned Restricted Subsidiary that is a Subsidiary Guarantor or (ii)
such other person is merged or consolidated with or into, or transfers or
conveys all or substantially all of its assets to, the Company or a
Restricted Subsidiary;
(c) Investments by the Company or a Restricted Subsidiary in the Company
or a Restricted Subsidiary that is a Subsidiary Guarantor;
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(d) Investments in existence on the Closing Date;
(e) promissory notes received as a result of Asset Sales permitted under
the "--Certain Covenants--Limitation on Certain Asset Sales" covenant;
(f) any acquisition of assets solely in exchange for the issuance of
Qualified Equity Interests of the Company;
(g) stock, obligations or securities received in satisfaction of
judgments, in bankruptcy proceedings or in settlement of debts;
(h) Hedging Obligations otherwise permitted under the Indenture;
(i) loans or advances to officers or employees of the Company or any of
its Restricted Subsidiaries in the ordinary course of business not to exceed
$250,000 in the aggregate at any one time outstanding; and
(j) other Investments that do not exceed $4 million in the aggregate at
any time outstanding.
"Preferred Stock" means, with respect to any person, any and all shares,
interests, partnership interests, participations, rights in or other equivalents
(however designated) of such person's preferred or preference stock, whether now
outstanding or issued after the Closing Date, and including, without limitation,
all classes and series of preferred or preference stock of such person.
"Principals" means (i) Lehman, (ii) each Affiliate of Lehman as of the
Closing Date, (iii) JFLEI, and (iv) each officer or employee (including their
respective immediate family members) of Lehman as of the Closing Date.
"Public Equity Offering" means an offer and sale of common stock (which is
Qualified Stock) of the Company pursuant to a registration statement that has
been declared effective by the Commission pursuant to the Securities Act (other
than a registration statement on Form S-8 or otherwise relating to equity
securities issuable under any employee benefit plan of the Company).
"Qualified Equity Interest" means any Qualified Stock and all warrants,
options or other rights to acquire Qualified Stock (but excluding any debt
security that is convertible into or exchangeable for Capital Stock).
"Qualified Stock" of any person means any and all Capital Stock of such
person, other than Disqualified Stock.
"Related Party" with respect to any Principal means (A) any controlling
stockholder or 80% (or more) owned Subsidiary of such Principal or (B) trust,
corporation, partnership or other entity, the beneficiaries, stockholders,
partners, owners or Persons beneficially holding an 80% or more controlling
interest of which consist of such Principal and/or such other Persons referred
to in the immediately preceding clause (A).
"Restricted Subsidiary" means any Subsidiary other than an Unrestricted
Subsidiary.
"Sale and Leaseback Transaction" means any transaction or series of related
transactions pursuant to which a person sells or transfers any property or asset
in connection with the leasing, or the resale against installment payments, of
such property or asset to the seller or transferor.
"Series A Preferred Stock" means the Series A Cumulative Redeemable
Preferred Stock of the Company, no par value.
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"Significant Subsidiary" means any Restricted Subsidiary of the Company that
together with its Subsidiaries, (a) for the most recent fiscal year of the
Company, accounted for more than 10% of the consolidated net sales of the
Company and its Subsidiaries or (b) as of the end of such fiscal year, was the
owner of more than 10% of the consolidated assets of the Company and its
Restricted Subsidiaries, in the case of either (a) or (b), as set forth on the
most recently available consolidated financial statements of the Company for
such fiscal year or (c) was organized or acquired after the beginning of such
fiscal year and would have been a Significant Subsidiary if it had been owned
during such entire fiscal year.
"Stated Maturity" means, when used with respect to any Senior Note or any
installment of interest thereon, the date specified in such Senior Note as the
fixed date on which the principal of such Note or such installment of interest
is due and payable and, when used with respect to any other Indebtedness, means
the date specified in the instrument governing such Indebtedness as the fixed
date on which the principal of such Indebtedness or any installment of interest
thereon is due and payable.
"Subordinated Indebtedness" means Indebtedness of the Company or a
Subsidiary Guarantor that is subordinated in right of payment to the Notes or
the Note Guarantee issued by such Subsidiary Guarantor, as the case may be.
"Subsidiary" means any person a majority of the equity ownership or Voting
Stock of which is at the time owned, directly or indirectly, by the Company
and/or one or more other Subsidiaries of the Company.
"Subsidiary Guarantor" means any Restricted Subsidiary that is a party to a
Note Guarantee pursuant to the terms of the Indenture.
"Unrestricted Subsidiary" means (a) any Subsidiary that is designated by the
Board of Directors of the Company as an Unrestricted Subsidiary in accordance
with the "Unrestricted Subsidiaries" covenant and (b) any Subsidiary of an
Unrestricted Subsidiary.
"Voting Stock" means any class or classes of Capital Stock pursuant to which
the holders thereof have the general voting power under ordinary circumstances
to elect at least a majority of the board of directors, managers or trustees of
any person (irrespective of whether or not, at the time, stock of any other
class or classes has, or might have, voting power by reason of the happening of
any contingency).
"Wholly Owned Restricted Subsidiary" means any Restricted Subsidiary, all of
the outstanding voting securities (other than directors' qualifying shares or
shares of foreign Restricted Subsidiaries required to be owned by foreign
nationals pursuant to applicable law) of which are owned, directly or
indirectly, by the Company.
DESCRIPTION OF NEW CREDIT FACILITY
GENERAL
Concurrently with the consummation of the Recapitalization, the Company
entered into a Loan and Security Agreement (the "New Credit Agreement") with
NationsBank, N.A., as administrative agent (the "Agent"), and other lending
institutions party thereto (the "Banks"), which agreement provides the Company
with a $15.0 million revolving credit facility (the "New Credit Facility"), to
be guaranteed by each existing and future domestic subsidiary of the Company (in
this context, the "Subsidiary Guarantors"). See "Use of Proceeds." The Prior
Offering and the New Credit Facility were conditioned upon each other. This
information relating to the New Credit Facility is materially complete but is
qualified in its entirety by reference to the complete text of the documents
entered into or to be entered into in connection therewith. The following is a
description of the general terms of the New Credit Facility.
SECURITY
Indebtedness of the Company under the New Credit Facility is secured by (i)
a first priority security interest in substantially all of the personal property
(including, without limitation, accounts receivable,
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inventory, machinery, equipment, contracts and contract rights, trademarks,
copyrights, patents, license agreements and general intangibles) of the Company
and its domestic subsidiaries, whether now owned or hereafter acquired, (ii) a
first priority perfected pledge of 100% of the capital stock of its domestic
subsidiaries and 66% of the Capital Stock of its non-United States Subsidiaries
and (iii) a mortgage lien on the Company's presently owned real property and
hereinafter acquired.
INTEREST
Indebtedness under the New Credit Facility bears interest at a floating rate
of interest equal to, at the Company's option, the Eurodollar Rate (as defined
in the New Credit Agreement) for one, two, three or six months, plus 2.50% or
NationsBank, N.A.'s Prime Rate. The "Prime Rate" is a fluctuating interest rate
equal to the higher of (i) the rate of interest announced publicly by the Agent
as its prime rate and (ii) a rate equal to 1/2 of 1% per annum above the
weighted average of the rates on overnight Federal funds transactions with
members of the Federal Reserve System arranged by Federal funds brokers, as
determined for any day by the Agent. Interest based on the Base Rate shall be
payable monthly in arrears. Interest based on the Eurodollar Rate shall be
payable in arrears at the earlier of the (a) end of the applicable interest
period and (b) the first day of the month in which the Interest Payment Date
occurs.
BORROWING BASE
Pursuant to the terms of the New Credit Agreement, advances under the New
Credit Facility will be limited to the lesser of (a) $15.0 million and (b)(i)
85% of eligible accounts receivable plus (ii) 50% of eligible inventory minus
(iii) the aggregate amount of all undrawn letters of credit issued under the New
Credit Facility plus the aggregate amount of any unreimbursed drawings under any
outstanding letters of credit.
MATURITY
Loans made pursuant to the New Credit Facility may be borrowed, repaid and
reborrowed from time to time until the fifth anniversary of the Closing Date,
subject to the satisfaction of certain conditions on the date of any such
borrowing.
FEES
The Company is required to pay to the Banks in the aggregate a commitment
fee equal to .50% per annum, payable in arrears on a monthly basis, on the
committed undrawn amount of the New Credit Facility. The Agent and the Banks
shall receive such other fees as have been separately agreed upon with the
Agent, including, without limitation, in respect of letters of credit issued
under the letter of credit subfacility.
LETTERS OF CREDIT SUBFACILITY
The New Credit Facility includes a subfacility for the issuance of letters
of credit up to a maximum aggregate amount at any one time outstanding not to
exceed $1.0 million. If any letter of credit is outstanding after the
termination of the New Credit Facility, the Company would be required to post a
standby letter of credit or deposit cash collateral in an amount sufficient to
reimburse the Banks for amounts drawn under any such outstanding letter of
credit.
CONDITIONS TO CLOSING AND EXTENSIONS OF CREDIT
The New Credit Agreement provides that the obligation of the Banks to close
and make the initial loans will be subject to the satisfaction of certain
conditions customary in transactions of this type, including, but not limited
to, the consummation of the Recapitalization, the placement by the Company of
the Notes, receipt by the Banks of customary opinions of counsel, corporate
documents, financial
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statements and a solvency letter, the absence of any material adverse change and
the absence of any default or event of default under the New Credit Agreement.
The obligation of the Banks to make subsequent loans or extend letters of credit
after the Closing will be subject to the satisfaction of certain customary
conditions including, but not limited to, the absence of a default or event of
default under the New Credit Agreement, all representations and warranties under
the New Credit Agreement being true and correct in all material respects and the
absence of a material adverse change.
COVENANTS
The New Credit Agreement contains customary covenants of the Company and the
subsidiary guarantors, including, without limitation, restrictions on (i) the
incurrence of debt, (ii) the sale of assets, (iii) mergers, acquisitions and
other business combinations, (iv) voluntary prepayment of other debt of the
Company, (v) transactions with affiliates (as defined in the New Credit
Agreement), (vi) investments, as well as prohibitions on the payment of
dividends to, or the repurchase or redemption of stock from, shareholders and
(vii) various financial covenants, including covenants requiring the maintenance
of fixed charge coverage and maximum funded debt to EBITDA ratios.
EVENTS OF DEFAULT; REMEDIES
The New Credit Agreement contains customary events of default under the New
Credit Facility, including the non-payment of principal or interest when due
under the notes issued in connection with the New Credit Facility or, subject to
applicable grace periods in certain circumstances, upon the non-fulfillment of
the covenants described above, certain changes in control of the ownership of
the Company, cross-defaults to certain other indebtedness, certain events of
bankruptcy and insolvency, ERISA, judgment defaults and failure of any guaranty
or security agreement supporting the New Credit Agreement to be in full force
and effect. If any such event of default occurs, the Agent will be entitled, on
behalf of the Banks, to take all actions permitted to be taken by a secured
creditor under the Uniform Commercial Code and to accelerate the amounts due
under the New Credit Facility and may require all such amounts outstanding
thereunder to be immediately paid in full.
INDEMNIFICATION
Under the New Credit Agreement, the Company has agreed to indemnify the
Agent, the Banks and related persons from and against any and all losses,
liabilities, claims, damages or expenses (including, without limitations, fees
and disbursements of counsel) that may be incurred by or asserted against any
such indemnified party in connection with any investigation, litigation or other
proceeding relating to the New Credit Agreement or related documents, provided
that the Company is not liable for any such losses, liabilities, claims, damages
or expenses resulting from such indemnified party's own gross negligence or
willful misconduct. Finally, the New Credit Agreement contains customary
provisions protecting the Banks in the event of unavailability of funding,
illegality, capital adequacy requirements, increased costs, withholding taxes
and funding losses.
DESCRIPTION OF REDEEMABLE PREFERRED STOCK AND WARRANTS
REDEEMABLE PREFERRED STOCK
In connection with the consummation of the Recapitalization, the Company
issued (i) 16,000 shares of Redeemable Preferred Stock designated as Series A
11 1/2% Cumulative Redeemable Preferred Stock to MassMutual and Jackson
National, (ii) 2,000 shares of Redeemable Preferred Stock designated as Series B
11 1/2% Cumulative Redeemable Preferred Stock to Paribas and (iii) warrants to
purchase approximately 964,000 shares of common stock of the Company at an
initial exercise price of per share equal to one-half of the Recapitalization
Consideration to MassMutual, Paribas and Jackson National.
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RANKING. The Redeemable Preferred Stock ranks prior to the Company's Common
Stock with respect to dividend rights and rights on liquidation, winding up or
dissolution of the Company, and to all other classes and series of equity
securities of the Company as may hereafter be issued, other than any class or
series of equity securities of the Company expressly designated as being on a
parity with ("Parity Securities") or senior to the Redeemable Preferred Stock.
Such other classes or series of equity securities of the Company not expressly
designated as being on a parity with or senior to the Redeemable Preferred Stock
are referred to hereafter as "Junior Securities." The rights of holders of
shares of the Redeemable Preferred Stock are subordinate to the rights of the
Company's general creditors. The Company may not create or issue other classes
of stock ranking on a parity with or senior to the Redeemable Preferred Stock
unless it receives approval or consent of the holders of at least a two-thirds
of the Redeemable Preferred Stock. See "--Voting Rights" below.
DIVIDEND RIGHTS. Dividends shall be payable to holders of Redeemable
Preferred Stock, out of funds legally available therefor, at the annual rate per
share of 11.5% times the sum of (i) $1,000 and (ii) accrued but unpaid dividends
as of the immediately preceding Dividend Payment Date (as defined below).
Dividends shall be payable (A) at the annual rate per share of .115 shares of
Redeemable Preferred Stock per share of Redeemable Preferred Stock from the
original issue date of the Redeemable Preferred Stock (the "Issue Date") through
July 15, 2000, and (B) in cash after July 15, 2000.
Dividends on the Redeemable Preferred Stock will be payable quarterly on
each January 15, April 15, July 15 and October 15 of each year (each a "Dividend
Payment Date"), commencing October 15, 1997. Dividends payable for any period
less than a full quarterly period shall be computed on the basis of a 360-day
year with equal months of 30 days. Dividends for the first dividend period will
accrue from the Issue Date. Dividends shall be fully cumulative and shall accrue
on a quarterly basis (whether or not declared) from the Issue Date. Dividends
declared will be payable to holders of record as they appear on the stock books
of the Company at the close of business on such record dates, not exceeding 60
days nor fewer than 10 days preceding the Dividend Payment Date therefor.
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 of Redeemable Preferred Stock at the annual rate of 13.5% times the
sum of (i) $1,000 per share and (ii) accrued but unpaid dividends thereon. Upon
payment in full of all dividends in arrears, cash dividends will thereafter be
payable at the 11.5% annual rate set forth above.
In addition, no dividends in any form shall be declared or paid or set apart
for payment on any Junior Securities or Parity Securities for any dividend
period unless full dividends on the Redeemable Preferred Stock for the then
current dividend period shall have been paid or declared and set aside. When
dividends on the Redeemable Preferred Stock are in arrears, dividends declared
upon shares of the Redeemable Preferred Stock and Parity Securities shall be
declared PRO RATA based upon the respective amounts that would have been paid on
the Redeemable Preferred Stock and the Parity Securities had dividends been paid
in full.
So long as any shares of the Redeemable Preferred Stock are outstanding, the
Company shall not, without the prior consent of the holders of two-thirds of the
outstanding shares of Redeemable Preferred Stock, (i) make any payment on
account of, or set apart for payment money for a sinking or other similar fund
for, the purchase, redemption or retirement of, any Junior Securities (other
than dividends or distributions payable in additional shares of Junior
Securities to holders of Junior Securities); (ii) permit any corporation or
other entity directly or indirectly controlled by the Company to purchase or
redeem any Junior Securities; (iii) declare, pay or set apart for payment, or
permit any corporation or other entity directly or indirectly controlled by the
Company to declare, pay or set apart for payment, any dividend or make any
distribution or payment on any Junior Securities or Parity Securities, whether
directly or indirectly and whether in cash, obligations or shares of the Company
or other property (other than
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dividends or distributions payable in additional shares of Junior Securities to
holders of Junior Securities); or (iv) make any payment on account of, or set
apart for payment money for a sinking or other similar fund for, the purchase,
redemption or retirement of, any Parity Securities, whether directly or
indirectly, and whether in cash, obligations, shares of the Company or other
property (other than payments solely of Junior Securities), and shall not permit
any corporation or other entity directly or indirectly controlled by the Company
to purchase or redeem any Parity Securities, unless prior to or at the time of
such payment or setting apart for payment, the Company shall have repurchased,
redeemed or retired shares of Redeemable Preferred Stock on a PRO RATA basis
with the Parity Securities as to which such sinking fund or similar fund
payment, or such purchase, redemption or retirement, is being effected.
LIQUIDATION PREFERENCE. Holders of shares of Redeemable Preferred Stock
shall be entitled to receive the stated liquidation value of $1,000 per share
($18.0 million in the aggregate based on 18,000 shares of Redeemable Preferred
Stock to be issued on the Issue Date), plus an amount per share equal to any
dividends accrued but unpaid, without interest (the "Liquidation Preference"),
in the event of any liquidation, dissolution or winding up of the Company,
whether voluntary or involuntary, out of or to the extent of the net assets of
the Company legally available for distribution, before any distributions are
made with respect to any Common Stock of the Company or any other Junior
Securities. After payment of the 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.
Upon any such liquidation, dissolution or winding up of the Company, such
preferential amounts with respect to the Redeemable Preferred Stock and any
class or series ranking on a parity with the Redeemable Preferred Stock if not
paid in full shall be distributed PRO RATA in accordance with the aggregate
preferential amounts of the Redeemable Preferred Stock and such other classes or
series of stock.
OPTIONAL REDEMPTION. The Company may, at its option, redeem at any time,
out of funds legally available therefor, all or any portion of the shares (in
whole shares only) of the Redeemable Preferred Stock on a PRO RATA basis, at a
redemption price per share equal to 100% of the Liquidation Preference thereof
on the date of redemption.
MANDATORY REDEMPTION. On the date that is the one hundred and twenty-sixth
(126th) month anniversary of the Issue Date, the Company shall redeem any and
all outstanding shares of Redeemable Preferred Stock, out of funds legally
available therefor, at a redemption price per share equal to 100% of the
Liquidation Preference thereof on such date.
REDEMPTION UPON CHANGE OF CONTROL. Upon the occurrence of a Change of
Control (as defined in the Certificate of Determination for the Redeemable
Preferred Stock), the Redeemable Preferred Stock shall be redeemable at the
option of the holders thereof, in whole or in part, at a redemption price per
share equal to 100% of the Liquidation Preference on the date of redemption
provided, however, that the Company will not be obligated to redeem any
Redeemable Preferred Stock upon a Change of Control prior to repurchase or
redemption of such Notes then outstanding as the Company is required to
repurchase or has called for redemption in connection with Chance of Control
pursuant to the terms of the Indenture.
VOTING RIGHTS. The holders of shares of Redeemable Preferred Stock shall
not be entitled to any voting rights, except as required by applicable law and
except as set forth below:
Without the consent of the holders of at least two-thirds of the outstanding
shares of Redeemable Preferred Stock, the Company may not (i) amend its Articles
of Incorporation in any way that would adversely alter or change the powers,
preferences, special rights or economics of the Redeemable Preferred Stock, (ii)
create, authorize or issue any shares of capital stock ranking senior to or on a
parity with the Redeemable Preferred Stock or (iii) create, authorize or issue
any shares of capital stock constituting Junior Securities, unless such Junior
Securities are expressly subordinate in right of payment
105
<PAGE>
to the Redeemable Preferred Stock and such Junior Securities have no additional
rights (directly or indirectly) upon the Company's failure to redeem such shares
or to pay or declare a dividend or make a distribution with respect thereto.
ADDITIONAL VOTING RIGHTS OF SERIES A REDEEMABLE PREFERRED STOCK. In
addition to the voting rights set forth above under the caption "--Voting
Rights," the holders of shares of Series A Redeemable Preferred Stock shall be
entitled to voting rights as set forth below:
Without the consent of the holders of at least two-thirds of the outstanding
shares of Series A Redeemable Preferred Stock, the Company may not enter into
any agreement which limits or otherwise adversely affects the Company's ability
to comply with its mandatory redemption obligations described above, including,
without limitation, any such agreement or plan entered into with respect to (i)
the sale of all or substantially all of the assets of the Company, (ii) the
voluntary liquidation, dissolution or winding up of the Company or (iii) the
consolidation or merger of the Company with any one or more other corporations,
other than a consolidation or merger in which the shareholders of the Company
immediately prior to such transaction will hold more than 50% of the equity
securities of the surviving entity immediately after the consummation of such
transaction.
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, voting separately as a class and to the
exclusion of the holders of all other classes and series of stock of the
Company, 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 shall fail 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, voting separately
as a class and to the exclusion of the holders of all other classes and series
of stock of the Company, 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 (i) all such dividends in arrears are paid in full or (ii) all shares of
Series A Redeemable Preferred Stock shall have been redeemed pursuant to the
mandatory redemption provisions described above, as the case may be.
TRANSFER RESTRICTIONS. There are no restrictions on the transferability of
the Redeemable Preferred Stock, except as required by applicable securities
laws.
WARRANTS
The Warrants issued in connection with the Recapitalization entitle the
holders thereof to purchase in the aggregate up to approximately 964,000 shares
of Common Stock of the Company (the "Warrant Shares"), or 20% of the outstanding
Common Stock of the Company on a fully diluted basis upon the completion of the
Transactions. The Warrants are immediately exercisable from and after the date
of issuance until February 20, 2008 at an exercise price per share equal to
one-half of the Recapitalization Consideration, payable in cash or by tendering
shares of Redeemable Preferred Stock. The exercise price and number of Warrant
Shares are both subject to adjustment in certain events. The Warrants will be
transferable separately from the Redeemable Preferred Stock.
There are no restrictions on the transferability of the Warrants, except as
required by applicable securities laws and as may be set forth in the
Shareholders' Agreement.
106
<PAGE>
Unless and until the Warrants are exercised, the holders of the Warrants
have no right to vote on matters submitted to the shareholders of the Company.
The holders of the Warrants have no right to receive dividends; provided,
however, that upon exercise of the Warrants, the exercise price therefor shall
be reduced by an amount equal to the dividends in respect of the Common Stock
that the holder of the Warrants would have received had the Warrants been
exercised on the Issue Date. The holders of the Warrants are not entitled to
share in the assets of the Company in the event of liquidation or dissolution of
the Company or the winding up of the Company's affairs; provided, however, that
the holders of the Warrants are entitled to receive at least 30 days' prior
written notice of any such liquidation, dissolution or winding up of affairs and
shall be afforded the opportunity to exercise the Warrants prior to such
liquidation, dissolution or winding up of affairs.
REGISTRATION RIGHTS FOR WARRANT SHARES
The holders of the Warrant Shares are entitled to one "demand" registration
right at any time on or after the later of (i) August 20, 2000 and (ii) the
181st day after completion of the initial public offering by the Company of its
Common Stock, subject to additional customary rights and limitations. In
addition, the holders of the Warrant Shares are entitled to unlimited
"piggyback" registration rights after the date of the Company's initial public
offering of its Common Stock, subject to customary rights and limitations.
PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of New Notes received in exchange for old Notes where
such Old Notes were acquired as a result of market-making activities or other
trading activities. The Company has agreed that, starting on the Expiration Date
and ending on the close of business 180 days after the Expiration Date, it will
make this Prospectus, as amended or supplemented, available to any broker-dealer
for use in connection with any such resale. In addition, until , 199 , all
dealers effecting transactions in the New Notes may be required to deliver a
Prospectus.
The Company will not receive any proceeds from any sales of New Notes by
broker-dealers. New Notes received by broker-dealers pursuant to the Exchange
Offer may be sold from time to time in one or more transactions in the
over-the-counter market, in negotiated transactions, through the writing of
options on the New Notes or a combination of such methods of resale, at market
prices prevailing at the time of resale, at prices related to such prevailing
market prices or negotiated prices. Any such resale may be made directly to
purchasers or to or through brokers or dealers who may receive compensation in
the form of commissions or concessions from any such broker-dealer and/or the
purchasers of any such New Notes. Any broker-dealer that resells New Notes that
were received by it pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of such New Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit of any
such resale of New Notes and any commissions or concessions received by such
persons may be deemed to be underwriting compensation under the Securities Act.
The Letter of Transmittal states that by acknowledging that it will deliver and
by delivering a prospectus, a broker-dealer will not be deemed to admit that it
is an "underwriter" within the meaning of the Securities Act.
For a period of 180 days after the Expiration Date, the Company will
promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any broker-dealer that requests such documents
in the Letter of Transmittal. The Company has agreed to pay all expenses
incident to the Exchange Offer (including the expenses of one counsel for the
holders of the Notes) other than commissions or concessions of any brokers or
dealers and will indemnify the holders of the Notes (including any
broker-dealers) against certain liabilities, including liabilities under the
Securities Act.
107
<PAGE>
LEGAL MATTERS
The legality of the New Notes will be passed upon for the Company by Gibson,
Dunn & Crutcher, LLP, Los Angeles, California.
EXPERTS
The Consolidated financial statements of Burke Industries, Inc. at December
29, 1995 and January 3, 1997, and for each of the three years in the period
ended January 3, 1997, appearing in this Prospectus and Registration Statement
have been audited by Ernst & Young LLP, independent auditors, as set forth in
their reports thereon appearing elsewhere herein, and are included in reliance
upon such reports given upon the authority of such firm as experts in accounting
and auditing.
108
<PAGE>
BURKE INDUSTRIES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Report of Ernst & Young LLP, Independent Auditors.......................................................... F-2
Consolidated Statements of Income for the three fiscal years ended January 3, 1997......................... F-3
Consolidated Balance Sheets at December 29, 1995 and January 3, 1997....................................... F-4
Consolidated Statements of Shareholders' Equity for the three fiscal years ended January 3, 1997........... F-5
Consolidated Statements of Cash Flows for the three fiscal years ended January 3, 1997..................... F-6
Notes to Consolidated Financial Statements................................................................. F-7
Consolidated Statements of Income for the nine months ended September 27, 1996 and October 3, 1997
(unaudited).............................................................................................. F-19
Consolidated Balance Sheets at January 3, 1997 and October 3, 1997 (unaudited)............................. F-20
Consolidated Statements of Cash Flows for the nine months ended September 27, 1996 and October 3, 1997
(unaudited).............................................................................................. F-21
Notes to Consolidated Financial Statements (unaudited)..................................................... F-22
</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 29, 1995 and January 3, 1997,
and the related consolidated statements of income, shareholders' equity, and
cash flows for each of the three fiscal years in the period ended January 3,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Burke
Industries, Inc. and subsidiaries at December 29, 1995 and January 3, 1997, and
the consolidated results of their operations and their cash flows for each of
the three fiscal years in the period ended January 3, 1997, in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
San Jose, California
March 7, 1997
except for note 10, as to which the date is August 20, 1997
F-2
<PAGE>
BURKE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Net sales........................................................................ $ 44,370 $ 68,411 $ 72,466
Costs and expenses:
Cost of sales.................................................................. 29,998 49,226 49,689
Selling........................................................................ 5,143 6,161 6,824
General and administrative..................................................... 3,009 4,051 4,786
--------- --------- ---------
Income from operations........................................................... 6,220 8,973 11,167
Interest expense, net............................................................ 2,812 3,007 2,668
--------- --------- ---------
Income before income tax provision, discontinued operation, and extraordinary
loss........................................................................... 3,408 5,966 8,499
Income tax provision............................................................. 1,395 3,393 3,466
--------- --------- ---------
Income from continuing operations before discontinued operation, and
extraordinary loss............................................................. 2,013 2,573 5,033
Loss from discontinued operation, net of income tax benefit of $341 in 1994, $443
in 1995, and $205 in 1996...................................................... (511) (664) (308)
Loss on disposal of discontinued operation, net of income tax benefit of $356.... -- -- (624)
Extraordinary loss on debt settlement, net of income tax benefit of $547......... -- (815) --
--------- --------- ---------
Net income....................................................................... $ 1,502 $ 1,094 $ 4,101
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these Statements.
F-3
<PAGE>
BURKE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEAR
--------------------
1995 1996
--------- ---------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Trade accounts receivable, less allowance of $336 in 1995 and $189 in 1996.................. $ 9,856 $ 9,155
Inventories................................................................................. 7,218 8,616
Prepaid expenses and other current assets................................................... 552 630
Deferred income tax assets.................................................................. 1,238 1,014
--------- ---------
Total current assets...................................................................... 18,864 19,415
Property, plant, and equipment:
Land and improvements....................................................................... 1,884 1,884
Buildings and improvements.................................................................. 9,096 9,151
Equipment................................................................................... 10,788 12,329
Leasehold improvements...................................................................... 535 555
--------- ---------
22,303 23,919
Accumulated depreciation and amortization................................................... 7,748 9,101
--------- ---------
14,555 14,818
Construction-in-process....................................................................... 140 183
--------- ---------
14,695 15,001
Prepaid pension cost.......................................................................... 625 542
Goodwill, net................................................................................. 1,570 1,529
Note receivable from an affiliate of the principal shareholders............................... -- 4,066
Other assets.................................................................................. 132 120
Net assets of discontinued operation.......................................................... 3,843 --
--------- ---------
Total assets.............................................................................. $ 39,729 $ 40,673
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Checks outstanding in excess of funds deposited............................................. $ 1,716 $ 828
Trade accounts payable and accrued expenses................................................. 4,514 6,454
Accrued compensation and related liabilities................................................ 1,813 1,937
Income taxes payable........................................................................ 2,571 2,468
Current portion of long-term obligations.................................................... 2,848 2,400
--------- ---------
Total current liabilities................................................................. 13,462 14,087
Long-term obligations, less current portion................................................... 20,183 16,469
Other noncurrent liabilities.................................................................. 684 720
Deferred income tax liabilities............................................................... 3,440 3,457
Subordinated debt............................................................................. 1,620 1,657
SHAREHOLDERS' EQUITY:
Class A common stock, no par value:
Authorized shares--20,000
Issued and outstanding shares--9,431 in 1995 and 9,377 in 1996.......................... 5,633 6,716
Convertible Class B common stock, no par value:
Authorized shares--5,000
Issued and outstanding shares--none..................................................... -- --
Accumulated deficit......................................................................... (5,293) (2,433)
--------- ---------
Total shareholders' equity................................................................ 340 4,283
--------- ---------
Total liabilities and shareholders' equity................................................ $ 39,729 $ 40,673
--------- ---------
--------- ---------
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
F-4
<PAGE>
BURKE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
CLASS A TOTAL
COMMON STOCK SHAREHOLDERS'
-------------------- ACCUMULATED EQUITY
SHARES AMOUNT DEFICIT (DEFICIT)
--------- --------- ------------ -------------
<S> <C> <C> <C> <C>
Balance (deficit) at fiscal year ended 1993...................... 10,017 $ 6,648 $ (7,302) $ (654)
Net income..................................................... -- -- 1,502 1,502
Proceeds from sales of shares through employee stock plans..... 2 1 -- 1
--------- --------- ------------ -------------
Balance at fiscal year ended 1994................................ 10,019 6,649 (5,800) 849
Net income..................................................... -- -- 1,094 1,094
Increase in value of shareholder warrants...................... 587 (587) --
Repurchase of stock............................................ (588) (453) -- (453)
Repurchase of warrants......................................... -- (1,150) -- (1,150)
--------- --------- ------------ -------------
Balance at fiscal year ended 1995................................ 9,431 5,633 (5,293) 340
Net income..................................................... -- -- 4,101 4,101
Proceeds from sales of shares through employee stock plans..... 181 77 -- 77
Increase in value of shareholder warrants...................... -- 1,241 (1,241) --
Repurchase of stock............................................ (235) (235) -- (235)
--------- --------- ------------ -------------
Balance at fiscal year ended 1996................................ 9,377 $ 6,716 $ (2,433) $ 4,283
--------- --------- ------------ -------------
--------- --------- ------------ -------------
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements
F-5
<PAGE>
BURKE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
-------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income........................................................................ $ 1,502 $ 1,094 $ 4,101
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization:
Property, plant, and equipment................................................ 1,106 1,354 1,378
Goodwill and other............................................................ 164 134 41
Debt discount arising from warrants........................................... 275 259 37
Loss on disposal of discontinued operation...................................... -- -- 624
Extraordinary loss on debt settlement--noncash portion.......................... -- 1,362 --
Changes in net assets of discontinued operation................................. 398 (680) 1,401
Changes in operating assets and liabilities:
Trade accounts receivable..................................................... (675) (4,326) 701
Inventories................................................................... (524) (2,539) (1,398)
Prepaid expenses and other current assets..................................... (103) (68) (78)
Cash in escrow................................................................ 2,027 -- --
Prepaid pension cost.......................................................... 32 66 83
Other assets.................................................................. (26) (31) 12
Trade accounts payable and accrued expenses................................... (436) 1,853 1,940
Accrued compensation and related liabilities.................................. 245 536 124
Deferred income taxes......................................................... 78 (462) 241
Income taxes payable.......................................................... (374) 1,798 (103)
Other noncurrent liabilities.................................................. 68 (142) 36
--------- --------- ---------
Net cash provided by operating activities......................................... 3,757 208 9,140
INVESTING ACTIVITIES
Purchases of property, plant, and equipment....................................... (335) (3,647) (1,684)
Proceeds from disposal of discontinued operation.................................. -- -- 1,818
Note receivable from an affiliate of the principal shareholders................... -- -- (4,066)
Proceeds from sale of equipment................................................... -- 123 --
--------- --------- ---------
Net cash used in investing activities............................................. (335) (3,524) (3,932)
FINANCING ACTIVITIES
Net borrowings (repayments) of long-term debt..................................... (3,326) 3,691 (4,162)
Checks outstanding in excess of funds deposited................................... (97) 1,228 (888)
Repurchase of common stock and warrants........................................... -- (1,603) (235)
Proceeds from sales of shares through employee stock plans........................ 1 -- 77
--------- --------- ---------
Net cash provided by (used in) financing activities............................... (3,422) 3,316 (5,208)
--------- --------- ---------
Change in cash.................................................................... -- -- --
Cash at beginning of year......................................................... -- -- --
--------- --------- ---------
Cash at end of year............................................................... $ -- $ -- $ --
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements
F-6
<PAGE>
BURKE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
Burke Industries, Inc. and its wholly owned subsidiaries (the Company)
develop, manufacture, and market various elastomer products for use in
commercial and military applications.
The Company operates within one industry segment, which includes the
developing, manufacturing and marketing of various elastomer products for use in
commercial and military applications.
The Company sells its products through a network of distributors or directly
to customers in the aerospace construction and defense, industries and other
commercial markets, primarily in North America. The Company performs ongoing
credit evaluations of its customers' financial condition and generally does not
require collateral.
One customer accounted for approximately 11.0% of net sales in fiscal 1996.
No other customer constituted 10% or more of net sales in any of the three
fiscal years ended in 1996.
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, 1997.
Substantially all of the Company's hourly workers in Taunton, Massachusetts
are represented by the United Electrical, Radio, and Machine Workers of America
through a collective bargaining agreement that expires June 5, 1997.
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
reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION
Revenue from sales of products is generally recognized upon shipment to
customers. For contracts relating to certain products, a portion of the revenue
is recognized upon completion of a part of the manufacturing process and upon
customer acceptance. The remaining revenue is recognized upon completion of the
manufacturing process and shipment.
WARRANTY
The Company generally warrants its roofing products for two years, for which
the related costs are not significant. In addition, the Company sells extended
warranties for ten to twenty years. Revenues received for extended warranties
are deferred and amortized over the period in which warranty costs are expected
F-7
<PAGE>
BURKE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
to be incurred. Warranty reserves and deferred warranty revenues are included in
accrued expenses and other noncurrent liabilities on the accompanying
consolidated balance sheets.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are stated at cost. Depreciation is computed
over the estimated useful lives (three to forty years) of the assets using the
straight-line method. Leasehold improvements are amortized by the straight-line
method over the shorter of the estimated useful life of the asset or the term of
the related lease. Amortization of assets under capital leases is included in
depreciation expense.
FINANCIAL INSTRUMENTS
The carrying value of accounts receivable and payable and accrued
liabilities approximates fair value due to the short-term maturities of these
assets and liabilities.
ACCOUNTING PERIODS
The Company's fiscal year ends on the Friday closest to December 31. The
Company maintains a fifty-two/fifty-three week fiscal year cycle, which resulted
in a fifty-three week year in fiscal 1996. For convenience the accompanying
financial statements have been referred to as fiscal year ended 1994, 1995 and
1996 for the periods ended December 30, 1994, December 29, 1995 and January 3,
1997, respectively.
COMPREHENSIVE INCOME
In June 1997, the FASB released Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" (FAS 130). FAS 130 establishes
standards for the reporting and display of comprehensive income and its
components in a full set of general purpose financial statements and is
effective for fiscal years beginning after December 15, 1997. The Company
believes that adoption of FAS 130 will not have a material impact on the
Company's consolidated financial statements.
SEGMENT INFORMATION
In June 1997, the FASB released Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
(FAS 131). FAS 131 will change the way companies report selected segment
information in annual financial statements and also requires those companies to
report selected segment information in interim financial reports to
stockholders. FAS 131 is effective for fiscal years beginning after December 15,
1997. The Company is currently evaluating the impact of the application of the
new rules on the Company's consolidated financial statements.
F-8
<PAGE>
BURKE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. INVENTORIES
Inventories consist of the following at fiscal year ended:
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
(IN THOUSANDS)
Raw materials.............................................................. $ 2,850 $ 3,260
Work-in-process............................................................ 1,238 1,433
Finished goods............................................................. 3,130 3,923
--------- ---------
$ 7,218 $ 8,616
--------- ---------
--------- ---------
</TABLE>
3. GOODWILL AND LONG-LIVED ASSETS
Goodwill represents the excess of the purchase price of acquired companies
over the estimated fair value of the tangible and specifically identified
intangible net assets acquired. In accordance with SFAS 121, "Accounting for the
Impairment of Long-Lived Assets and for the Long-Lived Assets to Be Disposed
Of," 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 is being amortized on a straight-line basis over forty years.
Accumulated amortization totaled $262,000 and $303,000 at fiscal year ended 1995
and 1996, respectively.
F-9
<PAGE>
BURKE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. LONG-TERM DEBT AND LEASE OBLIGATIONS
Long-term debt consists of the following at fiscal year ended:
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
(IN THOUSANDS)
Promissory note......................................................... $ 1,000 $ --
Line of credit with bank................................................ 9,134 5,099
Term loans payable to bank.............................................. 12,897 13,770
--------- ---------
Total senior long-term obligations...................................... 23,031 18,869
Less current portion.................................................... 2,848 2,400
--------- ---------
$ 20,183 $ 16,469
--------- ---------
--------- ---------
Senior subordinated note payable to an affiliate of the principal
shareholders.......................................................... $ 1,000 $ 1,000
Junior subordinated notes payable to shareholders, net of unamortized
discount of $130,000 in 1995 and $93,000 in 1996...................... 620 657
--------- ---------
Total subordinated debt................................................. $ 1,620 $ 1,657
--------- ---------
--------- ---------
Long-term debt is due as follows (in thousands):
1997............................................................................... $ 2,400
1998............................................................................... 2,400
1999............................................................................... 2,400
2000............................................................................... 13,326
---------
$ 20,526
---------
---------
</TABLE>
SENIOR LONG-TERM OBLIGATIONS
The Company maintains a credit facility with a bank, which provides
available borrowings up to a maximum of $30,000,000, subject to certain
limitations. Borrowings under this facility, which expire September 15, 2000
(thereafter, the facility automatically renews for one-year periods under
certain conditions), may be term loans, letters of credit, or a revolving line
of credit. All borrowings under this facility are secured by the Company's
accounts receivable, inventories, equipment, real estate, and general
intangibles.
The term loans under the credit facility bear interest payable monthly at
2.75% (2.25% after fiscal year ended 1996) to 3.50% above the London Interbank
Offer Rate (LIBOR) (5.69% at fiscal year ended 1996). One term loan ($2,417,000
at fiscal year ended 1996) is subject to a one-time reduction (from a 3.50%
increment to 3.00%) if the Company meets certain financial ratios at any time
after December 30, 1997. The term loans require aggregate monthly principal
payments of approximately $200,000 with all unpaid principal due September 15,
2000. The term loans also require that the proceeds from sales of certain
property or equipment be used to reduce the principal balance of the loans.
The credit facility also provides for a nonrevolving equipment line of
credit up to $3,000,000 that can be utilized for up to 100% of the value of the
equipment financed. Amounts drawn under this line are limited to $1,500,000 per
annum and are converted into notes once a year. Amounts drawn under this line as
well as under the notes bear an interest rate of 2.75% above LIBOR (2.25% after
fiscal year ended
F-10
<PAGE>
BURKE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. LONG-TERM DEBT AND LEASE OBLIGATIONS (CONTINUED)
1996). Included in term loans at fiscal year ended 1996 is approximately
$1,159,000 drawn under this line of which approximately $264,000 has been
converted into a term loan at fiscal year ended 1996.
The credit facility also provides for letters of credit not to exceed the
lesser of $1,100,000 or 17% of the fair value of the Company's interest in
certain property. There were no outstanding letters of credit at fiscal year
ended 1995 and 1996.
Under the facility, the Company may also borrow on a revolving line of
credit up to its borrowing base, representing certain accounts receivable,
inventories, and other assets up to a maximum of $30,000,000, less the amounts
of any outstanding term loans and letters of credit. At fiscal year ended 1996,
the Company had $4,686,000 available under the facility. Line of credit
borrowings bear interest computed daily and are payable monthly at LIBOR plus
2.75% (2.25% after fiscal year ended 1996).
The Company has maintained required minimum working capital, tangible net
worth, operating income, and financial ratios and is prohibited from
distributing dividends on the Company's common stock under certain covenants and
restrictions of the credit facility and senior subordinated note.
SUBORDINATED NOTES PAYABLE
The senior subordinated note payable to an affiliate of the principal
shareholders (senior note) and the junior subordinated notes payable to certain
shareholders (junior notes) are due October 10, 2000 and require monthly
interest payments at 12.14% with all unpaid principal due on October 10, 2000.
The senior and junior notes contain certain prepayment penalties; however,
the Company may not make principal payments on the junior notes without written
agreement from the shareholder under a subordination agreement between the
Company and the shareholders. The senior note is secured by substantially all of
the Company's tangible assets, subordinate to the security interests of the
nonsubordinated bank debt discussed below. The junior notes are subordinate to
and cross-defaulted with the senior note and nonsubordinated bank debt discussed
above.
The shareholders holding the junior notes hold warrants to purchase
approximately 1,700,000 shares of the Company's Class A common stock for $0.425
per share.
Interest expense consists of the following:
<TABLE>
<CAPTION>
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Interest incurred................................................ $ 2,836 $ 3,039 $ 2,771
Capitalized...................................................... (11) (30) (19)
Interest income.................................................. (13) (2) (84)
--------- --------- ---------
Interest expense, net............................................ $ 2,812 $ 3,007 $ 2,668
--------- --------- ---------
--------- --------- ---------
</TABLE>
Included in interest expense is $1,388,000, $1,108,000 and $212,000 incurred
on subordinated shareholder notes in 1994, 1995 and 1996, respectively. There
was no interest payable to these shareholders at fiscal year ended 1995 and
1996.
The Company has met the specified minimum operating income and financial
ratios required to reduce the interest rate on most of its facility by 0.50%,
effective fiscal year ended 1996. Therefore, the
F-11
<PAGE>
BURKE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. LONG-TERM DEBT AND LEASE OBLIGATIONS (CONTINUED)
Company believes the fair value of the long-term debt at fiscal year ended 1996
approximates the carrying value of such debt at fiscal year ended 1996.
LEASE OBLIGATIONS
The Company also leases certain manufacturing, warehousing, and
administrative space under noncancelable operating leases. At fiscal year ended
1996, future minimum payments under noncancelable operating leases are as
follows (in thousands):
<TABLE>
<S> <C>
1997................................................................ $ 1,097
1998................................................................ 1,015
1999................................................................ 976
2000................................................................ 897
2001................................................................ 387
---------
Total minimum lease payments........................................ $ 4,372
---------
---------
</TABLE>
Rental expense approximated $522,000, $1,006,000, and $1,143,000 in 1994,
1995, and 1996, respectively. Rental expense is before sublease income of
$206,000 in 1996. Future sublease rental income commitments aggregated
$1,616,000 at fiscal year ended 1996.
5. SHAREHOLDERS' EQUITY AND SHAREHOLDERS' TRANSACTIONS
COMMON STOCK
Class A common stock and convertible Class B common stock have identical
rights, terms and conditions except that convertible Class B common stock is
nonvoting.
The following summarizes the shares of common stock reserved for issuance at
January 3, 1997:
<TABLE>
<CAPTION>
CLASS A
COMMON
STOCK
---------------
<S> <C>
(IN THOUSANDS)
Exercise of warrants........................................................... 1,700
Exercise of options under the 1989 Stock Option Plan........................... 1,600
-----
3,300
-----
-----
</TABLE>
WARRANTS AND SHAREHOLDERS' TRANSACTIONS
At fiscal year ended 1994, a bank held warrants (bank warrants) to purchase
approximately 3,333,000 shares of convertible Class B common stock at $0.425 per
share.
On October 10, 1995, the Company and the bank owning the warrants entered
into a settlement agreement whereby the Company repurchased the outstanding
warrants and shares held by the bank and repaid the senior subordinated debt
owed to the bank. As a result of these transactions, an unamortized debt
discount of $950,000 and settlement fees of $412,000 have been expensed. These
amounts are shown as an extraordinary item in the 1995 income statement, net of
tax.
F-12
<PAGE>
BURKE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. SHAREHOLDERS' EQUITY AND SHAREHOLDERS' TRANSACTIONS (CONTINUED)
The shareholder warrants, issued in connection with the junior subordinated
notes described in Note 4, expire on January 30, 2002. Any time after January
30, 1995, the Company may call or the shareholders may put all or a portion of
the warrants at a price based on the difference between the fair value of the
Class A common stock (determined by an agreed-upon independent appraiser) and
the exercise price of the warrants. The aggregate increase in the difference
between the fair value of the Class A common stock and the exercise price of the
shareholder warrants ($587,000 in 1995 and $1,241,000 in 1996) has been charged
to accumulated deficit.
On October 25, 1996, the Company loaned $4,000,000 to an affiliate of the
principal shareholders which note bears interest at the highest rate actually
charged to the Company under its credit facility with a bank. All unpaid
principal and interest are due on October 25, 2001. The Company is charged a
management fee by an affiliate of the principal shareholders which was $250,000
in each of the three fiscal years ended 1996.
STOCK OPTIONS
The Company accounts for its stock option plan in accordance with provisions
of the Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees" (APB Opinion No. 25). In 1995, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" (FAS 123), that provides an alternative to APB
Opinion No. 25. The Company will continue to account for its employee stock
plans in accordance with the provisions of APB Opinion No. 25 with footnote
disclosures of the material impact of FAS 123. The number of shares granted in
fiscal year ended 1995 and 1996 are not material, therefore, the effect of
applying the FAS 123 minimum value method to the Company's stock option grants
would not result in pro forma net income materially different from historical
amounts reported. Therefore, such pro forma information and weighted average
assumptions specified in FAS 123 are not separately presented herein. Future pro
forma net income results may be materially different from actual amounts
reported.
Under the 1989 Stock Option Plan (the Plan), incentive and nonqualified
options to purchase up to a total of 1,600,000 shares of Class A common stock
may be granted to officers and employees at the discretion of the Board of
Directors. Incentive stock options must be granted at not less than the fair
value of the Company's common stock at the date of grant, and nonqualified stock
options must be granted at not less than 85% of the fair value of the Company's
common stock at the date of grant. Options vest as determined by the Board of
Directors. Currently, substantially all outstanding options vest ratably over
five years from date of grant. During 1996, the Company granted 200,000
incentive options to two officers under the Plan which vested immediately on the
date of grant.
During 1996, the Company also granted 360,000 nonqualified options to two
officers which vested immediately on the date of grant.
F-13
<PAGE>
BURKE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. SHAREHOLDERS' EQUITY AND SHAREHOLDERS' TRANSACTIONS (CONTINUED)
A summary of all stock option activity is as follows:
<TABLE>
<CAPTION>
OPTIONS WEIGHTED AVERAGE
OUTSTANDING PRICE PER SHARE
------------- -----------------
<S> <C> <C>
(IN THOUSANDS, EXCEPT
PER SHARE PRICE)
Balance at fiscal year ended 1993............................. 1,184 $ 0.425
Granted..................................................... 200 $ 0.425
Exercised................................................... (2) $ 0.425
Canceled.................................................... (4) $ 0.425
-----
Balance at fiscal year ended 1994............................. 1,378 $ 0.425
Granted..................................................... 25 $ 0.425
Exercised................................................... -- $ --
Canceled.................................................... (144) $ 0.425
-----
Balance at fiscal year ended 1995............................. 1,259 $ 0.425
Granted..................................................... 618 $ 1.500
Exercised................................................... (181) $ 0.425
Canceled.................................................... (96) $ 0.425
-----
Balance at fiscal year ended 1996............................. 1,600 $ 0.840
-----
-----
</TABLE>
There were approximately 1,564,000 options exercisable at fiscal year ended
1996. Options outstanding at fiscal year ended 1996 ranged in price from $0.425
to $1.500 and had a weighted average contractual life of fifty-three months.
6. DISCONTINUED OPERATION
On June 28, 1996, the Company disposed of certain of the assets related to
its custom-molded organic rubber products manufacturing operation for cash and
future consideration. The 1996 loss from the discontinued operation includes
results through June 28, 1996. Net sales of the discontinued operation were
$9,099,000, $8,984,000, and $4,279,000 in 1994, 1995, and 1996, respectively.
7. PENSION AND RETIREMENT PLANS
The Company maintains a single employer 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-14
<PAGE>
BURKE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. PENSION AND RETIREMENT PLANS (CONTINUED)
The following table sets forth the plan's funded status and amounts
recognized in the Company's consolidated balance sheets as of fiscal year end:
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
(IN THOUSANDS)
Actuarial present value of benefit obligations:
Vested benefit obligation................................................ $ 2,661 $ 2,713
Nonvested benefit obligation............................................. 114 183
--------- ---------
Accumulated benefit obligation............................................. $ 2,775 $ 2,896
--------- ---------
--------- ---------
</TABLE>
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
(IN THOUSANDS)
Plan assets at fair value, primarily listed stocks and U.S. bonds.......... $ 2,789 $ 2,920
Projected benefit obligation............................................... 2,775 2,896
--------- ---------
Plan assets in excess of projected benefit obligation...................... 14 24
Unrecognized net loss from past experience different from that assumed and
effects of changes in assumptions........................................ 406 352
Prior service cost not yet recognized in net periodic pension cost......... 205 166
--------- ---------
Prepaid pension cost....................................................... $ 625 $ 542
--------- ---------
--------- ---------
</TABLE>
Net periodic pension expense for 1994, 1995, and 1996 included the following
components:
<TABLE>
<CAPTION>
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
(IN THOUSANDS)
Service cost--benefits earned during the year....................... $ 68 $ 57 $ 65
Interest cost on projected benefit obligation....................... 169 183 193
Actual return on plan assets........................................ 30 (342) (233)
Net amortization and deferral....................................... (235) 168 58
--------- --------- ---------
Net periodic pension cost........................................... $ 32 $ 66 $ 83
--------- --------- ---------
--------- --------- ---------
</TABLE>
The weighted average discount rate used in determining the actuarial present
value of the projected benefit obligation was 8.0% in 1994, 7.00% in 1995, and
7.75% in 1996. The expected long-term rate of return on plan assets was 8.50%
for all of the years presented.
The Company also maintains a defined contribution 401(k) plan covering
substantially all of its other regular employees. The employees become eligible
for participation after 1,000 hours of service. Participants may elect to
contribute up to 20% of their compensation to this plan, subject to Internal
Revenue Service (IRS) limits. The Company matches a portion of the employee's
contribution. The Company contributed approximately $75,000, $105,000, and
$113,000 to this plan in 1994, 1995, and 1996, respectively.
F-15
<PAGE>
BURKE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES
The income tax provision recognized in the consolidated statements of
operations consists of the following:
<TABLE>
<CAPTION>
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
(IN THOUSANDS)
Deferred:
Federal........................................................ $ 49 $ (407) $ 150
State.......................................................... 29 (55) 91
--------- --------- ---------
78 (462) 241
Current:
Federal........................................................ 761 2,527 2,171
State.......................................................... 215 338 493
--------- --------- ---------
976 2,865 2,664
--------- --------- ---------
$ 1,054 $ 2,403 $ 2,905
--------- --------- ---------
--------- --------- ---------
</TABLE>
In 1996, the Company settled with the IRS certain issues relating to the
Company's income tax returns for 1988 through 1990. As of fiscal year ended
1995, the Company has fully provided for the taxes and interest payable as a
result of the settlement.
A reconciliation of the income tax provision at the U.S. federal statutory
rate (34%) to the income tax provision at the effective tax rate is as follows:
<TABLE>
<CAPTION>
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
(IN THOUSANDS)
Income taxes computed at the U.S. federal statutory rate......... $ 869 $ 1,189 $ 2,382
State taxes (net of federal benefit)............................. 161 187 385
IRS settlement................................................... -- 1,000 --
Other individually immaterial items.............................. 24 27 138
--------- --------- ---------
Income tax provision............................................. $ 1,054 $ 2,403 $ 2,905
--------- --------- ---------
--------- --------- ---------
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax
F-16
<PAGE>
BURKE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES (CONTINUED)
purposes. Significant components of the Company's deferred tax assets and
liabilities at fiscal years ended 1995 and 1996 are as follows:
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
(IN THOUSANDS)
Deferred tax liabilities:
Increase in assets as a result of acquisition in 1988.................. $ (3,141) $ (3,064)
Depreciation........................................................... (334) (380)
Other.................................................................. (137) (115)
--------- ---------
Total deferred tax liabilities........................................... (3,612) (3,559)
Deferred tax assets:
Receivable allowances and inventory valuation.......................... 483 387
State taxes............................................................ 117 199
Warranty reserve....................................................... 204 196
Accrued vacation....................................................... 258 255
Other.................................................................. 348 79
--------- ---------
Total deferred tax assets................................................ 1,410 1,116
Valuation allowance...................................................... -- --
--------- ---------
Net deferred tax liability............................................... $ (2,202) $ (2,443)
--------- ---------
--------- ---------
</TABLE>
In addition to the settlement described above, the Company received a
"Notice of Deficiency" from the IRS for 1992 and 1993, also related to the
reorganization of the Company in 1988, resulting in proposed tax deficiencies of
approximately $1,534,000. Penalties on these proposed deficiencies would be
$290,000. The Company filed a tax court petition contesting the proposed tax
deficiencies. The Company believes that it has meritorious legal defenses to the
proposed IRS adjustments. Based upon the Company's analysis of the issues,
management believes that an adequate provision has been made for additional
liabilities that may ultimately result.
9. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1994 1995 1996
--------- ---------- ---------
<S> <C> <C> <C>
(IN THOUSANDS)
Cash paid for interest.......................................................... $ 2,438 $ 2,683 $ 1,950
Cash paid for income taxes...................................................... $ 1,395 $ 1,315 $ 2,771
Borrowings of long-term debt.................................................... $ 54,638 $ 101,393 $ 79,516
Repayments and settlement of long-term debt and capital lease obligations....... $ 57,964 $ 97,702 $ 83,678
Long-term capital lease obligations incurred in connection with the acquisition
of equipment.................................................................. $ 80 $ -- $ --
Note payable issued in connection with asset acquisition........................ $ -- $ 1,000 $ --
</TABLE>
F-17
<PAGE>
BURKE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. SUBSEQUENT EVENTS
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 Tauton, Massachusetts, through June 6, 2000.
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; (ii) received $20.0 million in cash from an investor group for Common
Stock and (iii) received $18.0 million in cash for the issuance of Redeemable
Preferred Stock (the "Transactions"). In addition, the Company entered into a
credit facility which provides for revolving credit borrowings of up to $15.0
million.
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"). The Guarantor Subsidiaries comprise all of the
direct and indirect subsidiaries of the Company (other than the Non-Guarantor
Subsidiary, which has no assets or liabilities and generates none of the
consolidated revenues of the Company). Each of the Guarantor Subsidiarys'
guarantees of the Company's $110 million senior notes, is full, unconditional
and joint and several. The Company's subsidiaries have no operations or assets
and liabilities and therefore no separate financial statements of the Company's
subsidiaries are presented because management has determined that they are not
material to investors.
F-18
<PAGE>
BURKE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-------------------------
<S> <C> <C>
SEPT 27,
1996 OCT 3, 1997
------------ -----------
Net sales.............................................................................. $ 54,476 $ 68,785
Costs and expenses:
Cost of sales........................................................................ 37,722 48,423
Selling.............................................................................. 5,097 5,508
General and administrative........................................................... 3,208 5,220
Stock option purchase................................................................ -- 14,105
------------ -----------
Income (loss)from operations........................................................... 8,449 (4,471)
Interest expense, net.................................................................. 2,054 2,625
------------ -----------
Income (loss) before income tax provision (benefit) and discontinued operation......... 6,395 (7,096)
Income tax provision (benefit)......................................................... 2,558 (2,555)
------------ -----------
Income (loss) from continuing operations before discontinued operation................. 3,837 (4,541)
Loss from discontinued operation, net of income tax benefit of $205.................... (308) --
Loss on disposal of discontinued operation, net of income tax benefit of $356.......... (624) --
------------ -----------
Net income (loss)...................................................................... $ 2,905 $ (4,541)
------------ -----------
------------ -----------
</TABLE>
The accompanying Notes to Consolidated Financial Statements (Unaudited)
are an integral part of these statements.
F-19
<PAGE>
BURKE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JANUARY 3, OCTOBER 3
1997 1997
----------- -----------
<S> <C> <C>
(1) (UNAUDITED)
ASSETS
Current assets:
Cash................................................................................... $ -- $ 10,670
Trade accounts receivable, less allowance of $189 in 1996 and $331 in 1997............. 9,155 12,547
Inventories............................................................................ 8,616 9,924
Prepaid expenses and other current assets.............................................. 630 572
Refundable income taxes................................................................ -- 2,796
Deferred income tax assets............................................................. 1,014 1,014
----------- -----------
Total current assets................................................................. 19,415 37,523
Property, plant, and equipment:
Land and improvements.................................................................. 1,884 1,884
Buildings and improvements............................................................. 9,151 9,151
Equipment.............................................................................. 12,329 12,777
Leasehold improvements................................................................. 555 555
----------- -----------
23,919 24,367
Accumulated depreciation and amortization................................................ 9,101 10,126
----------- -----------
14,818 14,241
Construction-in-process.................................................................. 183 462
----------- -----------
15,001 14,703
Prepaid pension cost..................................................................... 542 542
Deferred financing costs................................................................. 4,877
Goodwill, net............................................................................ 1,529 1,495
Note receivable from an affiliate of the principal shareholders.......................... 4,066 --
Other assets............................................................................. 120 112
----------- -----------
Total assets......................................................................... $ 40,673 $ 59,252
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Checks outstanding in excess of funds deposited........................................ $ 828 $ --
Trade accounts payable and accrued expenses............................................ 6,454 7,720
Accrued compensation and related liabilities........................................... 1,937 2,420
Income taxes payable................................................................... 2,468 --
Current portion of long-term obligations............................................... 2,400 --
Payable to shareholders................................................................ -- 5,882
----------- -----------
Total current liabilities............................................................ 14,087 16,022
Long-term obligations, less current portion.............................................. 16,469 --
Senior Notes............................................................................. -- 110,000
Other noncurrent liabilities............................................................. 720 712
Deferred income tax liabilities.......................................................... 3,457 3,457
Subordinated debt........................................................................ 1,657 --
Redeemable Preferred stock, no par value:
Authorized shares -- 0 in 1996 and 50 in 1997. Issued and outstanding shares -- 0 in
1996 and 18 in 1997.................................................................. -- 15,681
Shareholders' equity:
Class A common stock, no par value:
Authorized shares--20,000
Issued and outstanding shares--9,377 in 1996 and 3,857 in 1997....................... 6,716 25,464
Convertible Class B common stock, no par value:
Authorized shares--5,000
Issued and outstanding shares--none.................................................. -- --
Accumulated deficit.................................................................... (2,433) (112,084)
----------- -----------
Total shareholders' equity (deficit)................................................. 4,283 (86,620)
----------- -----------
Total liabilities and shareholders' equity........................................... $ 40,673 $ 59,252
----------- -----------
----------- -----------
</TABLE>
- ------------------------------
(1) The information in this column was derived from the Company's audited
consolidated financial statements at January 3, 1997.
The accompanying Notes to Consolidated Financial Statements (Unaudited)
are an integral part of these statements.
F-20
<PAGE>
BURKE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
---------------------
<S> <C> <C>
SEPT 27, OCT 3,
1996 1997
--------- ----------
OPERATING ACTIVITIES
Net income (loss)........................................................................... $ 2,905 $ (4,541)
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization:
Property, plant, and equipment.......................................................... 1,049 1,025
Deferred financing costs................................................................ -- 66
Goodwill................................................................................ 30 34
Debt discounts arising from warrants.................................................... 28 93
Interest on shareholder note............................................................ -- (240)
Loss on dispoal of discontinued operations................................................ 624 --
Changes in net assets of discontinued operations.......................................... 1,401 --
Changes in operating assets and liabilities:
Trade accounts receivable............................................................... (1,310) (3,392)
Inventories............................................................................. (274) (1,308)
Prepaid expenses and other current assets............................................... (331) 58
Refundable income tax................................................................... (206) (5,264)
Deferred income tax..................................................................... 9 --
Other assets............................................................................ (24) 8
Trade accounts payable and accrued expenses............................................. 2,996 1,266
Accrued compensation and related liabilities............................................ (306) 483
Other noncurrent liabilities............................................................ -- (8)
--------- ----------
Net cash provided by (used in) operating activities......................................... $ 6,591 (11,720)
INVESTING ACTIVITIES
Purchases of property, plant, and equipment................................................. (1,319) (727)
Proceeds from disposal of discontinued operation............................................ 1,818 --
Note receivable from an affiliate of the principal shareholders............................. -- 4,306
--------- ----------
Net cash provided by investing activities................................................... 499 3,579
FINANCING ACTIVITIES
Net borrowings (repayments) of long-term debt............................................... (5,890) --
Checks outstanding in excess of funds deposited............................................. (1,030) (828)
Payable to shareholder...................................................................... -- 5,882
Repurchase of common stock and warrants..................................................... (235) --
Proceeds from sales of shares through employee stock plans.................................. 65 10
--------- ----------
Deferred financing costs.................................................................... -- (4,943)
Re-payment of long term debt................................................................ -- (18,869)
Re-payment of sub debt...................................................................... -- (1,750)
Issuance of long-term debt.................................................................. -- 110,000
Issuance of preferred stock, net of issuance costs.......................................... -- 17,895
Issuance for common stock, net of issuance costs............................................ -- 18,724
Net recapitalization consideration.......................................................... -- (107,310)
--------- ----------
Net cash provided by (used in) financing activities......................................... (7,090) 18,811
--------- ----------
Change in cash.............................................................................. -- 10,670
Cash at beginning of period................................................................. -- --
--------- ----------
Cash at end of period....................................................................... $ -- $ 10,670
--------- ----------
--------- ----------
</TABLE>
The accompanying Notes to Consolidated Financial Statements (Unaudited)
are an integral part of these statements.
F-21
<PAGE>
BURKE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION AND ACCOUNTING PERIODS
The accompanying consolidated financial statements of Burke Industries, Inc.
and subsidiaries (the Company) have been prepared in accordance with generally
accepted accounting principles for interim financial information and with Rule
10-01 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for fair presentation have
been included.
Operating results for the nine months ended October 3, 1997 are not
necessarily indicative of the results that may be expected for the year ending
January 2, 1998.
The Company uses a 52 to 53-week fiscal year ending on the Friday closest to
December 31. The Company also follows a 4/4/5 week quarterly cycle. The
nine-month periods ended on September 27, 1996 and October 3, 1997.
2. 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
reporting period. Actual results could differ from those estimates.
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
JANUARY 3, 1997 OCTOBER 3, 1997
--------------- ---------------
<S> <C> <C>
(IN THOUSANDS)
Raw materials................................................ $ 3,260 $ 4,205
Work-in-process.............................................. 1,433 1,637
Finished goods............................................... 3,923 4,082
------ ------
$ 8,616 $ 9,924
------ ------
------ ------
</TABLE>
4. DISCONTINUED OPERATION
On June 28, 1996, the Company disposed of certain assets related to its
custom-molded organic rubber products manufacturing operations for cash and
future consideration. The 1996 loss from discontinued operation includes results
through June 28, 1996.
F-22
<PAGE>
BURKE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
5. SHAREHOLDERS' EQUITY
Changes in shareholders' equity from January 4, 1997 to October 3, 1997 are
as follows (in thousands):
<TABLE>
<CAPTION>
CLASS A COMMON STOCK
-------------------- ACCUMULATED
SHARES AMOUNT DEFICIT
--------- --------- ------------
<S> <C> <C> <C>
Balance at January 4, 1997.................................. 9,377 $ 6,716 $ (2,433)
Net income................................................ -- -- (4,541)
Proceeds from sales of shares through employees stock
plans................................................... 22 10
Increase in value of shareholder warrants................. -- 5,100 (5,100)
Preferred stock dividend in kind.......................... (259)
Warrant accretion......................................... (27)
Preferred stock warrant value............................. 2,500
Proceeds from sales of common stock, net of issuance
costs................................................... 3,134 18,724
Recapitalization of Company............................... (8,676) (5,086) (102,224)
--------- --------- ------------
Balance at October 3, 1997.................................. 3,857 $ 25,464 $ (112,084)
--------- --------- ------------
--------- --------- ------------
</TABLE>
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 Tauton, Massachusetts through June 6, 2000.
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; (ii) received $20.0 million in cash from an investor group for Common
Stock and (iii) received $18.0 million in cash for the issuance of Redeemable
Preferred Stock (the "Transactions"). In addition, the Company entered into a
credit facility which provides for revolving credit borrowings of up to $15.0
million.
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 Subsidiarys' guarantees of
the Company's $110 million senior notes, is full, unconditional and joint and
several. The Company's subsidiaries have no operations or assets and liabilities
and therefore no separate financial statements of the Company's subsidiaries are
presented.
In connection with the above August 1997 transactions, the tax benefit the
Company will receive associated with the cost to purchase options issued and
outstanding under the Company's stock option plan, in addition to other tax
savings associated with the transaction, will be distributed to the Company's
continuing and former shareholders when realized by the Company. Accordingly the
Company has recognized a liability of approximately $5,882 at October 3, 1997.
F-23
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ALL TENDERED OLD NOTES, EXECUTED LETTERS OF TRANSMITTAL AND OTHER RELATED
DOCUMENTS SHOULD BE DIRECTED TO THE EXCHANGE AGENT. QUESTIONS AND REQUESTS FOR
ADDITIONAL COPIES OF THE PROSPECTUS, LETTER OF TRANSMITTAL AND OTHER RELATED
DOCUMENTS SHOULD BE ADDRESSED TO THE EXCHANGE AGENT AS FOLLOWS:
BY REGISTERED OR CERTIFIED MAIL:
UNITED STATES TRUST COMPANY OF NEW YORK
P.O. BOX 844
COOPER STATION
NEW YORK, NY 10276-0844
ATTN: CORPORATE TRUST SERVICES
BY FACSIMILE:
(212) 420-6152
BY OVERNIGHT COURIER:
UNITED STATES TRUST COMPANY OF NEW YORK
770 BROADWAY, 13TH FLOOR
NEW YORK, NEW YORK 10003
ATTN: CORPORATE TRUST SERVICES
BY HAND:
UNITED STATES TRUST COMPANY OF NEW YORK
111 BROADWAY
LOWER LEVEL
NEW YORK, NEW YORK 10006
ATTN: CORPORATE TRUST SERVICES
CONFIRM BY TELEPHONE 800-548-6565
(ORIGINALS OF ALL DOCUMENTS SUBMITTED BY FACSIMILE SHOULD BE SENT PROMPTLY
BY HAND, OVERNIGHT COURIER, OR REGISTERED OR CERTIFIED MAIL)
NO BROKER DEALER OR OTHER PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFER
MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED
IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY SECURITY OTHER THAN THE SECURITIES OFFERED HEREBY NOR DOES IT CONSTITUTE
AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES
OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE
SUCH AN OFFER OR SOLICITATION TO SUCH PERSON. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY
IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF.
UNTIL , 1998 (90 DAYS FROM THE DATE OF THIS PROSPECTUS) ALL
DEALERS EFFECTING TRANSACTIONS IN THE NEW NOTES, WHETHER OR NOT PARTICIPATING IN
THIS EXCHANGE OFFER, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
OFFER TO EXCHANGE ALL OUTSTANDING 10% SENIOR NOTES DUE 2007 ($110,000,000
PRINCIPAL AMOUNT) FOR 10% SENIOR NOTES DUE 2007.
[LOGO]
PAYMENT OF PRINCIPAL AND INTEREST
UNCONDITIONALLY GUARANTEED BY ITS SUBSIDIARIES
---------------------
PROSPECTUS
---------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
INDEX TO FINANCIAL
STATEMENT SCHEDULES
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Auditors............................................................................. S-2
Schedule II--Valuation and Qualifying Accounts............................................................. S-3
</TABLE>
S-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Burke Industries, Inc. and Subsidiaries
We have audited the consolidated financial statements of Burke Industries,
Inc. as of January 3, 1997 and December 29, 1995, and for each of the three
years in the period ended January 3, 1997, and have issued our report thereon
dated March 7, 1997 except for note 10, as to which the date is August 20, 1997
included elsewhere in this Registration Statement. Our audits also included the
financial statement schedule listed in Item 21(b) of this Registration
Statement. This Schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
San Jose, California
March 7, 1997
S-2
<PAGE>
SCHEDULE II
VALUATION & QUALIFYING ACCOUNTS
BURKE INDUSTRIES, INC.
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO
BEGINNING OF COSTS AND (A) BALANCE AT
DESCRIPTION PERIOD EXPENSES DEDUCTIONS END OF PERIOD
- ------------------------------------------------------------ --------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts
(deducted from accounts receivable)
Year ended January 3, 1997................................ $ 336 $ 225 $ 372 $ 189
Year ended December 29, 1995.............................. 95 367 126 336
Year ended December 30, 1994.............................. 75 100 80 95
</TABLE>
- ------------------------
(a) Includes write-offs and reversals
S-3
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company is a California corporation. Section 317 of the California
Corporations Code authorizes the indemnification by a California corporation of
any person who was or is a party or is threatened to be made a party to any
proceeding by reason of that person's status as an agent of the corporation;
provided that no such indemnification may be provided for any person if he or
she shall (i) not have acted in good faith and in a manner the person reasonably
believed to be in the best interests of the corporation, or (ii) in any criminal
proceeding, not have had reasonable cause to believe his or her conduct was not
unlawful. In the case of actions brought by or in the right of the corporation,
indemnification may only be provided if the person acted in good faith, and in a
manner the person believe to be in the best interests of the corporation and its
shareholders. Indemnification must be provided to the extent that an agent has
been successful, on the merits or otherwise, in defense of an action of the type
described in the first and second sentences of this paragraph.
The Bylaws of the Company provide that it shall indemnify and hold harmless
any person who is or was a director or officer of the Company, or who is or was
serving at the request of the Board of Directors of the Company as a director,
officer, employee or agent of another foreign or domestic corporation,
partnership, joint venture, trust or other enterprise (an "Agent"), from and
against any expenses, judgments, fines, settlements, and other amounts actually
and reasonably incurred in connection with any "proceeding" (as defined in
Section 317(a)) to the fullest extent permitted by applicable law. In the event
of such person's death, the right of indemnification under the Bylaws of the
Company shall extend to such person's legal representatives. The right of
indemnification under the Company's ByLaws is not exclusive of any other rights
such person may have whether by law or under any agreement, insurance policy,
vote of directors or shareholders, or otherwise.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------- -------------------------------------------------------------------------------------------
<C> <S>
1 Purchase Agreement, dated August 14, 1997, between the Company and the Initial Purchaser.
2.1 Agreement and Plan of Merger, dated as of August 13, 1997, by and among the Company, the
Company Shareholders, JFLEI and MergerCo.**
3.1 Articles of Incorporation of the Company.**
3.2 Bylaws of the Company.**
3.3 Articles of Incorporation of Burke Flooring Products, Inc.**
3.4 Bylaws of Burke Flooring Products, Inc.**
3.5 Articles of Incorporation of Burke Rubber Company, Inc.**
3.6 Bylaws of Burke Rubber Company, Inc.**
3.7 Articles of Incorporation of Burke Custom Processing, Inc.**
3.8 Bylaws of Burke Custom Processing, Inc.**
4.1 Indenture among the Company, the Subsidiary Guarantors and United States Trust Company of
New York, relating to the Old Notes and the New Notes, dated as of August 20, 1997.**
4.2 Form of Note (included in Exhibit 4.1).**
4.3 Registration Rights Agreement, dated August 20, 1997, between the Company and the
Holders.**
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------- -------------------------------------------------------------------------------------------
<C> <S>
5.1 Opinion of Gibson, Dunn & Crutcher LLP, including consent.*
8.1 Opinion of Gibson, Dunn & Crutcher LLP with regard to federal income tax consequences of
the Exchange Offer.*
10.1 Loan and Security Agreement, dated August 20, 1997, between the Company, the Lenders and
NationsBank, N.A.**
10.2 Form of Revolving Note.**
10.3 Subsidiary Guaranty, dated August 20, 1997, between the Company and the Subsidiaries.**
10.4 Subsidiary Security Agreement, dated August 20, 1997, between the Company and the
Subsidiaries.**
10.5 Stock Pledge Agreement, dated August 20, 1997.**
10.6 Investment Agreement, dated August 20, 1997, between the Company and preferred
shareholders.**
10.7 Shareholders' Agreement, dated August 20, 1997, between the Company and the shareholders.**
10.8 Shareholders' Registration Rights Agreement, dated August 20, 1997, between the Company and
the shareholders.*
10.9 Warrantholders' Registration Rights Agreement, dated August 20, 1997, between the Company
and the warrantholders.**
10.10 Form of Warrant Certificate.**
10.11 Management Agreement, dated August 20, 1997, between the Company and J. F. Lehman &
Company.**
10.12 Lease Agreement, dated April 30, 1997 between the Company and Senter Properties, LLC for
the premises at 2049 Senter Road, San Jose, CA.**
10.13 Lease Agreement, dated May 1, 1996, between the Company and SSMRT Bensenville Industrial
Park (3), Inc. for the premises at 870 Thomas Drive, Bensenville, IL.**
10.14 Lease Agreement, dated October 20, 1995, between the Company and Lincoln Property Company
for the premises at 13767 Freeway Drive, Santa Fe Springs, CA.**
10.15 Lease Agreement, dated April 25, 1983, between the Company and Donald M. Hypes for the
premises at 14910 Carmenita Blvd., Norwalk, CA.**
10.16 Lease Agreement, dated March 29, 1996, between the Company and S&M Development Co., a
general partnership for the premises at 13615 Excelsior Drive, Santa Fe Springs, CA.**
10.17 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.**
10.18 Sublease Agreement, dated February 20, 1992, between Burke Rubber Company for the premises
at 107 South Riverside Drive, Modesto, CA.**
10.19 Servicing Agreement, dated April 26, 1996, between the Company and Westland Technologies.**
12.1 Statement re: Computation of Ratios of Earnings to Fixed Charges and Combined Fixed Charges
and Preferred Stock Dividends.
21.1 Subsidiaries of the Company.**
23.1 Consent of Gibson, Dunn & Crutcher (to be included in Exhibit 5.1) LLP.*
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------- -------------------------------------------------------------------------------------------
<C> <S>
23.2 Consent of Ernst & Young LLP.
24.1 Powers of Attorney (see pages II-4 through II-8 of this Registration Statement).**
25.1 Statement of Eligibility of United States Trust Company of New York, as trustee under the
Indenture filed as Exhibits 4.1 and 4.2, on Form T-1.
27.1 Financial Data Schedule.
99.1 Form of Letter of Transmittal to be used in connection with the Notes Exchange Offer.*
99.2 Notice of Guaranteed Delivery regarding Old Notes.*
</TABLE>
- ------------------------
* To be filed by amendment.
** Previously Filed.
(b) Financial Statement Schedule
The following financial statement schedule is filed with Part II of this
Registration Statement:
<TABLE>
<CAPTION>
Schedule Number Description of Schedule
- ------------------------------------- -------------------------------------
<S> <C>
II Valuation and Qualifying Accounts
</TABLE>
ITEM 22. UNDERTAKINGS.
The undersigned registrants hereby undertake with respect to the securities
offered by them:
1. Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "Act") may be permitted as to directors, officers
and controlling persons of any Registrant pursuant to the provisions described
in Item 20 or otherwise, the Registrants have been advised that in the opinion
of the Commission such indemnification is against public policy as expressed in
the Act and is, therefore unenforceable. In the event a claim for
indemnification against such liabilities (other than the payment by any
Registrant of expenses incurred or paid by a director, officer or controlling
person of such Registrant in the successful defense of any action, suit, or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, such Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
2. The undersigned Registrants hereby undertake to respond to requests for
information that is incorporated by reference into the Prospectus pursuant to
Items 4, 10(b), 11 or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
3. The undersigned Registrants hereby undertake to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
4. To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
II-3
<PAGE>
deviation from the low or high and of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424 (b) if, in the aggregate, the changes in volume and
price represent no more than 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in
the effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
5. That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
6. To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of San
Jose, State of California on the 26th day of November, 1997.
BURKE INDUSTRIES, INC.,
a California corporation
By: /s/ ROCCO C. GENOVESE
-----------------------------------------
Rocco C. Genovese,
CHIEF EXECUTIVE OFFICER AND PRESIDENT
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
Director, Chief Executive
/s/ ROCCO C. GENOVESE Officer and President
- ------------------------------ (Principal Executive November 26, 1997
Rocco C. Genovese Officer)
* Vice President--Finance
- ------------------------------ (Principal Financial and November 26, 1997
David E. Worthington Accounting Officer)
*
- ------------------------------ Director November 26, 1997
Reed C. Wolthausen
*
- ------------------------------ Director November 26, 1997
John F. Lehman
*
- ------------------------------ Director November 26, 1997
Donald Glickman
*
- ------------------------------ Director November 26, 1997
George Sawyer
*
- ------------------------------ Director November 26, 1997
Keith Oster
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
*
- ------------------------------ Director November 26, 1997
Oliver C. Boileau
*
- ------------------------------ Director November 26, 1997
Thomas G. Pownall
*
- ------------------------------ Director November 26, 1997
Bruce D. Gorchow
*By: /s/ ROCCO C. GENOVESE
- ------------------------------
Rocco C. Genovese
ATTORNEY-IN-FACT
</TABLE>
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of San
Jose, State of California on the 26th day of November, 1997.
BURKE FLOORING PRODUCTS, INC.,
a California corporation
By: /s/ ROCCO C. GENOVESE
-----------------------------------------
Rocco C. Genovese,
PRESIDENT
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
/s/ ROCCO C. GENOVESE
- ------------------------------ President (Principal November 26, 1997
Rocco C. Genovese Executive Officer)
* Vice President--Finance
- ------------------------------ (Principal Financial and November 26, 1997
David E. Worthington Accounting Officer)
*
- ------------------------------ Director November 26, 1997
Keith Oster
*By: /s/ ROCCO C. GENOVESE
- ------------------------------
Rocco C. Genovese
ATTORNEY-IN-FACT
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of San
Jose, State of California on the 26th day of November, 1997.
BURKE RUBBER COMPANY, INC.,
a California corporation
By: /s/ ROCCO C. GENOVESE
-----------------------------------------
Rocco C. Genovese,
PRESIDENT
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
/s/ ROCCO C. GENOVESE
- ------------------------------ President (Principal November 26, 1997
Rocco C. Genovese Executive Officer)
* Vice President--Finance
- ------------------------------ (Principal Financial and November 26, 1997
David E. Worthington Accounting Officer)
*
- ------------------------------ Director November 26, 1997
Keith Oster
*By: /s/ ROCCO C. GENOVESE
-------------------------
Rocco C. Genovese,
ATTORNEY-IN-FACT
II-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of San
Jose, State of California on the 26th day of November, 1997.
BURKE CUSTOM PROCESSING, INC., a
California corporation
By: /s/ ROCCO C. GENOVESE
-----------------------------------------
Rocco C. Genovese,
PRESIDENT
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
/s/ ROCCO C. GENOVESE
- ------------------------------ President (Principal November 26, 1997
Rocco C. Genovese Executive Officer)
* Vice President--Finance
- ------------------------------ (Principal Financial and November 26, 1997
David E. Worthington Accounting Officer)
*
- ------------------------------ Director November 26, 1997
Keith Oster
*By: /s/ ROCCO C. GENOVESE
-------------------------
Rocco C. Genovese,
ATTORNEY-IN-FACT
II-9
<PAGE>
REGISTRATION NO. 333-36675
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
EXHIBITS
TO
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
BURKE INDUSTRIES, INC.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
1 Purchase Agreement, dated August 14, 1997, between the Company and the Initial Purchaser.
2.1 Agreement and Plan of Merger, dated as of August 13, 1997, by and among the Company, the Company
Shareholders, JFLEI and MergerCo.**
3.1 Articles of Incorporation of the Company.**
3.2 Bylaws of the Company.**
3.3 Articles of Incorporation of Burke Flooring Products, Inc.**
3.4 Bylaws of Burke Flooring Products, Inc.**
3.5 Articles of Incorporation of Burke Rubber Company, Inc.**
3.6 Bylaws of Burke Rubber Company, Inc.**
3.7 Articles of Incorporation of Burke Custom Processing, Inc.**
3.8 Bylaws of Burke Custom Processing, Inc.**
4.1 Indenture among the Company, the Subsidiary Guarantors and United States Trust Company of New York,
relating to the Old Notes and the New Notes, dated as of August 20, 1997.**
4.2 Form of Note (included in Exhibit 4.1).**
4.3 Registration Rights Agreement, dated August 20, 1997, between the Company and the Holders.**
5.1 Opinion of Gibson, Dunn & Crutcher LLP, including consent.*
8.1 Opinion of Gibson, Dunn & Crutcher LLP with regard to federal income tax consequences of the Exchange
Offer.*
10.1 Loan and Security Agreement, dated August 20, 1997, between the Company, the Lenders and NationsBank,
N.A.**
10.2 Form of Revolving Note.**
10.3 Subsidiary Guaranty, dated August 20, 1997, between the Company and the Subsidiaries.**
10.4 Subsidiary Security Agreement, dated August 20, 1997, between the Company and the Subsidiaries.**
10.5 Stock Pledge Agreement, dated August 20, 1997.**
10.6 Investment Agreement, dated August 20, 1997, between the Company and preferred shareholders.**
10.7 Shareholders' Agreement, dated August 20, 1997, between the Company and the shareholders.**
10.8 Shareholders' Registration Rights Agreement, dated August 20, 1997, between the Company and the
shareholders.*
10.9 Warrantholders' Registration Rights Agreement, dated August 20, 1997, between the Company and the
warrantholders.**
10.10 Form of Warrant Certificate.**
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
10.11 Management Agreement, dated August 20, 1997, between the Company and J. F. Lehman & Company.**
10.12 Lease Agreement, dated April 30, 1997 between the Company and Senter Properties, LLC for the premises
at 2049 Senter Road, San Jose, CA.**
10.13 Lease Agreement, dated May 1, 1996, between the Company and SSMRT Bensenville Industrial Park (3),
Inc. for the premises at 870 Thomas Drive, Bensenville, IL.**
10.14 Lease Agreement, dated October 20, 1995, between the Company and Lincoln Property Company for the
premises at 13767 Freeway Drive, Santa Fe Springs, CA.**
10.15 Lease Agreement, dated April 25, 1983, between the Company and Donald M. Hypes for the premises at
14910 Carmenita Blvd., Norwalk, CA.**
10.16 Lease Agreement, dated March 29, 1996, between the Company and S&M Development Co., a general
partnership for the premises at 13615 Excelsior Drive, Santa Fe Springs, CA.**
10.17 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.**
10.18 Sublease Agreement, dated February 20, 1992, between Burke Rubber Company for the premises at 107
South Riverside Drive, Modesto, CA.**
10.19 Servicing Agreement, dated June 27, 1996, between the Company and Westland Technologies.**
12.1 Statement re: Computation of Ratios of Earnings to Fixed Charges and Combined Fixed Charges and
Preferred Stock Dividends.
21.1 Subsidiaries of the Company.**
23.1 Consent of Gibson, Dunn & Crutcher (to be included in Exhibit 5.1) LLP.*
23.2 Consent of Ernst & Young LLP.
24.1 Powers of Attorney (see pages II-4 through II-8 of this Registration Statement).**
25.1 Statement of Eligibility of United States Trust Company of New York, as trustee under the Indenture
filed as Exhibits 4.1 and 4.2, on Form T-1.
27.1 Financial Data Schedule.
99.1 Form of Letter of Transmittal to be used in connection with the Notes Exchange Offer.*
99.2 Notice of Guaranteed Delivery regarding Old Notes.*
</TABLE>
- ------------------------
* To be filed by amendment.
** Previously filed.
<PAGE>
JFL MERGER CO.
BURKE INDUSTRIES, INC.
$110,000,000
10% SENIOR NOTES DUE 2007
PURCHASE AGREEMENT
August 14, 1997
NationsBanc Capital Markets, Inc.
NationsBank Corporate Center
100 North Tryon Street
Charlotte, North Carolina 28255
Ladies and Gentlemen:
A wholly owned subsidiary of J.F. Lehman Equity Investors I, L.P.
("JFLEI"), JFL Merger Co., a California corporation (the "MergerCo."), proposes
to issue and sell to you (the "Initial Purchaser"), $110,000,000 principal
amount of 10% Senior Notes Due 2007 (the "Notes") of Burke Industries, Inc., a
California corporation (the "Company"), who shall succeed to MergerCo.'s
obligation to deliver the Notes by merging with MergerCo. concurrently with the
Closing Date (as defined herein). The Notes are to be issued under an indenture
(the "Indenture") to be dated as of August 15, 1997 between the Company and
certain of the subsidiaries of the Company acting as guarantors with respect to
the obligations of the Company thereunder (the "Guarantors") and U.S. Trust
Company of New York, N.A., as trustee (the "Trustee").
The sale of the Notes to the Initial Purchaser will be made without
registration of the Notes under the Securities Act of 1933, as amended (the
"Securities Act"), in reliance upon exemptions from the registration
requirements of the Securities Act. The Initial Purchaser has advised MergerCo.
that the Initial Purchaser will offer and sell the Notes purchased by it
hereunder in accordance with Section 4 hereof as soon as it deems advisable.
The Notes will have the benefit of certain registration rights, pursuant to a
Registration Rights Agreement, substantially in the form attached hereto as
Exhibit A, to be dated as of August 20, 1997, between the Company and the
Initial Purchaser (the "Registration Rights Agreement").
In connection with the sale of the Notes, MergerCo. and the Company have
prepared a preliminary offering Memorandum, dated July 31, 1997, (the
"Preliminary Memorandum") and a final offering memorandum, dated August 14, 1997
(the "Final Memorandum"). Each of the Preliminary Memorandum and the Final
Memorandum sets forth certain information concerning the Company, MergerCo. and
the Notes. MergerCo. hereby confirms that it has authorized the use of the
Preliminary Memorandum and the Final Memorandum, and any amendment or supplement
thereto, in connection with the offer and sale of the Notes by the Initial
Purchaser.
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Unless stated to the contrary, all references herein to the Final Memorandum are
to the Final Memorandum at the Execution Time (as defined below) and are not
meant to include any amendment or supplement, or any information incorporated by
reference therein, subsequent to the Execution Time.
1. INTRODUCTION. The Securities are being issued and sold in
connection with the recapitalization (the "Recapitalization") of the Company
by means of a merger of MergerCo. into the Company, with the Company as the
surviving corporation, pursuant to an Agreement and Plan of Merger, dated as
of August 13, 1997 (the "Merger Agreement") among the Company, J.F. Lehman &
Company, a Delaware corporation, MergerCo., and certain shareholders of the
Company. Pursuant to the Merger, all shares of the Company's common stock
(the "Common Stock"), other than those retained by certain members of
management and certain other shareholders (collectively, the "Continuing
Shareholders") of the Company will be converted into the right to receive
$9.31 per share in cash (the "Recapitalization Consideration"). Immediately
after consummation of the Recapitalization, JFLEI and the Continuing
Shareholders will own 65% and 15%, respectively, of the issued and
outstanding shares of the Company's Common Stock on a fully diluted basis.
Certain warrants to purchase the Company's Common Stock (the "Warrants")
will be issued in conjunction with the issuance of the 11 1/2% Series A
Cumulative Redeemable Preferred Stock (the "Preferred Stock") of the Company.
The Warrants will represent 20% of the shares of the Company's Common Stock
on a fully diluted basis. The time of the consummation of the
Recapitalization is referred to herein as the "Effective Time."
In order to finance the Recapitalization and the relevant fees, expenses
and commissions, including those payable under this agreement, the Company will
require financing of approximately $154.6 million. Of such amount:
(i) approximately $110.0 million has been provided through the issuance and sale
of the Senior Notes; (ii) approximately $18.0 million has been provided through
the issuance and sale of Preferred Stock and Warrants; (iii) approximately $20.0
million has been provided through the investment of JFLEI; and
(iv) approximately $6.6 million has been provided through the investment of the
Continuing Shareholders.
The Merger Agreement and the documents entered into in connection therewith
including, without limitation, the agreements attached thereto as exhibits, are
herein collectively referred to as the "Merger Documents." This Purchase
Agreement (this "Agreement"), the Notes and the Indenture are herein
collectively referred to as the "Offering Documents." The Offering Documents,
the Credit Agreement among MergerCo., NationsBank, N.A., as administrative
agent, and other lending institutions party thereto (the "New Credit Facility"),
to which the Company will become subject upon consummation of the Merger, the
Merger Documents and the other documents pursuant to which the Recapitalization
will be effected and financed (including, but not limited to, documents
providing for the repayment of the Company's existing credit facility between
Fleet Capital Corporation and the Company, documents providing for the repayment
of the Company's 12 1/4% Subordinated Notes due October 10, 2000 and documents
providing for the exercise of the Company's outstanding employee stock options)
are herein collectively referred to as the "Transaction Documents."
2. REPRESENTATIONS AND WARRANTIES. Each of JFLEI and MergerCo., jointly
and severally, represents and warrants to the Initial Purchaser that:
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(a) The Preliminary Memorandum, at the date thereof, did not contain
any untrue statement of a material fact or omit to state any material fact
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading. The Final Memorandum, at the
date hereof, does not, and at the Closing Date (as defined below) will not
(or, if amended or supplemented, the Final Memorandum as amended or
supplemented at the date of any such amendment or supplement and at the
Closing Date, will not), contain any untrue statement of a material fact or
omit to state any material fact necessary to make the statements therein,
in the light of the circumstances under which they were made, not
misleading; PROVIDED, HOWEVER, that JFLEI and MergerCo. make no
representation or warranty as to the information contained in or omitted
from the Preliminary Memorandum or the Final Memorandum, or any amendment
or supplement thereto, in reliance upon and in conformity with information
furnished in writing to the Company or MergerCo. by or on behalf of the
Initial Purchaser specifically for inclusion therein.
(b) Neither the Company, MergerCo. nor any "Affiliate" (as defined in
Rule 501(b) of Regulation D under the Securities Act ("Regulation D") ) of
the Company or MergerCo. or any person acting on its or their behalf (other
than the Initial Purchaser, as to which no representation is made) has,
directly or indirectly, made offers or sales of any security, or solicited
offers to buy any security, under circumstances that would require the
registration of the Notes under the Securities Act.
(c) Neither the Company, MergerCo. nor any Affiliate, or any person
acting on its or their behalf (other than the Initial Purchaser, as to
which. no representation is made) has engaged in any form of general
solicitation or general advertising (within the meaning of Regulation D) in
connection with any offer or sale of the Notes in the United States.
(d) The Notes satisfy the eligibility requirements of Rule 144A(d)(3)
under the Securities Act.
(e) Neither the Company nor MergerCo. is or, as of the Effective
Time, will be an "investment company" within the meaning of the Investment
Company Act of 1940, as amended (the "Investment Company Act"), without
taking account of any exemption arising out of the number of holders of the
securities of the Company or MergerCo., as the case may be.
(f) Neither the Company nor MergerCo. has paid or agreed to pay to
any person any compensation for soliciting another to purchase any
securities of the Company or MergerCo. (except as contemplated by this
Agreement and the Merger Documents).
(g) The consolidated financial statements (including the notes
thereto) and schedules of the Company and its consolidated subsidiaries set
forth in the Final Memorandum fairly present in all material respects- the
financial position, results of operations and cash flows of the Company and
its consolidated subsidiaries as of the dates and for the periods specified
therein; since the date of the latest of such financial statements, there
has been no change nor any development or event involving a
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prospective change which has had a material adverse effect on (i) the
business, operations, properties, assets, liabilities, net worth, condition
(financial or otherwise) or prospects of the Company and its consolidated
subsidiaries, taken as a whole as the case may be, or (ii) the ability of
the Company to perform any of its obligations (whether existing prior to or
as of the Effective Time) under this Agreement, the Registration Rights
Agreement, the Indenture, the Notes or any of the other Transaction
Documents (a "Material Adverse Effect"); such financial statements and
schedules have been prepared in accordance with generally accepted
accounting principles consistently applied throughout the periods involved
(except as otherwise expressly noted in the Final Memorandum); the other
financial and statistical information and data set forth in the Final
Memorandum (and any amendment or supplement thereto) is, in all material
respects, accurately presented and prepared on a basis consistent with such
financial statements, except as otherwise stated therein; and the
statistical, market-related and projected financial data (including,
without limitation, the projected statement of operations data for the year
ended January 2, 1998) included in the Final Memorandum are based on or
derived from sources which the Company believes to be reliable and accurate
and are based upon assumptions and qualifications which the Company
considers reasonable and appropriate in all material respects.
(h) The pro forma financial statements (including the notes thereto)
and the other pro forma financial information included in the Final
Memorandum (i) comply as to form in all material respects with the
applicable requirements of Regulation S-X promulgated under the Exchange
Act, (ii) have been prepared in accordance with the Commission's rules and
guidelines with respect to pro forma financial statements and (iii) have
been properly computed on the bases described therein; the assumptions used
in the preparation of the pro forma financial data and other pro forma
financial information included in the Prospectus are reasonable in all
material respects and the adjustments used therein are appropriate in all
material respects to give effect to the transactions or circumstances
referred to therein.
(i) Subsequent to the respective dates as of which information is
given in the Preliminary Memorandum and the Final Memorandum, (i) the
Company, the subsidiaries of the Company and MergerCo. have not incurred
any material liability or obligation, direct or contingent, nor entered
into any material transaction not in the ordinary course of business;
(ii) the Company and MergerCo. have not purchased any of their outstanding
capital stock, nor declared, paid or otherwise made any dividend or
distribution of any kind on their capital stock; and (iii) there has not
been any material change in the capital stock, short-term debt or long-term
debt of the Company, the subsidiaries of the Company or MergerCo., except
in each case as described in or contemplated by the Preliminary Memorandum
or the Final Memorandum, as the case may be.
(j) Each of the Company, the subsidiaries of the Company and
MergerCo. has been duly incorporated and is and, as of the Effective Time,
will be validly existing as a corporation in good standing under the laws
of California, or, in the case of each subsidiary of the Company, the
jurisdiction in which it is chartered or organized, and is and, as of the
Effective Time, will be duly qualified to do business as a foreign
corporation
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and is and, as of the Effective time, will be in good standing under the
laws of each jurisdiction which requires such qualification wherein it owns
or leases properties or conducts business, except in such jurisdictions in
which the failure to so qualify, singly or in the aggregate, would not have
a Material Adverse Effect.
(k) Each of the Company, the subsidiaries of the Company and
MergerCo. has and, as of the Effective Time, will have full power
(corporate and other) to own or lease its properties and conduct its
business as described in the Final Memorandum; the Company has full power
(corporate and other) to enter into the Registration Rights Agreement, the
Indenture and the Merger Agreement and to carry out all the terms and
provisions thereof to be carried out by it; MergerCo. has full power
(corporate and other) to enter into this Agreement, the Merger Agreement
and the New Credit Facility and to carry out all the terms and provisions
hereof and thereof to be earned out by it; JFLEI has full power (corporate
and other) to enter into this Agreement and to carry out all the terms and
provisions hereof to be carried out by it; the subsidiaries of the Company
have full power (corporate and other) to enter into the Registration Rights
Agreement and the Indenture and to carry out all the terms and provisions
thereof to be carried out by them; and the Company has full power
(corporate and other) to succeed to the obligations of MergerCo. under the
New Credit Facility upon consummation of the Recapitalization.
(l) The Company has, and the Company and MergerCo. will have, as of
the Effective Time, the authorized, issued and outstanding capitalization
as set forth in the Final Memorandum under the caption "Capitalization."
All of the issued shares of capital stock of the Company and MergerCo. have
been or will be, as of the Effective Time, duly authorized, validly issued,
fully paid and nonassessable and were not issued in violation of any
preemptive or similar rights.
(m) There are no outstanding subscriptions, rights, warrants,
options, calls, convertible securities, commitments of sale or liens
related to or entitling any person to purchase or otherwise to acquire any
shares of capital stock of, or other ownership interest in, the Company or
any subsidiary thereof except as otherwise disclosed in the Final
Memorandum. At and as of the Effective Date, there will be no outstanding
subscriptions, rights, warrants, options, calls, convertible securities,
commitments of sale or liens related to or entitling any person to purchase
or otherwise to acquire any shares of capital stock of, or other ownership
interest in, the Company or any subsidiary thereof except as otherwise
disclosed in the Final Memorandum.
(n) The issued shares of capital stock of each of the Company's
subsidiaries have been duly authorized and validly issued, are fully paid
and nonassessable and, except for directors' qualifying shares and except
as otherwise set forth in the Final Memorandum are and, as of the Effective
Time, will be owned of record and beneficially by the Company, either
directly or through wholly owned subsidiaries, free and clear of any
pledge, lien, encumbrance, security interest, restriction on voting or
transfer, preemptive rights or claim of any third party. No subsidiary of
the Company is or, as of the Effective Time, will be prohibited, directly
or indirectly, from paying any dividends to the Company, from making any
other distribution on such subsidiary's capital stock, from repaying to the
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Company any loans or advances to such subsidiary from the Company or from
transferring any of such subsidiary's property or assets to the Company or
any other subsidiary of the Company, except as described in or contemplated
by the Final Memorandum.
(o) Neither the Company nor any of its subsidiaries nor MergerCo. is
or, as of the Effective Time, neither the Company nor any of its
subsidiaries will be (i) in violation of its corporate charter or bylaws,
(ii) in breach or violation of any law, ordinance, governmental or
administrative rule or regulation or court decree or (iii) in default in
the performance or observance of any obligation, agreement, covenant or
condition contained in any contract, indenture, mortgage, loan agreement,
note, lease or other instrument to which it is a party or by which its
respective properties may be bound, which in the case of (ii) or (iii)
would have a Material Adverse Effect.
(p) The issuance, offering and sale of the Notes to the Initial
Purchaser pursuant to this Agreement, the Company succeeding upon
consummation of the Recapitalization to MergerCo.'s obligations under the
New Credit Facility, the delivery of the Notes under this Agreement, the
compliance by the Company and the Guarantors with the other provisions of
this Agreement and the provisions of the Registration Rights Agreement, the
Indenture, the Notes and the Merger Agreement, the compliance by MergerCo.
with the provisions of this Agreement, the Merger Agreement and the New
Credit Facility, the compliance by JFLEI with the provisions of this
Agreement, the consummation of the other transactions herein and therein
contemplated and the consummation of the other transactions contemplated
hereby and in the Final Memorandum do not (i) require the consent,
approval, authorization, order, registration or qualification of or with
any governmental authority or court, except such as may be required under
state securities or blue sky laws or except as may be contemplated by the
Registration Rights Agreement or (ii) conflict with, result in a breach or
violation of, or constitute a default under, or result in the creation or
imposition of any lien, charge or encumbrance upon any property or assets
of the Company, any of its subsidiaries or MergerCo. pursuant to, any
material contract, loan agreement, note, indenture, mortgage, deed of
trust, lease or other agreement or instrument to which the Company, any of
the subsidiaries of the Company or MergerCo. is a party, or by which the
Company, any of the subsidiaries of the Company or MergerCo. or any of
their respective properties is bound, or the charter or by-laws of the
Company, any of the subsidiaries of the Company or MergerCo., or any
statute, rule or regulation or any judgment, order or decree of any
governmental authority or court or arbitrator applicable to the Company,
any of the subsidiaries of the Company or MergerCo., except as rights to
indemnity and contribution may be limited by federal or state securities
laws or public policy.
(q) The Company and the subsidiaries of the Company possess and, as
of the Effective Time, will possess all certificates, authorizations and
permits (including environmental permits) issued by the appropriate
federal, state or foreign regulatory authorities or bodies necessary to
conduct their respective businesses, except for those the lack of which
would not cause a Material Adverse Effect, and neither the Company, any of
its subsidiaries nor MergerCo. has received any notice of proceedings
relating to the
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revocation-or modification of any such certificate, authorization or permit
which, singly or in the aggregate, is reasonably likely to result in a
Material Adverse Effect.
(r) No legal or governmental proceedings or investigations are
pending to which the Company or any of the subsidiaries of the Company is
or, as of the Effective Time, will be a party or to which the property of
the Company or any of the subsidiaries of the Company is subject that are
not described in the Final Memorandum, and no such proceedings or
investigations, to the best knowledge of the Company add MergerCo., have
been threatened against the Company, any of the subsidiaries of the Company
or MergerCo., or with respect to any of their respective properties, except
in each case for such proceedings or investigations that, singly or in the
aggregate, are not reasonably likely to result in a Material Adverse
Effect.
(s) The Company, each of the subsidiaries of the Company and
MergerCo. have and, as of the Effective Time, will have valid title in fee
simple to all items of real property and title to all personal property
owned by each of them, in each case free and clear of any pledge, lien,
encumbrance, security interest or other defect or claim of any third party,
except (i) such as do not materially and adversely affect the value of such
property and do not interfere with the use made or proposed to be made of
such property by the Company, such subsidiary or MergerCo. to an extent
that such interference would have a Material Adverse Effect, and
(ii) permitted liens set forth in the Final Memorandum. Any real property
and buildings held under lease by the Company, any such subsidiary or
MergerCo. are held and, as of the Effective Time, will be held under valid,
subsisting and enforceable leases, with such exceptions as do not
materially interfere with the use made or proposed to be made of such
property and buildings by the Company, such subsidiary or MergerCo.
(t) This Agreement has been duly authorized, executed and delivered
by JFLEI and MergerCo.
(u) The Registration Rights Agreement, the indenture, the New Credit
Facility and the Merger Agreement have been or, as of the Effective Time,
will have been duly authorized by all necessary corporate actions of the
Company and, when duly executed and delivered by the Company (and its
subsidiaries, as applicable) and the other parties thereto or, in the case
of the New Credit Facility, upon consummation of the Recapitalization,
will, both prior to and as of the Effective Time, constitute legal, Valid
and binding obligations of the Company, enforceable against the Company in
accordance with their terms, except as the same may be limited by
(i) applicable bankruptcy, insolvency, reorganization, moratorium or other
laws affecting creditors' rights generally, including without limitation
the effect of statutory or other laws regarding fraudulent conveyances or
transfers; or preferential transfers, or (ii) general principles of equity,
whether considered at law or at equity, and except as rights to indemnity
and contribution in the Registration Rights Agreement may be limited by
federal or state securities laws or public policy.
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(v) The Merger Agreement and the New Credit Facility have been or, as
of the Effective Time, will have been duly authorized by all necessary
corporate actions of MergerCo. and the Company and, when duly executed and
delivered by MergerCo. and the other parties thereto, will, both prior to
and as of the Effective Time, constitute legal, valid and binding
obligations of MergerCo., enforceable against MergerCo. in accordance with
their terms, except as the same may be limited by (i) applicable
bankruptcy, insolvency, reorganization, moratorium or other laws affecting
creditors' rights generally, including without limitation the effect of
statutory or other laws regarding fraudulent conveyances or transfers or
preferential transfers, or (ii) general principles of equity, whether
considered at law or at equity.
(w) Prior to the Effective Time, the Notes will have been duly
authorized by all necessary corporate action for issuance and sale pursuant
to this Agreement and, when executed, authenticated, issued and delivered
in the manner provided for in the Indenture and sold and paid for as
provided in this Agreement, the Notes will constitute legal, valid and
binding obligations of the Company and the Guarantors entitled to the
benefits of the Indenture and enforceable against the Company and the
Guarantors in accordance with their terms, except as the same may be
limited by (i) applicable bankruptcy, insolvency, reorganization,
moratorium or other laws affecting creditors' rights generally, including
without limitation the effect of statutory or other laws regarding
fraudulent conveyances or transfers or preferential transfers or
(ii) general principles of equity, whether considered at law or at equity.
(x) Ernst & Young LLP, who have audited certain financial statements
of the Company and its consolidated subsidiaries and delivered their
reports with respect to the audited consolidated financial statements and
schedules in the Final Memorandum, are independent public accountants
within the meaning of the Securities Act and the applicable rules and
regulations thereunder.
(y) The Company and each of its subsidiaries maintain a system of
internal accounting controls sufficient to provide reasonable assurances
that (i) transactions are executed in accordance with management's general
or specific authorizations; (ii) transactions are recorded as necessary to
permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain asset accountability;
(iii) access to assets is permitted only in accordance with management's
general or specific authorization; and (iv) the recorded accountability for
assets is compared with the existing assets at reasonable intervals and
appropriate action is taken with respect to any differences.
(z) Neither the Company nor any of dc subsidiaries of the Company is
now or, after giving effect to the issuance of the Notes and the
consummation of the transactions contemplated by the Final Memorandum will
be (i) insolvent, (ii) left with unreasonably small capital with which to
engage in its anticipated businesses or (iii) incurring debts beyond its
ability to pay such debts as they become due.
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(aa) The Company and the subsidiaries of the Company own or otherwise
possess and, as of the Effective Time, will continue to own or otherwise
possess the right to use all patents, trademarks, service marks, trade
names and copyrights, all applications and registrations for each of the
foregoing, and all other proprietary rights and confidential information
used in the conduct of their respective businesses as currently conducted,
except to the extent the-absence thereof would not have a Material Adverse
Effect; and neither the Company nor any subsidiary of the Company has
received any notice, or is otherwise aware, of any infringement of or
conflict with the rights of any third party with respect to any of the
foregoing which, singly or in the aggregate, is reasonably likely to result
in a Material Adverse Effect.
(bb) The Company and the subsidiaries of the Company are and, as of
the Effective Time, will continue to be insured by insurers of recognized
financial responsibility (or by appropriate self-insurance) against such
losses and risks and in such amounts as are prudent and customary in the
businesses and in the locations in or at which they are engaged; and
neither the Company nor any such subsidiary has any reason to believe that
it will not be able to renew its existing insurance coverage as and when
such coverage expires or to obtain similar coverage from similar insurers
as may be necessary to continue its business at a cost that would not have
a Material Adverse Effect.
(cc) There is (i) no unfair labor practice complaint pending against
the Company or any of its subsidiaries or, to the best knowledge of the
Company, threatened against any of them, before the National Labor
Relations Board or any state or local labor relations board, and no
significant grievance or more significant arbitration proceeding arising
out of or under any collective bargaining agreement is so pending against
the Company or any of its subsidiaries or, to the best knowledge of the
Company, threatened against any of them, and (ii) no significant strike,
labor dispute, slowdown or stoppage pending against the Company or any of
its subsidiaries or, to the best knowledge of the Company, threatened
against it or any of its subsidiaries which, in the case of (i) or (ii) is
likely to result in a Material Adverse Effect.
(dd) The Company has and, as of the Effective Time, will have filed
all foreign, federal, state and local tax returns that are required to be
filed, except insofar as the failure to file such returns, singly or in the
aggregate, would not have a Material Adverse Effect, or has requested
extensions thereof and in each case has paid all taxes required to be paid
by it and any other assessment, fine or penalty levied against it, to the
extent that any of the foregoing is due and payable, other than those being
contested in good faith and for which adequate reserves have been provided
or those currently payable without penalty or interest.
(ee) Neither of the Company, MergerCo. nor any Affiliate of the
Company or MergerCo. has taken, directly or indirectly, any action designed
to cause or result in, or which has constituted or which might reasonably
be expected to cause or result in, stabilization or manipulation (as such
terms are defined under the Exchange Act) of the price of any security of
the Company to facilitate the sale or resale of the Notes.
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(ff) Except as disclosed in the Final Memorandum, and except as would
not individually or in the aggregate have a Material Adverse Effect (i) the
Company and each of its subsidiaries is and, as of the Effective Time, will
be in compliance with all applicable Environmental Laws (as defined below),
(ii) the Company and each its subsidiaries has and, as of the Effective
Time, will have all permits, authorizations and approvals required under
any applicable Environmental Laws and is in compliance with their
requirements, (iii) there are no pending, or to the best knowledge of the
Company or any of its subsidiaries threatened, Environmental Claims (as
defined below) against the Company or any of its subsidiaries and (iv) the
Company and each of its subsidiaries does not have knowledge of any
circumstances with respect to any of their respective properties or
operations that could reasonably be anticipated to form the basis of an
Environmental Claim against the Company or any of its subsidiaries or any
of their respective properties or operations and the business operations
relating thereto that would have a Material Adverse Effect. For purposes
of this Agreement, the following terms shall have the following meanings:
"Environmental Law" means, with respect to any person, any federal, state,
local or municipal statute, law, rule, regulation, ordinance, code, policy
or rule of common law and any published judicial or administrative
interpretation thereof including any judicial or administrative order,
consent decree or judgment binding on such person or any of its
subsidiaries, relating to the environment, health, safety or any chemical,
material or substance, exposure to which is prohibited, limited or
regulated by any such governmental authority. "Environmental Claims" means
any and all administrative, regulatory or judicial actions, suits, demands,
demand letters, claims, liens, notices of noncompliance or violation,
investigations or proceedings relating in any way to any Environmental Law.
(gg) The Company has reasonably concluded that any and all costs and
liabilities incurred or reasonably expected to be incurred pursuant to any
Environmental Law (including, without limitation, any capital or operating
expenditures required for clean-up, closure of properties or compliance
with Environmental Laws or any permit, license or approval, any related
constraints on operating activities and potential liabilities to third
parties) would not, singly or in the aggregate, have a Material Adverse
Effect.
(hh) Each certificate signed by any officer of the Company and
delivered to the Initial Purchaser or its counsel shall be deemed to be a
representation and warranty by the Company to the Initial Purchaser as to
the matters covered thereby.
(ii) Each certificate signed by any officer of MergerCo. and delivered
to the Initial Purchaser or its counsel shall be deemed to be a
representation and warranty by MergerCo. to the Initial Purchaser as to the
matters covered thereby.
(jj) Except as stated in the Final Memorandum none of the Company or
any of its subsidiaries or MergerCo. knows of any outstanding claims
against it for services, either in the nature of a finder's fee, financial
advisory fee, origination fee or similar fee, with respect to the
transactions contemplated by the Transaction Documents.
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(kk) The guarantees by the subsidiaries have been duly authorized by
each of the Guarantors, and, when executed and authenticated in accordance
with the provisions of the Indenture, will conform in all material respects
to the description thereof in the Final Memorandum, will be valid and
binding obligations of each of the Guarantors, will be entitled to the
benefits of the Indenture and will be enforceable in accordance with their
terms, except as the same may be limited by (i) applicable bankruptcy,
insolvency, reorganization, moratorium or other laws affecting creditors'
rights generally, including without limitation the effect of statutory or
other laws regarding fraudulent conveyances or transfers or preferential
transfers or (ii) general principles of equity, whether considered at law
or at equity..
(ll) MergerCo. was formed solely for the purpose of consummating the
Recapitalization. MergerCo. has no material assets or liabilities,
conducts no business and is a party to no material agreements other than
this Agreement and as described in the Final Memorandum.
(mm) The sale of the Notes to the Initial Purchaser does not
constitute a "prohibited transaction" (as defined in the Employee
Retirement Income Security Act of 1974, as amended).
3. PURCHASE AND SALE. Subject to the terms and conditions and in
reliance upon the representations and warranties herein set forth, MergerCo.
agrees to cause the Company to sell to the Initial Purchaser, and the Initial
Purchaser agrees to purchase from the Company at a purchase price of 97% of the
principal amount thereof, plus accrued interest, if any, from August 14, 1997 to
the Closing Date, $110,000,000 principal amount of Notes.
4. DELIVERY AND PAYMENT. Delivery of and payment for the Notes shall be
made at 10:00 a.m. New York City time, on August 20, 1997, or such later date as
the Initial Purchaser shall designate, which date and time may be postponed by
agreement between the Initial Purchaser and MergerCo. (such date and time of
delivery and payment for the Notes being herein called the "Closing Date").
Delivery of the Notes shall be made to the Initial Purchaser against payment by
the Initial Purchaser of the purchase price thereof to or upon the order of
MergerCo. in immediately available funds or such other manner of payment as may
be agreed by MergerCo. and the Initial Purchaser. Delivery of the Notes shall
be made at such location as the Initial Purchaser shall reasonably designate at
least one business day in advance of the Closing Date and payment for the Notes
shall be made at the offices of Shearman & Sterling ("Counsel for the Initial
Purchaser"), 599 Lexington Avenue, New York, New York, with any transfer taxes
payable in connection with the transfer of the Notes fully paid, against payment
of the purchase price therefor. Certificates for the Notes shall be registered
in such names and in such denominations as the Initial Purchaser may request not
less than two full business days in advance of the Closing Date.
MergerCo. agrees to have the Notes available for inspection, checking and
packaging by the Initial Purchaser in New York, New York, not later than
1:00 p.m. on the business day prior to the Closing Date.
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5. OFFERING OF NOTES BY THE INITIAL PURCHASER. The Initial Purchaser
represents and warrants to and agrees with JFLEI and MergerCo. that:
(a) It has not offered or sold, and will not offer or sell, any Notes
except to those it reasonably believes to be (i) "qualified institutional
buyers" (as defined in Rule 144A under the Securities Act) and that, in
connection with each such sale, it has taken or will take reasonable steps
to ensure that the purchaser of such Notes is aware that such sale is being
made in reliance on Rule 144A, or (ii) other institutional "accredited
investors" (as defined in Rule 501(a)(1), (2), (3) or (7) of Regulation D)
that, prior to their purchase of the Notes, deliver to the Initial
Purchaser a letter containing the representations and agreements set forth
in the form of Annex A to the Final Memorandum.
(b) Neither it nor any person acting on its behalf has made or will
make offers or sales of the Notes in the United States by means of any form
of general solicitation or general advertising (within the meaning of
Regulation D) in the United States.
(c) The Initial Purchaser's acquisition of the Notes does not
constitute a "prohibited transaction" (as defined in the Employee
Retirement Income Security Act of 1974, as amended).
6. AGREEMENTS. MergerCo. agrees with the Initial Purchaser that:
(a) The Company and MergerCo. will furnish to the Initial Purchaser
and to Counsel for the Initial Purchaser, without charge, during the period
referred to in paragraph (c) below, as many copies of the Final Memorandum
and any amendments and supplements thereto as it may reasonably request.
The Company and MergerCo. will pay the expenses of printing of all
documents relating to the Offering.
(b) The Company and MergerCo. will not amend or supplement the Final
Memorandum unless the Initial Purchaser shall previously have been advised
thereof and shall not have objected thereto in writing within ten business
days after being furnished a copy thereof.
(c) Prior to the consummation of the exchange offer made pursuant to
the Registration Rights Agreement or the effectiveness of an applicable
shelf registration statement if, in the reasonable judgment of the Initial
Purchaser, the Initial Purchaser or any of its Affiliates are required to
deliver an offering memorandum in connection with sales of, or
market-making activities with respect to, the Notes, (a) the Company will
periodically amend or supplement the Final Memorandum so that the
information contained in the Final Memorandum complies with the
requirements of Rule 144A of the Securities Act, (b) the Company will amend
or supplement the Final Memorandum when necessary to reflect any material
changes in the information provided therein so that the Final Memorandum
will not contain any untrue statement of a material fact or omit to state
any material fact necessary in order to make the statements therein, in
light of the circumstances existing as of the date the Final Memorandum is
so delivered, not
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misleading and (c) the Company will provide the Initial Purchaser with
copies of each such amended or supplemented Final Memorandum, as the
Initial Purchaser may reasonably request. MergerCo. and JFLEI hereby
expressly acknowledge that the indemnification and contribution provisions
of Section 9 hereof are specifically applicable and relate to each offering
memorandum, registration statement, prospectus, amendment or supplement
referred to in this Section 6(c).
(d) The Company and MergerCo. will arrange for the qualification of
the Notes for sale by the Initial Purchaser under the laws of such
jurisdictions as the Initial Purchaser may reasonably designate and will
maintain such qualifications in effect as long as required for the sale of
the Notes; PROVIDED, HOWEVER, that the Company and MergerCo. shall not be
obligated to qualify as a foreign corporation in any jurisdiction in which
they are not now so qualified or to take any action that would subject them
to general consent to service of process in any jurisdiction in which they
are not now so subject or to subject themselves to taxation in any such
jurisdiction. MergerCo. or the Company will promptly advise the Initial
Purchaser of the receipt by the Company or MergerCo. of any notification
with respect to the suspension of the qualification of the Notes for sale
in any jurisdiction or the initiation or threatening of any proceeding for
such purpose.
(e) Whenever the Company or MergerCo. publishes or makes available to
the public (by filing with any regulatory authority or securities exchange
or by publishing a press release or otherwise) any information that could
reasonably be expected to be material in the context of the offer and sale
of Notes under this Agreement, the same shall immediately notify the
Initial Purchaser as to the nature of such information or event. Until the
third anniversary of the Closing Date, the Company will notify the Initial
Purchaser of (i) any decrease in the rating of the Notes or any other debt
securities of the Company by any nationally recognized statistical rating
organization (as defined in Rule 436(g) under the Securities Act) or
(ii) any notice given of any intended or potential decrease in any such
rating or of a possible change in any such rating which does not indicate
the direction of the possible change, as soon as the Company becomes aware
of any such decrease or notice. For a period of two years after the
Closing Time, the Company will also deliver to the Initial Purchaser, as
soon as available and to the extent individually prepared, and without
request, copies of its latest annual report and quarterly statement and any
reports of its auditors thereon.
(f) Neither the Company, MergerCo., any of their Affiliates, nor any
person acting on its or their behalf other than the Initial Purchaser, as
to which no agreement is made, will, directly or indirectly, make offers or
sales of any security, or solicit offers to buy any security, under
circumstances that would require the registration of the Notes under the
Securities Act (other than pursuant to the Registration Rights Agreement).
(g) Neither the Company, MergerCo., any of their Affiliates, nor any
person acting on its or their behalf other than the Initial Purchaser, as
to which no agreement is made, will engage, in connection with the offering
of the Notes, (i) in any form of general
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solicitation or general advertising (within the meaning of Regulation D) or
(ii) in any public offering within the meaning of Section 4(2) of the
Securities Act.
(h) So long as any of the Notes are "restricted securities' within
the of Rule 144(a)(3) under the Securities Act, the Company will, during
any period 1 which it is not subject to and in compliance with Section 13
or 15(d) of the Exchange Act, provide to each holder of such restricted
securities and to each prospective purchaser (as designated by such holder)
of such restricted securities, upon the request of such holder or
prospective purchaser, any information required to be provided by
Rule 144A(d)(4) under the Securities Act. Such information, at the date of
its provision by the Company to such holders or prospective purchasers,
will not contain any untrue statement of a material fact or omit to state
any material fact necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. This covenant is
intended to be for the benefit of the holders and the prospective
purchasers designated by such holders from time to time of such restricted
securities.
(i) The Company and MergerCo. will cooperate with the Initial
Purchaser and use their best efforts to (i) permit the Notes to be eligible
for clearance settlement through The Depository Trust Company and
(ii) permit the Notes to be designated PORTAL-eligible securities in
accordance with the rules and regulations of the National Association of
Securities Dealers, Inc. (the "NASD").
(j) The Company and MergerCo. will not, until 180 days following the
Closing Date, without the prior written consent of the Initial Purchaser,
offer, sell or contract to sell, or otherwise dispose of, directly or
indirectly, or announce the offering of, any debt securities issued or
guaranteed by the Company or MergerCo. (other than the Notes).
(k) The Company and MergerCo. will apply the net proceeds from the
sale of the Notes as set forth in the Final Memorandum under the caption
"Use of Proceeds."
7. CONDITIONS TO THE OBLIGATION OF THE INITIAL PURCHASER. The
obligations of the Initial Purchaser to purchase the Notes shall be subject to
the accuracy in all material respects of the representations and warranties on
the part of the Company, JFLEI and MergerCo. contained herein at the date and
time that this Agreement is executed and delivered by the parties hereto (the
"Execution Time"), and at the Closing Date as specified in Section 7(g), to the
accuracy in all material respects of the statements of the Company and MergerCo.
made in any certificates pursuant to the provisions hereof, to the performance
by the Company and MergerCo. of their obligations hereunder at or prior to the
Closing Date and to the following additional conditions:
(a) The Company shall have entered into a Registration Rights
Agreement with the Initial Purchaser substantially in the form attached
hereto as Exhibit A.
(b) The Company and MergerCo. shall have entered into the Merger
Agreement attached hereto as Exhibit B. The closing contemplated by the
Merger Agreement, including without limitation the Recapitalization, shall
be consummated in
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accordance with the terms of the Merger Agreement contemporaneously with
the sale of the Notes pursuant to this Agreement.
(c) MergerCo. shall have entered into the New Credit Facility with
NationsBank, N.A., as administrative agent, and other lending institutions
party thereto substantially in the form attached hereto as Exhibit C and
the Company shall have succeeded to the obligation of MergerCo. thereunder
upon consummation of the Recapitalization. There shall exist at and as of
the Closing Date no conditions that would constitute a default (or an event
that with notice or the lapse of time, or both, would constitute a default)
under the New Credit Facility. On the Closing Date, all conditions to
closing under the New Credit Facility shall have been satisfied, and the
Company shall have unused commitments of at least $15,000,000 under the New
Credit Facility. On the Closing Date, the New Credit Facility shall be in
full force and effect and shall not have been modified.
(d) The Company and the Trustee shall have entered into the
Indenture, substantially in the form attached hereto as Exhibit D.
(e) The Company shall have furnished to the Initial Purchaser the
opinion of Gibson, Dunn & Crutcher, L.L.P., Counsel for the Company, dated
the Closing Date, substantially to the effect that:
(i) the Company is a corporation validly existing and in good
standing under the laws of California and is duly qualified to do
business as a foreign corporation and is in good standing under the
laws of each jurisdiction which requires such qualification wherein it
owns or leases properties or conducts business, except in such
jurisdictions in which the failure to so qualify, singly or in the
aggregate, would not have a Material Adverse Effect;
(ii) Each of the Guarantors is a corporation validly existing
and in good standing under the laws of the jurisdiction in which it is
chartered or organized and is duly qualified to do business as a
foreign corporation and is in good standing under the laws of each
jurisdiction which requires such qualification wherein it owns or
leases properties or conducts business, except in such jurisdictions
in which the failure to so qualify, singly or in the aggregate, would
not have a Material Adverse Effect;
(iii) the Company has the authorized, issued and outstanding
capitalization as set forth in the Final Memorandum under the caption
"Capitalization." All of the issued shares of capital stock of the
Company have been duly authorized and validly issued and are fully
paid and nonassessable and were not, to the best of such counsel's
knowledge, issued in violation of any preemptive or similar rights;
(iv) the issued shares of capital stock of each of the
Guarantors have been duly authorized and validly issued, are fully
paid and nonassessable and,
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except for directors' qualifying shares and except as otherwise set
forth in the Final Memorandum are owned of record and beneficially by
the Company, either directly or through wholly owned subsidiaries,
free and clear, to the best of such counsel's knowledge, of any
pledge, lien, encumbrance, security interest, restriction on voting or
transfer, preemptive rights or other defect or claim of any third
party;
(v) this Agreement has bee duly authorized, executed and
delivered by MergerCo.;
(vi) The Merger Agreement has been duly authorized, executed
and delivered by the Company and each of the Registration Rights
Agreement and the Indenture have been duly authorized, executed and
delivered by the Company and the Guarantors and constitute legal,
valid and binding obligations of the Company and the Guarantor,
enforceable against the Company and the Guarantors in accordance with
their terms, except as the same may be limited by (A) applicable
bankruptcy, insolvency, reorganization, moratorium or other laws
affecting creditors' rights generally, including without limitation
the effect of statutory or other laws regarding fraudulent conveyances
or transfers, preferential transfers or distributions by corporations
to shareholders, (B) general principles of equity, whether considered
at law or at equity, including, without limitation, concepts of
materiality, reasonableness, good faith and fair dealing, or (C) other
customary exceptions specified by such counsel in their opinion and
reasonably satisfactory to Counsel for the Initial Purchaser;
(vii) each of the Merger Agreement and the New Credit Facility
have been duly authorized, executed and delivered by MergerCo. and the
New Credit Facility has been duly authorized by the Company and each
such document constitutes a legal, valid and binding obligation of
MergerCo. as of the time of its execution and of the Company as of the
Effective Time, enforceable against MergerCo. or the Company, as the
case may be, in accordance with its terms, except as the same may be
limited by (A) applicable bankruptcy, insolvency, reorganization,
moratorium or other laws affecting creditors' rights generally,
including without limitation the effect of statutory or other laws
regarding fraudulent conveyances or transfers, preferential transfers
or distributions by corporations to shareholders, (B) general
principles of equity, whether considered at law or at equity,
including, without limitation, concepts of materiality,
reasonableness, good faith and fair dealing, or (C) other customary
exceptions specified by such counsel in their opinion and reasonably
satisfactory to Counsel for the Initial Purchaser;
(viii) the Notes have been duly authorized and, when executed and
authenticated in accordance with the provisions of the Indenture and
delivered to and paid for by the Initial Purchaser pursuant to this
Agreement, will constitute legal, valid and binding obligations of the
Company and the Guarantors entitled to the benefits of the Indenture
and enforceable against the Company and the Guarantors in accordance
with their terms, except as may be limited by
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(A) applicable bankruptcy, insolvency, reorganization, moratorium or
other laws affecting creditors' rights generally, including without
limitation the effect of statutory or other laws regarding fraudulent
conveyances or transfers, preferential transfers or distributions by
corporations to shareholders, (B) general principles of equity,
whether considered at law or at equity, including, without limitation,
concepts of materiality, reasonableness, good faith and fair dealing,
or (C) other customary exceptions specified by such counsel in their
opinion and reasonably satisfactory to Counsel for the Initial
Purchaser;
(ix) the statements set forth under the headings "The
Transactions," "Description of Senior Notes," "Description of New
Credit Facility," "Description of Preferred Stock and Warrants" and
"Plan of Distribution" in the Final Memorandum, insofar as such
statements constitute summaries of the legal matters, documents and
proceedings, referred to therein, fairly summarize the matters
referred to therein;
(x) the issuance, offering, sale and delivery of the Notes to
the initial Purchaser pursuant to this Agreement, the Company
succeeding upon consummation of the Recapitalization to MergerCo.'s
obligations under the New Credit Facility, the delivery of the Notes
under this Agreement, the compliance by the Company and the Guarantors
with the other provisions of this Agreement and the provisions of the
Registration Rights Agreement, the Indenture, the Notes and the Merger
Agreement, the compliance by MergerCo. with the provisions of this
Agreement, the Merger Agreement and the New Credit Facility, the
consummation of the other transactions herein and therein contemplated
and the consummation of the other transactions contemplated hereby and
in the Final Memorandum do not (i) require the consent, approval,
authorization, order, registration or qualification of or with any
governmental authority or court, except such as may be required under
state securities or blue sky laws or except as may be contemplated by
the Registration Rights Agreement or (ii) (a) conflict with, result in
a breach or violation of, or constitute a default under the charter or
by-laws of the Company, any of the subsidiaries of the Company or
MergerCo. or, (b) result in a breach or violation of, or constitute a
default under or result in the creation or imposition of any lien,
charge or encumbrance upon any property or assets of the Company, any
of its subsidiaries or MergerCo. pursuant to (1) any material
contract, loan agreement, note, indenture, mortgage, deed of trust,
lease or other agreement or instrument to which the Company, any of
the subsidiaries of the Company or MergerCo. is a party, or by which
the Company, any of the subsidiaries of the Company or MergerCo. or
any of their respective properties is bound that has been identified
to such Counsel as being the only such documents that are material to
the Company, such subsidiary or Merger Co., as applicable, by officers
of such entity pursuant to an officers' certificate attached to such
opinion, or, (2) to the best of such Counsel's knowledge, (x) any
statute, rule or regulation that in such counsel's experience is
generally applicable to transactions of the type contemplated by the
Final Memorandum and the Merger Agreement or (y) any judgment, order
or decree of any governmental authority or court or arbitrator
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<PAGE>
applicable to the Company, any of the subsidiaries of the Company or
MergerCo., except as rights to indemnity and contribution may be
limited by federal or state securities laws or public policy.
(xi) To the best knowledge of such counsel, there are no
pending or threatened legal or governmental proceedings to which the
Company is a party that would be required under the Securities Act to
be described in a registration statement or a prospectus delivered at
the time of the confirmation of the sale of an offering of securities
registered under the Securities Act that are not described in the
Final Memorandum, or, to such counsel's best knowledge after due
inquiry, that seek to restrain, enjoin, prevent the consummation of or
otherwise challenge the issuance or sale of the Notes to the Initial
Purchaser;
(xii) assuming the accuracy of the representations and
warranties of the Initial Purchaser and compliance by it with its
agreements contained herein, no registration of the Notes under the
Securities Act is required, and no qualification of the Indenture
under the Trust Indenture Act of 1939 is necessary, for the offer and
sale by the Initial Purchaser of the Notes in the manner contemplated
by this Agreement; and
(xiii) Neither the Company nor MergerCo. is an "investment
company" within the meaning of the Investment Company Act without
taking account of any exemption arising out of the number of holders
of securities of the Company or MergerCo.
In addition, such counsel shall also state that such counsel has
participated in conferences with officers and representatives of the
Company and MergerCo., representatives of the independent public
accountants for the Company and the Initial Purchaser at which the contents
of the Final Memorandum and related matters were discussed, and no facts
have come to the attention of such counsel that lead such counsel to
believe that the Final Memorandum, as of its date or as of the Closing
Date, contained or contains an untrue statement of a material fact or
omitted or omits to state any material fact necessary to make the
statements therein, in light of the circumstances under which there were
made, not misleading (it being understood that such counsel need express no
belief or opinion with respect to the financial statements and other
financial data included therein).
In rendering the opinions set forth in paragraph (iii) and (iv) above,
such counsel may rely, to the extent such opinions relate to issuances of
Common Stock by the Company prior to the Recapitalization and as specified
in such opinion, upon the opinion of Morrison & Foerster LLP.
All references in this Section 7(e) to the Final Memorandum shall be
deemed to include any amendment or supplement thereto at the Closing Date.
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(f) The Initial Purchaser shall have received from Shearman &
Sterling, Counsel for the Initial Purchaser such opinion or opinions, dated
the Closing Date, with respect to the issuance and sale of the Notes and
other related matters as the Initial Purchaser may reasonably require, and
the Company and MergerCo. shall have furnished to such counsel such
documents as they reasonably request for the purpose of enabling them to
pass upon such matters;
(g) (i) the representations and warranties on the part of the Company
and MergerCo. in this Agreement shall be true and correct in all material
respects on and as of the Closing Date with the same effect as if made on
the Closing Date, and the Company and MergerCo. shall have complied with
all the agreements and satisfied all the conditions on their part to be
performed or satisfied hereunder at or prior to the Closing Date;
(ii) since the date of the most recent financial statements
included in the Final Memorandum, there shall have been no change nor
any development or event involving a prospective change constituting a
Material Adverse Effect; and
(iii) the Company shall have furnished to the Initial Purchaser
a certificate of the Company signed by the chief executive officer and
the principal financial or accounting officer of the Company dated the
Closing Date, to the effect that the signers of such certificate have
carefully examined the Final Memorandum, any amendment or supplement
to the Final Memorandum and this Agreement and to the effect set forth
in clauses (i) and (ii) above.
(h) At the Execution Time and at the Closing Date, Ernst & Young LLP
shall have furnished to the Initial Purchaser a letter or letters, dated
respectively as of the Execution Time and as of the Closing Date, in form
and substance satisfactory to the Initial Purchaser, confirming that they
are independent accountants within the meaning of the Securities Act and
the Exchange Act and the applicable rules and regulations thereunder and
Rule 101 of the Code of Professional Conduct of the American Institute of
Certified Public Accountants (the "AICPA") and otherwise satisfactory in
form and substance to the Initial Purchaser and its Counsel.
(i) The Notes shall have been designated PORTAL-eligible securities
in accordance with the rules and regulations of the NASD.
(j) (i) Neither the Company nor any of its subsidiaries shall have
sustained since the date of the latest audited financial statements
included in the Final Memorandum losses or interferences with their
businesses, taken as a whole, from fire, explosion, flood or other
calamity, whether or not covered by insurance, or from any labor dispute or
court or governmental action, order or decree, otherwise than as set forth
or contemplated in the Final Memorandum or (ii) since such date, there
shall not have been any change in the capital stock or long-term debt of
the Company or any of its subsidiaries or any change, or any development
involving a prospective change, in or affecting the general affairs,
management, financial position, stockholders' equity or results of
operations of the Company or its subsidiaries, taken as a whole, otherwise
than as set forth or contemplated
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<PAGE>
in the Final Memorandum, the effect of which, in any such case described in
clause (i) or (ii), is, in the reasonable judgment of the Initial
Purchaser, so material and adverse as to make it impracticable or
inadvisable to proceed with the offering or the delivery of the Notes being
delivered on the Closing Date on the terms and in the manner contemplated
herein and in the Final Memorandum.
(k) Subsequent to the execution and delivery of this Agreement, there
shall not have occurred any of the following: (i) trading in securities
generally on the New York Stock Exchange or The NASDAQ Stock Market's
National Market, or in the over-the-counter market shall have been
suspended or materially limited, or minimum prices shall have been
established on such exchange; (ii) a banking moratorium shall have been
declared by federal or New York State authorities; (iii) the United States
shall have become engaged in hostilities, there shall have been an
escalation in hostilities involving the United States or there shall have
been a declaration of a national emergency or war by the United States; or
(iv) there shall have occurred such a material adverse change in general
economic, political or financial conditions (or the effect of international
conditions on the financial markets in the United States shall be such) as
to make it, in the reasonable judgment of the Initial Purchaser,
impracticable or inadvisable to proceed with the offering or delivery of
the Notes being delivered on the Closing Date on the terms and in the
manner contemplated herein and in the Final Memorandum.
(l) None of the issuance and sale of the Notes pursuant to this
Agreement, the Recapitalization or any of the other transactions
contemplated by any of the Transaction Documents or the Final Memorandum
shall be enjoined (temporarily or permanently) and no restraining order or
other injunctive order shall have been issued or any action, suit or
proceeding shall have been commenced with respect to this Agreement, the
Merger Agreement, the New Credit Facility, the Recapitalization or any of
the other transactions contemplated by the Final Memorandum, before any
court or governmental authority.
(m) Subsequent to the Execution Time, there shall not have been any
decrease in the rating of any of the Company's debt securities by any
"nationally recognized statistical rating organization" (as defined for
purposes of Rule 436(g) under the Securities Act) or any notice given of
any intended or potential decrease in any such rating or of a possible
change in any such rating that does not indicate the direction of the
possible change.
(n) The Company shall have furnished to the Initial Purchaser the
opinion of Houlihan Lokey Howard & Zukin Capital, in form and substance
acceptable to Counsel for the Initial Purchaser, attesting to the solvency
of each of the Company and its subsidiaries after giving effect to the
Recapitalization.
(o) Prior to the Closing Date, the Company shall have furnished to
the Initial Purchaser such further information, certificates and documents
as the Initial Purchaser may reasonably request.
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If any of the conditions specified in this Section 7 shall not have been
fulfilled in all material respects when and as provided in this Agreement, or if
any of the opinions and certificates mentioned above or elsewhere in this
Agreement shall not be in all material respects reasonably satisfactory in form
and substance to the Initial Purchaser and Counsel for the Initial Purchaser,
this Agreement and all obligations of the Initial Purchaser hereunder may be
canceled at the Closing Date by the Initial Purchaser. Notice of such
cancellation shall be given to the Company and MergerCo. in writing or by
telephone or telegraph confirmed in writing.
The documents required to be delivered by this Section 7 will be delivered
at the office of Counsel for Company, at 200 Park Avenue, New York, New York, on
the Closing Date.
8. PAYMENT OF EXPENSES. MergerCo. hereby agrees that the Company and
MergerCo. shall, whether or not the transactions contemplated by this Agreement
are consummated, pay all expenses incident to the performance of their
obligations under this Agreement, including the fees and disbursements of their
accountants and counsel, the cost of printing and delivery of the Preliminary
Memorandum, the Final Memorandum, all amendments thereof and supplements
thereto, this Agreement and all other documents relating to the offering, the
cost of preparing, printing, packaging and delivering the Notes, the fees and
disbursements, including fees of counsel incurred in compliance with
Section 6(d), the fees and disbursements of the Trustee, the fees of any agency
that rates the Notes and the fees and expenses incurred in connection with the
admission of the Notes for trading in the PORTAL system. If the sale of the
Notes provided for herein is not consummated because any condition to the
obligations of the Initial Purchaser set forth in Section 6 hereof is not
satisfied or because of any refusal, inability or failure on the part of the
Company or MergerCo. to perform any agreement herein or comply with any
provision hereof other than by reason of default by the Initial Purchaser in
payment for the Notes on the Closing Date, JFLEI and MergerCo. will reimburse
the Initial Purchaser upon demand for all out-of-pocket expenses (including
reasonable fees and disbursements of counsel) that shall have been incurred by
it in connection with the proposed purchase and sale of the Notes.
9. INDEMNIFICATION AND CONTRIBUTION. (a) JFLEI and MergerCo. agree to
indemnify and hold harmless the Initial Purchaser, the directors, officers,
employees and agents of the Initial Purchaser and each person who controls the
Initial Purchaser within the meaning of either the Securities Act or the
Exchange Act against any and all losses, claims, damages or liabilities, joint
or several, to which they or any of them may become subject under the Securities
Act, the Exchange Act or other federal or state statutory law or regulation, at
common law or otherwise, insofar as such losses, claims, damages or liabilities
(or actions in respect thereof) arise out of or are based upon any untrue
statement or alleged untrue statement of a material fact contained in the
Preliminary Memorandum, the Final Memorandum or any information provided by the
Company or MergerCo. or any of their Affiliates or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein, in the light
of the circumstances under which they were made, not misleading, and agree to
reimburse each such indemnified party, as incurred, for any legal or other
expenses reasonably incurred by them in connection with investigating or
defending any such loss, claim, damage, liability or action; PROVIDED, HOWEVER,
that JFLEI and MergerCo. will not be liable in any such case to the extent that
any such loss, claim, damage or liability arises out of or is based upon any
such untrue statement or alleged untrue statement or omission or alleged
omission
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(i) made in the Preliminary Memorandum or the Final Memorandum, or in any
amendment thereof or supplement thereto, in reliance upon and in conformity with
written information furnished to the Company by or on behalf of the Initial
Purchaser specifically for inclusion therein or (ii) made in the Preliminary
Memorandum if a copy of the Final Memorandum was not delivered by or on behalf
of the Initial Purchaser to the person asserting any claim against the Initial
Purchaser, the Final Memorandum was required by law to have been so delivered by
the Initial Purchaser and the untrue statement contained in or omission from
such Preliminary Memorandum was corrected in the Final Memorandum; and PROVIDED,
FURTHER, that the liability of JFLEI under this subparagraph (a) shall be
limited to $2,500,000. This indemnity agreement will be in addition to any
liability which the Company, JFLEI or MergerCo. may otherwise have.
(b) The Initial Purchaser agrees to indemnify and hold harmless JFLEI
and MergerCo., their directors, their officers, and each person who controls
JFLEI or MergerCo. within the meaning of either the Securities Act or the
Exchange Act, to the same extent as the foregoing indemnity from JFLEI and
MergerCo. to the Initial Purchaser, but only with reference to written
information relating to the Initial Purchaser furnished to the Company by or on
behalf of the Initial Purchaser specifically for inclusion in the Preliminary
Memorandum or the Final Memorandum (or in any amendment or supplement thereto).
This indemnity agreement will be in addition to any liability which the Initial
Purchaser may otherwise have. The JFLEI and MergerCo. acknowledge that the
statements set forth in the last paragraph of the cover page, the last paragraph
on page ii and under the heading "Plan of Distribution" in the Preliminary
Memorandum and the Final Memorandum constitute the only information furnished in
writing by or on behalf of the Initial Purchaser for inclusion in the
Preliminary Memorandum or the Final Memorandum (or any amendment or supplement
thereto).
(c) Promptly after receipt by an indemnified party under this
Section 9 of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against the indemnifying party
under this Section 9, notify the indemnifying party in writing of the
commencement thereof; but the failure so to notify the indemnifying party
(i) will riot relieve it from liability under paragraph (a) or (b) above unless
and to the extent it did not otherwise learn of such action and such failure
results in the forfeiture by the indemnifying party of substantial rights and
defenses and (ii) will not, in any event, relieve the indemnifying party from
any obligations to any indemnified party other than the indemnification
obligation provided in paragraph (a) or (b) above. The indemnifying party shall
be entitled to appoint counsel of the indemnifying party's choice at the
indemnifying party's expense to represent the indemnified party in any action
for which indemnification is sought (in which case the indemnifying party shall
not thereafter be responsible for the fees and expenses of any separate counsel
retained by the indemnified party or parties except as set forth below);
PROVIDED, HOWEVER, that such counsel shall be reasonably satisfactory to the
indemnified party. Notwithstanding the indemnifying party's election to appoint
counsel to represent the indemnified party in an action, the indemnified party
shall have the right to employ separate counsel (including local counsel), and
the indemnifying party shall bear the reasonable fees, costs and expenses of
such separate counsel if (i) the use of counsel chosen by the indemnifying party
to represent the indemnified party would present such counsel with a conflict of
interest, (ii) the actual or potential defendants in, or targets of, any such
action include both the indemnified party and the indemnifying party and the
indemnified party shall have reasonably concluded that there may be
22
<PAGE>
legal defenses available to it and/or other indemnified parties which are
different from or additional to those available to the indemnifying party,
(iii) the indemnifying party shall not have employed counsel satisfactory to the
indemnified party to represent the indemnified party within a reasonable time
after notice of the institution of such action or (iv) the indemnifying party
shall authorize the indemnified party to employ separate counsel at the expense
of the indemnifying party. It is understood that the indemnifying party shall
not, in connection with any proceeding or related proceedings in the same
jurisdiction, be liable for the fees and expenses of more than one separate firm
(in addition to any local counsel) for all such indemnified parties and that all
such fees and expenses shall be reimbursed as they are incurred. Such firm
shall be designated in writing by NationsBanc Capital Markets, Inc. in the case
of parties indemnified pursuant to-paragraph (a) above and by JFLEI or
MergerCo., as the case may be, in the case of parties indemnified pursuant to
paragraph (b) above. The indemnifying party shall not be liable for any
settlement of any proceeding effected without its written consent (not to be
unreasonably withheld), but if settled with such consent or if there be a final
judgment for the plaintiff, the indemnifying party agrees to indemnify the
indemnified party from and against any loss or liability by reason of such
settlement or judgment to the extent required by paragraph (a) or (b) above, as
applicable. Notwithstanding the foregoing sentence, if at any time an
indemnified party shall have requested an indemnifying party to reimburse the
indemnified party for fees and expenses of counsel as contemplated by the third
and fourth sentences of this paragraph, the indemnifying party agrees that it
shall be liable for any settlement of any proceeding effected without its
written consent if (i) such settlement is entered into more than 20 days after
receipt by such indemnifying party of the aforesaid request, (ii) such
indemnifying party shall have received notice of the terms of such settlement at
least five days prior to such settlement being entered into and (iii) such
indemnifying party shall not have reimbursed the indemnified party in accordance
with such request prior to the date of such settlement. An indemnifying party
will not, without the prior written consent of the indemnified parties, settle
or compromise or consent to the entry of any judgment with respect to any
pending or threatened claim, action, suit or proceeding in respect of which
indemnification or contribution may be sought hereunder (whether or not the
indemnified parties are actual or potential parties to such claim or action)
unless such settlement, compromise or consent includes an unconditional release
of each indemnified party from all liability arising out of such claim, action,
suit or proceeding.
(d) In the event that the indemnity provided in paragraph (a) or (b)
of this Section 9 is unavailable to or insufficient to hold harmless an
indemnified party for any reason, JFLEI, MergerCo. and the Initial Purchaser
agree to contribute to the aggregate losses, claims, damages and liabilities
(including legal or other expenses reasonably incurred in connection with
investigating or defending same) (collectively, "Losses") to which JFLEI,
MergerCo. and the Initial Purchaser may be subject in such proportion as is
appropriate to reflect the relative benefits received by the Company, JFLEI and
MergerCo. on the one hand and by the Initial Purchaser on the other hand from
the offering of the Notes; PROVIDED, HOWEVER, that in no case shall the Initial
Purchaser be responsible for any amount in excess of the purchase discount or
commission applicable to the Notes purchased by the Initial Purchaser hereunder;
and PROVIDED, further, that in no case shall the liability of JFLEI under this
subparagraph (d) exceed $2,500,000. If the allocation provided by the
immediately preceding sentence is unavailable for any reason, JFLEI, MergerCo.
and the Initial Purchaser shall contribute in such proportion as is appropriate
to reflect
23
<PAGE>
not only such relative benefits but also the relative fault of the Company,
JFLEI and of MergerCo. on the one hand and of the Initial Purchaser on the other
hand in connection with the statements or omissions which resulted in such
Losses as well as any other relevant equitable considerations. Benefits
received by the Company, JFLEI and MergerCo. shall be deemed to be equal to the
total net proceeds from the offering (before deducting expenses), and benefits
received by the Initial Purchaser shall be deemed to be equal to the total
purchase discounts and commissions received by the Initial Purchaser from
MergerCo. in connection with the purchase of the Notes hereunder. Relative
fault shall be determined by reference to whether any alleged untrue statement
or omission relates to information provided by the Company, JFLEI, MergerCo. or
the Initial Purchaser. JFLEI, MergerCo. and the Initial Purchaser agree that it
would not be just and equitable if contribution were determined by pro rata
allocation or any other method of allocation which does not take, into account
of the equitable considerations referred to above. Notwithstanding the
provisions of this paragraph (d), no person guilty of fraudulent
misrepresentation (within the meaning of Section 11 (f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. For purposes of this Section 9, each person who
controls the Initial Purchaser within the meaning of either the Securities Act
or the Exchange Act and each director, officer, employee and agent of the
Initial Purchaser shall have the same rights to contribution as the Initial
Purchaser, and each person who controls JFLEI or MergerCo. within the meaning of
either the Securities Act or Exchange Act and each officer and director of JFLEI
or MergerCo. shall have the same rights to contribution as JFLEI or MergerCo.,
respectively, subject in each case to the applicable terms and conditions of
this paragraph (d).
10. TERMINATION. This Agreement shall be subject to termination in the
absolute discretion of the Initial Purchaser, by notice given to MergerCo. prior
to delivery of and payment for the Notes, if prior to such time any of the
events described in Section 7(j) or 7(k) shall have occurred or if the Initial
Purchaser shall decline to purchase the Notes for any reason permitted under
this Agreement.
11. REPRESENTATIONS AND INDEMNITIES TO SURVIVE. The respective
agreements, representations, warranties, indemnities and other statements of the
Company, JFLEI, MergerCo- or their officers and of the Initial Purchaser set
forth in or made pursuant to this Agreement will remain in full force and
effect, regardless of any investigation made by or on behalf of the Initial
Purchaser, the Company, JFLEI or MergerCo. or any of the officers, directors or
controlling persons referred to in Section 9 hereof, and will survive delivery
of and payment for the Notes. The provisions of Sections 8 and 9 hereof shall
survive the termination or cancellation of this Agreement.
12. NOTICES. All communications hereunder will be in writing and
effective only on receipt, and, if sent to the Initial Purchaser, will be
mailed, delivered or telecopied and confirmed to it at 100 North Tryon Street,
Charlotte, North Carolina 28255, Attention: William Casperson, or, if sent to
the Company, will be mailed, delivered or telecopied and confirmed to the
Company at 2250 South Tenth Street, San Jose, California 95112, Attention: Dave
Wordington, Vice President, Finance or, if sent to JFLEI or MergerCo., will be
mailed, delivered or telecopied and confirmed to JFLEI or MergerCo. c/o J.F.
Lehman & Company, 450 Park Avenue, Sixth Floor, New York, New York 10022,
Attention: Keith Oster.
24
<PAGE>
13. SUCCESSORS. This Agreement will inure to the benefit of and be
binding upon the parties hereto and their respective successors and the officers
and directors and controlling persons referred to in Section 9 hereof, and no
other person will have any right or obligation hereunder.
14. APPLICABLE LAW. This Agreement will be governed by and construed in
accordance with the laws of the State of New York.
15. BUSINESS DAY. For purposes of this Agreement, "business day" means
each Monday, Tuesday, Wednesday, Thursday and Friday that is not a day on which
banking institutions in The City of New York, New York are authorized or
obligated by law, executive order or regulation to close.
17. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which will be deemed to be an original, but all such
counterparts will together constitute one and the same instrument.
18. EXPIRATION OF LIABILITY OF JFLEI. Notwithstanding any provisions in
this Agreement to the contrary, JFLEI shall have no liability whatsoever
pursuant to this Agreement at any time after the Effective Time.
25
<PAGE>
If the foregoing is in accordance with your understanding of our agreement,
please sign and return to us the enclosed duplicate hereof, whereupon this
Agreemenet and your acceptance shall represent a binding agreement between
MergerCo., JFLEI and the Initial Purchaser.
Very truly yours,
JFL MERGERCO.
By:
-----------------------------
Name:
Title:
J.F. LEHMAN EQUITY INVESTORS I, L.P.
By:
-----------------------------
Name:
Title:
The foregoing Agreement is hereby
confirmed and accepted as of the
date first above written.
NATIONSBANC CAPITAL MARKETS, INC.
By:
----------------------------
Name:
Title:
26
<PAGE>
Exhibit A
Registration Rights Agreement
<PAGE>
Exhibit B
Agreement and Plan of Merger
<PAGE>
Exhibit C
Credit Agreement
<PAGE>
Exhibit D
Indenture
<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>
PRO FORMA
-----------------------
FISCAL YEAR ENDED NINE MONTHS ENDED NINE MONTHS
------------------------------------------------------ -------------------------- FISCAL YEAR ENDED
SEPTEMBER 27, OCTOBER 3, ENDED OCTOBER 3,
1992 1993 1994 1995 1996 1996 1997 1996 1997
------ ------ ------ ------ ------ ------------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest expense . . . $2,862 $2,909 $2,836 $3,039 $2,771 $2,066 $ 2,947 $2,066 $ 2,947
Incremental interest
expense . . . . . . . -- -- -- -- -- -- -- 8,332 5,625
Estimated interest
portion of rent
expense . . . . . . . 257 283 174 335 381 252 282 381 282
------ ------ ------ ------ ------ ------ ------- ------- -------
Fixed charges. . . . . $3,119 $3,192 $3,010 $3,374 $3,152 $2,318 $ 3,229 $10,779 $ 8,854
------ ------ ------ ------ ------ ------ ------- ------- -------
------ ------ ------ ------ ------ ------ ------- ------- -------
Income (loss) before
income taxes. . . . . ($1,977) ($1,036) $3,408 $5,966 $8,499 $6,395 $(7,096) $ (41) $ 2,837
Fixed charges. . . . . 3,119 3,192 3,010 3,374 3,152 2,318 3,229 10,779 8,854
Less: interest
charges capitalized . (27) (12) (11) (30) (19) (9) (24) (19) (24)
------ ------ ------ ------ ------ ------ ------- ------- -------
Earnings (loss). . . . $1,115 $2,144 $6,407 $9,310 $11,632 $8,704 $(3,891) $10,719 $11,667
------ ------ ------ ------ ------ ------ ------- ------- -------
------ ------ ------ ------ ------ ------ ------- ------- -------
Ratio of earnings to
fixed charges - (A) . -- -- 2.1x 2.8x 3.7x 3.8x -- -- 1.3x
------ ------ ------ ------ ------ ------ ------- ------- -------
------ ------ ------ ------ ------ ------ ------- ------- -------
Fixed charges. . . . . $10,779 $ 8,854
Preferred stock
dividend
requirements . . . . 3,234 2,426
Accretion of
carrying value of
preferred stock . . . 391 292
------ -------
Combined fixed
charges & preferred
stock dividends . . . $14,404 $11,572
------- -------
------- -------
Ratio of earnings to combined fixed charges and preferred stock dividends - (A) -- --
-------
-------
</TABLE>
(A) Earnings were insufficient to cover fixed charges by $2,004 and $1,048 in
fiscal years 1992 and 1993, respectively.
Earnings were insufficient to cover fixed charges by $7,120 for the nine
months ended October 3, 1997.
Earnings were insufficient to cover pro forma fixed charges by $60 for
fiscal 1996.
Earnings were insufficient to cover pro forma combined fixed charges and
preferred stock dividends by $3,685 for fiscal year 1996 and $95 for the
nine months ended October 3, 1997.
<PAGE>
Exhibit 23.2
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Experts,"
"Summary Historical Consolidated Financial Data," and "Selected Historical
Consolidated Financial Data" and to the use of our reports dated March 7,
1997, in the Registration Statement (Form S-4) and related Prospectus of
Burke Industries, Inc. for the registration of $110,000,000 aggregate
principal amount of its 10% Senior Notes due 2007.
ERNST & YOUNG LLP
San Jose, California
September 26, 1997
<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM T-1
STATEMENT OF ELIGIBILITY UNDER THE TRUST INDENTURE ACT OF 1939
OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE
---------------------
CHECK IF AN APPLICATION TO DETERMINE
ELIGIBILITY OF A TRUSTEE PURSUANT TO
SECTION 305(b)(2) ______
---------------------
UNITED STATES TRUST COMPANY OF NEW YORK
(Exact name of trustee as specified in its charter)
NEW YORK 13-3818954
(Jurisdiction of incorporation (I.R.S. Employer
if not a U.S. national bank) Identification No.)
114 WEST 47TH STREET
NEW YORK, NEW YORK 10036-1532
(Address of principal (Zip Code)
executive offices)
NONE
(Name, address and telephone number of agent for service)
---------------------
BURKE INDUSTRIES, INC.
(Exact name of obligor as specified in its charter)
CALIFORNIA 94-3081144
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2250 SOUTH TENTH STREET
SAN JOSE, CALIFORNIA 95112
(Address of principal executive offices) (Zip Code)
10% SENIOR NOTE DUE 2007
(Title of the Indenture securities)
<PAGE>
GENERAL
1. General Information
Furnish the following information as to the trustee:
(a) Name and address of each examining or supervising authority to which
it is subject.
Federal Reserve Bank of New York (2nd District), New York, New York
(Board of Governors of the Federal Reserve System)
Federal Deposit Insurance Corporation, Washington, D.C.
New York State Banking Department, Albany, New York
(b) Whether it is authorized to exercise corporate trust powers.
The trustee is authorized to exercise corporate trust powers.
2. Affiliations with the Obligor
If the Obligor is an affiliate of the trustee, describe each such
affiliation.
None
3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14 and 15:
The obligor is currently not in default under any of its outstanding
securities for which United States Trusts Company of New York is
Trustee. Accordingly, responses to Items, 3, 4, 5, 6, 7, 8, 9, 10,
11, 12, 13, 14 and 15 of Form T-1 are not required under General
Instruction B.
16. List of Exhibits
T-1.1 - Organization Certificate, as amended, issued by the State of
New York Banking Department to transact business as a Trust
Company, is incorporated by reference to Exhibit T-1.1 to
Form T-1 filed on September 15, 1995 with the Commission
pursuant to the Trust Indenture Act of 1939, as amended by
the Trust Indenture Reform Act of 1990 (Registration
No. 33-97056).
T-1.2 - Included in Exhibit T-1.1.
T.1.3 - Included in Exhibit T-1.1.
T-1.4 - The By-Laws of United States Trust Company of New York, as
amended, is incorporated by reference to Exhibit T-1.4 to
Form T-1 filed on September 15, 1995 with the Commission
pursuant to the Trust Indenture Act of 1939, as amended by
the Trust Indenture Reform Act of 1990 (Registration
No. 33-97056).
T-1.6 - The consent of the trustee required by Section 321(b) of the
Trust Indenture Act of 1939, as amended by the Trust
Indenture Reform Act of 1990.
T-1.7 - A copy of the latest report of condition of the trustee
pursuant to law or the requirements of its supervising or
examining authority.
<PAGE>
NOTE
As of August 22, 1997, the trustee had 2,999,020 shares of Common Stock
outstanding, all of which are owned by its parent company, U.S. Trust
Corporation. The term "trustee" in Item 2, refers to each of United States
Trust Company of New York and its parent company, U.S. Trust Corporation.
In answering Item 2 in this statement of eligibility as to matters peculiarly
within the knowledge of the obligor or its directors, the trustee has relied
upon information furnished to it by the obligor and will rely on information to
be furnished by the obligor and the trustee disclaims responsibility for the
accuracy or completeness of such information.
---------------------
Pursuant to the requirements of the Trust Indenture Act of 1939, the trustee,
United States Trust Company of New York, a corporation organized and existing
under the laws of the State of New York, has duly caused this statement of
eligibility to be signed on its behalf by the undersigned, thereunto duly
authorized, all in the City of New York, and State of New York, on the 8th day
of September 1997.
UNITED STATES TRUST COMPANY
OF NEW YORK, Trustee
By:
-------------------------
Gerard F. Ganey
Senior Vice President
2
<PAGE>
The consent of the trustee required by Section 321(b) of the Act.
United States Trust Company of New York
114 West 47th Street
New York, NY 10036
September 26, 1997
Securities and Exchange Commission
450 5th Street, N.W.
Washington, DC 20549
Gentlemen:
Pursuant to the provisions of Section 321(b) of the Trust Indenture Act of
1939, as amended by the Trust Indenture Reform Act of 1990, and subject to the
limitations set forth therein, United States Trust Company of New York ("U.S.
Trust") hereby consents that reports of examinations of U.S. Trust by Federal,
State, Territorial or District authorities may be furnished by such authorities
to the Securities and Exchange Commission upon request therefor.
Very truly yours,
UNITED STATES TRUST COMPANY OF NEW YORK
By:
-------------------------------
/S/Gerard F. Ganey
Senior Vice President
<PAGE>
EXHIBIT T-1.7
UNITED STATES TRUST COMPANY OF NEW YORK
CONSOLIDATED STATEMENT OF CONDITION
JUNE 30, 1997
(IN THOUSANDS)
ASSETS:
Cash and Due from Banks . . . . . . . . . . . . . . . . . . $ 83,529
Short-Term Investments. . . . . . . . . . . . . . . . . . . 259,746
Securities, Available for Sale. . . . . . . . . . . . . . . 924,165
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,437,342
Less: Allowance for Credit Losses. . . . . . . . . . . . . 13,779
------------
Net Loans . . . . . . . . . . . . . . . . . . . . . . . . . 1,423,563
Premises and Equipment. . . . . . . . . . . . . . . . . . . 61,515
Other Assets. . . . . . . . . . . . . . . . . . . . . . . . 122,696
------------
Total Assets. . . . . . . . . . . . . . . . . . . . . . . . $ 2,875,214
------------
------------
LIABILITIES:
Deposits:
Non-Interest Bearing. . . . . . . . . . . . . . . . . . . . $ 763,075
Interest Bearing. . . . . . . . . . . . . . . . . . . . . . 1,409,017
------------
Total Deposits. . . . . . . . . . . . . . . . . . . . . . . 2,172,092
Short-Term Credit Facilities. . . . . . . . . . . . . . . . 404,212
Accounts Payable and Accrued Liabilities. . . . . . . . . . 132,213
------------
Total Liabilities . . . . . . . . . . . . . . . . . . . . . $ 2,708,517
------------
------------
STOCKHOLDER'S EQUITY:
Common Stock. . . . . . . . . . . . . . . . . . . . . . . . 14,995
Capital Surplus . . . . . . . . . . . . . . . . . . . . . . 49,541
Retained Earnings . . . . . . . . . . . . . . . . . . . . . 100,930
Unrealized Gains (Losses) on Securities Available for
Sale, Net of Taxes. . . . . . . . . . . . . . . . . . . . . 1,231
------------
Total Stockholder's Equity. . . . . . . . . . . . . . . . . 166,697
------------
Total Liabilities and Stockholder's Equity. . . . . . . . . $ 2,875,214
------------
------------
I, Richard E. Brinkman, Senior Vice President & Comptroller of the named bank do
hereby declare that this Statement of Condition has been prepared in conformance
with the instructions issued by the appropriate regulatory authority and is true
to the best of my knowledge and belief.
Richard E. Brinkman, SVP & Controller
August 7, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
CONSOLIDATED FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED JANUARY 3, 1997 AND
THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE 9 MONTHS ENDED OCTOBER
3, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS
<FISCAL-YEAR-END> JAN-03-1997 JAN-02-1998
<PERIOD-START> DEC-30-1996 JAN-04-1997
<PERIOD-END> JAN-03-1997 OCT-03-1997
<CASH> 0 0
<SECURITIES> 0 0
<RECEIVABLES> 9,344 12,878
<ALLOWANCES> 189 331
<INVENTORY> 8,616 9,924
<CURRENT-ASSETS> 19,415 37,523
<PP&E> 24,102 24,829
<DEPRECIATION> 9,101 10,126
<TOTAL-ASSETS> 40,673 59,252
<CURRENT-LIABILITIES> 14,087 16,022
<BONDS> 18,126 110,000
0 0
0 15,681
<COMMON> 6,716 25,464
<OTHER-SE> (2,433) (112,084)
<TOTAL-LIABILITY-AND-EQUITY> 40,673 59,252
<SALES> 72,466 68,785
<TOTAL-REVENUES> 72,466 68,785
<CGS> 49,689 48,423
<TOTAL-COSTS> 11,610 24,833
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 2,752 2,947
<INCOME-PRETAX> 8,499 (6,596)
<INCOME-TAX> 3,466 (2,555)
<INCOME-CONTINUING> 5,033 (4,541)
<DISCONTINUED> 932 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 4,101 (4,541)
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
